RENEWABLE ENERGY INCENTIVES

King & Spalding LLP 1185 Avenue of the Americas New York, New York 10036-4003 Phone: 212/556-2100 Fax: 212/556-2222 www.kslaw.com January 2007 RENEWABLE ENERGY INCENTIVES A variety of state and federal governmental incentives promote the generation of electricity from renewable resources. Many such incentives go directly to developers of renewable energy projects, including direct subsidies, tax benefits, low-interest loans, net metering and simplified interconnection procedures. Increasingly, states have been encouraging retail electric utilities to increase their use of renewable energy generation by imposing renewable energy quotas known as renewable portfolio standard ( RPS ) programs. At present, twenty states and the District of Columbia have RPS programs, and such programs are under discussion in other states. Proponents of renewable energy have also been lobbying for a federal RPS, an issue that is garnering broader support as the nation plans for its energy future. One outgrowth of the emphasis on renewable energy is the development of markets for renewable energy credits or certificates ( RECs ), also known as green tags. This memorandum discusses the various roles that RECs play in connection with renewable energy incentives. It also summarizes incentives available from the federal government and certain states with well-developed renewable energy incentives, namely Arizona, California, Colorado, Connecticut, Hawaii, New Jersey, New Mexico and Texas. WHAT IS A REC? RENEWABLE ENERGY CERTIFICATES RECs are a commodity that reflect the environmental attributes associated with renewable energy generation. Such attributes include the tangible benefits of renewable generation notably the avoidance of carbon and other emission types associated with fossil fuel consumption as well as intangible attributes such as green marketing rights. RECs are a vehicle that allow electric consumers, wholesalers and utilities to purchase green power on a notional basis without regard to the specific source of the generation. Many states also permit utilities to use REC purchases to satisfy RPS requirements. RECs are generally transacted on a standardized basis where one REC represents the environmental attributes associated with the production of one kilowatt-hour (kwh) of electricity from a renewable resource. The premise underlying the REC markets is that users of electricity may support and derive benefit from renewable resources on a

basis that is decoupled from the physical flow of electricity. For example, the flow of physical energy from a wind farm in rural South Dakota may be limited to nearby residents on a local utility system, but the financing to make the project possible may be supported by REC purchases by utilities and consumers in other regions where wind farm development is not feasible for economic or technical reasons. WHAT REC MARKETS EXIST? There are two distinct markets for RECs a voluntary market driven by consumer demand, and a compliance market driven by RPS programs and other legislative mandates. The voluntary market includes consumers that are willing to pay a green energy premium in connection with their energy consumption. For individuals, a REC purchase typically takes the form of a premium or surcharge on their electricity bills. Similar programs exist for industrial and commercial users of electricity, but such users may also buy RECs in bulk (individually or through consortiums) from renewable energy generators or marketers. Voluntary REC purchases are often made by energy intensive industries (e.g., large-scale retailers) or those seeking to offset greenhouse emissions in environmentallysensitive areas (e.g., ski resorts). RECs may be supplied from a variety of renewable energy sources throughout the country and sold to customers nationally, or they may be supplied from sources in a particular region or locality and marketed as such to local customers. Because RECs are decoupled from the physical generation of electricity, they are fungible and free from any inherent geographical and temporal limitations (although such limitations may arise as a result of certification requirements or state mandates). Compliance-driven REC purchases are generally made to satisfy state-level RPS requirements or other similar mandates. The detailed requirements of such programs vary considerably among states, and certain states may exclude or limit the use of RECs as a compliance mechanism. In New Jersey, for example, electricity suppliers may meet their requirements under New Jersey s RPS by purchasing RECs. The RECs used to satisfy the RPS requirements must come from certain types of renewable electricity (solar, wind, biomass, etc.) and must be certified by the New Jersey Board of Public Utilities or PJM-Environmental Information Services. REC purchases are not the only means of satisfying RPS requirements; utilities may instead elect to directly develop or purchase renewable resources, and derive RECs from the operation of those resources. HOW MUCH DO RECS COST? Prices for RECs may vary significantly based upon demand, and are influenced by other factors such as the type and location of the resource and any particular requirements of the purchaser. REC pricing is also affected by the interplay between the compliance and voluntary markets, and the impact of RPS regulations on the market. On a wholesale basis, REC prices have tended toward a range of $0.10 -.20 per kilowatt hour. In New Jersey, a typical commercial solar electric system is estimated to produce electricity at a price of $0.13 per kilowatt hour. The RECs associated with that production 2

have an estimated price of $0.20 per kilowatt hour. Combined, such a commercial solar electric system in New Jersey produces at approximately $0.33 per kilowatt hour, with the RECs responsible for greatly enhancing the economics. Regardless of whether they are used to serve voluntary or compliance markets, RECs provide a much-needed secondary revenue stream to accompany revenue from sales of the underlying electricity. In many cases, REC purchases facilitate the development of environmentally beneficial renewable resource projects and installations that would not otherwise be economically viable. WHERE CAN RECS BE OBTAINED? Marketers and brokers of RECs exist for both wholesale and retail markets, and retail consumers may have additional options to purchase RECs directly from their electric utilities. RECs may also be purchased in bulk directly from developers of renewable energy projects. For a comprehensive list of brokers nationwide, see the U.S. Department of Energy s Green Power Network Web site at www.eere.energy.gov/greenpower. HOW IS REC CERTIFICATION OBTAINED? Because of their intangible nature, REC certification is important to ensure accuracy, to avoid fraud and double-counting of credits, and to verify that credits being purchased may be used for their intended purpose. Several organizations exist that certify RECs, and each generally applies its own certification procedures. To become certified, a green power producer must generally submit an application demonstrating compliance with the certifying organization s requirements, enter into a contract with the certifying organization and submit to an annual audit of its power producing facilities. In addition to certification, such organizations may also provide REC marketing services. The largest certifier of RECs is Green-e, a program administered by the Center for Resource Solutions, a non-profit company with a mission to make it easier for commercial and residential energy consumers to understand and use renewable energy. Green-e provides voluntary certification for renewable energy products in connection with both the voluntary and compliance markets. More information about the Center for Resource Solutions and the Green-e program can be found at www.resource-solutions.org. Many states with RPS programs require that utilities obtain specific state agency certification so that particular RECs may be used to satisfy the applicable requirements. For example, many states require that the RECs be associated with local or regional resources, derived from specific resource types, or generated during a specific time period. States have also set up tracking and verification systems to ensure that renewable energy output is counted only once for the purpose of the RPS and to verify that entities claiming to produce or use green tags are abiding by certification requirements. 3

FEDERAL RENEWABLE ENERGY INCENTIVES In addition to state-level incentives for renewable energy production, the federal government offers a host of incentives including federal tax benefits, non-binding renewable purchase targets for federal agencies, and preferential rights for small renewable generators under the Public Utilities Regulatory Policy Act of 1978 ( PURPA ). FEDERAL TAX INCENTIVES Federal income tax incentives include favorable depreciation deductions and tax credits designed to encourage investment in renewable energy assets. Recent tax legislation reflects a more committed bi-partisan political backing for federal tax incentives. Several key incentives have been extended for a number of years, as opposed to the year-to-year extensions of the past. Particularly for wind and solar projects, the longer-term incentive allows financiers time to study the markets and develop portfolios. Tax legislation enacted in 2005 and 2006 extended the renewable energy production tax credit ( PTC ) to facilities placed in service before January 1, 2009. Facilities qualifying for the PTC include wind, solar, open and closed-loop biomass, and geothermal. The PTC is a dollar-for-dollar credit against federal income tax liability, measured by the electricity produced from qualifying facilities. As an alternative to the PTC, which is allowed to the producer of electricity from qualified facilities, the tax law also provides an investment tax credit for investment in certain renewable assets. This credit is based on a percentage of the investment in the assets, rather than the quantity of electricity generated. For equipment that uses solar energy to generate electricity or to heat or cool a structure, the investment tax credit is 30%. The allowable credit may be reduced if the project is financed with tax-exempt bonds or other government-sponsored subsidized financing. This 30% credit, effective for property placed in service before 2009, has resulted in an active financing market for photovoltaic and other solar energy projects. In addition to the tax credits noted above, the tax law allows 5-year accelerated depreciation deductions for wind and solar assets. For this purpose, the depreciable cost basis is reduced by a portion of any investment tax credit. PURPA In response to the energy crisis in the 1970 s, the federal government enacted PURPA to promote conservation of electric energy and decrease the country s dependence on foreign oil. PURPA requires local electric utilities to purchase electricity from qualifying facilities ( QFs ), a category that includes cogenerators and certain small renewable energy producers. The purchase price is to be at the utility s avoided cost, which is often higher than otherwise prevailing wholesale power prices. Before PURPA, renewable energy producers had limited market opportunities due to the lack of 4

deregulated markets or utility purchase obligations. However, in the decades following PURPA, many renewable generators entered into long-term contracts with local utilities that are still in effect today. In recent years, the proliferation of wholesale energy deregulation has undercut the justification for the mandatory purchase obligation under PURPA and led to calls for its repeal. PURPA was substantially modified by the Energy Policy Act of 2005 (the Energy Policy Act ), which permits states to opt out of the mandatory purchase requirements for new QFs, assuming the Federal Energy Regulatory Commission finds that organized wholesale markets or other surrogates exist. The extent to which such relief will be granted has yet to be determined, but PURPA has been and is likely (at least in certain markets) to remain one of the principal federal incentives for the development and marketing of renewable energy generation. FEDERAL PURCHASING GUIDELINES The federal government does not have an RPS requiring that certain amounts of electricity produced or consumed be from renewable resources. However, it does have a green power purchasing goal, originally established by Executive Order 13123 in 1999, whereby federal agencies are encouraged to increase usage of renewable energy. Executive Order 13123 encouraged each agency obtain 2.5% of its energy needs from renewable sources by 2005. In 2005, legislative force was put behind the federal government s objective of obtaining a greater percentage of power from renewable sources. Section 203 of the Energy Policy Act requires the federal government as a whole to purchase, to the extent economically feasible and technically practicable, at least 3% of its electricity from renewable resources in fiscal years 2007 2009, 5% in fiscal years 2010 2012, and 7.5% in fiscal year 2013 and thereafter. No enforcement mechanism was provided for in the act, which simply requires the President and the Secretary of Energy to seek to ensure compliance. The Federal Energy Management Program and its Renewable Energy Working Group are coordinating the compliance effort. Enforcement, however, may not prove to be a problem, as the goal set under Executive Order 13123 was met and exceeded as federal agencies combined to obtain 2,375 GWh of electricity, almost 1,000 GWh more than the goal, from renewable sources by the 2005 deadline. The purchase of RECs played a large role in meeting the 2005 goal and is expected to remain a prominent part of the federal government s approach going forward. STATE RENEWABLE ENERGY INCENTIVES In addition to RPS programs, state incentives may include direct subsidies, tax benefits, low interest loans, and streamlined interconnection rules. One type of statelevel incentive that has been increasing in popularity is net metering rules. Such rules allow residential and small commercial customers with on-site generation to offset their 5

electricity purchases with electricity they produce themselves (e.g., from solar panels). A bi-directional meter measures electricity flowing to a customer when the customer s use exceeds its production and from a customer when the customer s production exceeds its use. Under some net-metering rules, the utility also pays the customer for any net excess generation. Net metering rules function similar to PURPA, but on a smaller scale, in that they provide a guaranteed purchaser for individuals or companies that choose to develop renewable resources. They are often accompanied by rules that streamline the otherwise potentially long and complicated process of interconnecting a new generator with a utility system. The attached table summarizes the renewable energy incentives available in certain states that are considered to be leaders in encouraging renewable energy. * * * * King & Spalding actively represents U.S. equity investors, lenders and sponsors in a variety of asset finance, project finance and leasing transactions involving a wide range of assets and structures. Our commercial and tax lawyers concentrate on these transactions in New York, Atlanta, Houston, Washington D.C. and London. Our energy practice integrates the experience of King & Spalding lawyers skilled in business and law, particularly in businesses related to electricity, natural gas, oil, thermal energy, renewables and nuclear power, with lawyers having expertise in the areas of asset and project finance, public finance, corporate law, bankruptcy, environmental law, real estate and tax law. Justin Boose King & Spalding LLP 1185 Avenue of the Americas New York, NY 10036 (212) 556-2355 jboose@kslaw.com Brandy Copley King & Spalding LLP 1100 Louisiana Houston, TX 77002 (713) 276-7396 bcopley@kslaw.com Ned Crady King & Spalding LLP 1100 Louisiana Houston, TX 77002 (713) 751-3203 ncrady@kslaw.com Craig M. Kline King & Spalding LLP 1185 Avenue of the Americas New York, NY 10036 (212) 556-2101 ckline@kslaw.com Daniel R. Rogers King & Spalding LLP 1100 Louisiana Houston, TX 77002 (713) 751-3204 drogers@kslaw.com Philip H. Spector King & Spalding LLP 1185 Avenue of the Americas New York, NY 10036 (212) 556-2132 pspector@kslaw.com 6

Tax Credits Solar Energy Device Property Tax Exemption Sales Tax Exemption Renewable Portfolio Arizona Arizona offers a corporate tax credit for solar and wind installations in commercial and industrial applications. The tax credit is equal to 10% of the installed cost of qualified Solar Energy Devices (defined below) up to a maximum of $25,000 for any one building in the same year, and $50,000 in total credits in any year. The credit is available in taxable years January 1, 2006 through December 31, 2012. The credit can be applied against corporate taxes for installations serving commercial or industrial facilities in the taxpayer s trade or business located in Arizona or financed by a third-party organization. Businesses must apply to the Arizona Department of Commerce and receive certification to be eligible. A Solar Energy Device for purposes of this incentive is a system or series or mechanisms designed primarily to provide heating, to provide cooling, to produce electrical power, to produce mechanical power, to provide solar daylighting or to provide any combination of the foregoing by means of collecting and transferring solar generated energy into such uses either by active or passive means, including wind generator systems that produce electricity. Solar energy systems may also have the capability of storing solar energy for future use. Passive systems shall clearly be designed as a solar energy device, such as a trombe wall, and not merely as part of a normal structure, such as a window. For property tax assessment purposes, Solar Energy Devices and any other device or system designed for the production of solar energy for on-site consumption add no value to the property on which they are located. For purposes of this incentive, Solar Energy Device has the same definition as above, except that wind generator systems are not included. Arizona law allows retailers and prime contractors to deduct 100% of amounts received from the sale and installation of Solar Energy Devices (including wind electric generators and wind powered water pumps) from their state transaction privilege tax base. Retailers and prime contractors seeking to avail themselves of this exemption must register with the Arizona Department of Revenue prior to selling or installing the devices. On November 14, 2006 the Arizona Corporation Commission ( ACC ) adopted final rules to expand Arizona s Renewable Energy 7

Standard and Green Tags/ Renewable Energy Credits Net Metering Standard ( RES ) to 15% by 2025 with 30% of the renewable energy to be derived from distributed energy technologies (2,000 MW). The RES applies to investor owned utilities serving retail customers in Arizona, with exceptions for distributors with more than 50% of their customers outside the state. Utilities subject to the requirement must obtain RECs from eligible sources to meet 1.25% of their retail electric load in calendar year 2006. This percentage requirement increases to 15% by 2025. With the exception of certain hydropower facilities, renewable energy from facilities installed before January 1, 1997 are not eligible. The previous standard was 1.1% with 60% generated from solar electric technologies. By 2007, 5% of the RECs used to satisfy the standard must be obtained from eligible distributed renewable energy technologies. This percentage increases to 30% of the standard by 2012. One half of the annual distributed renewable energy requirement must come from residential sources and the other half from non-residential, non-utility applications. Extra credit multipliers may be earned for early installation of certain technologies and for in-state manufactured components. Tucson Electric Power Company ( TEP ) offers net metering for solar and wind systems up to a peak AC capacity of 10 kw. Net excess generation is credited to the following month s bill for up to a year. Any unused credit at the end of the year is granted to the utility. TEP s total net metering capacity is limited to 500 kw; as of January 2005, a total of 86 kw of net metering capacity existed. Installations must meet the IEEE-929 standard. (Though different from net metering, a decision by the ACC allows net billing at avoided cost. Arizona Public Service Co. and TEP both allow net billing. Net billing involves the calculation of net electricity usage in each billing period. If the customer generated more electricity than it used in a billing period, the utility purchases the net excess generation ( NEG ) from the customer at an avoided cost rate. If the customer used more electricity than it generated, the utility sells the needed electricity to the customer at retail price. The customer may not carry forward any NEG from one billing period to the next.) 8

Subsidies Tax Exemption California California s Emerging Renewables Program ( ERP ) provides incentives for the purchase of four types of grid-connected renewable energy generating systems: photovoltaics, solar thermal electric systems, fuel cells using renewable fuels, and small wind turbines. The program is available to all grid-connected utility customers within the electric utility services areas of Pacific Gas & Electric Company, Southern California Edison Company, San Diego Gas & Electric Company and Southern California Water Company (doing business as Bear Valley Electric Service). Beginning July 1, 2006 the rebate amounts are as follows: Photovoltaic: $2.60/W for systems less than 30 kw; Wind: $2.50/W for first 7.5 kw and $1.50/W for increments >7.5 kw and 30 kw; Solar thermal electric: $3.00/W for systems less than 30 kw; and Fuel cells using renewable fuels: $3.00/W for systems less than 30 kw. Incentives received from sources other than the ERP will be taken into consideration when incentives are paid out to prevent total incentives from exceeding total system costs. Performance Based Incentive Option: Participants operating photovoltaic systems may choose to receive a performance based rate for their incentive. This rate is equal to $0.50/kW and is paid over a three year period. Generators who elect to participate in the performance based plan must purchase metering equipment capable of measuring system performance in kwh. There is no limitation on the size of an eligible system; however, the funding cap for any system or group of systems located at any one site is capped at $400,000 and is capped at $1,000,000 for all systems installed by any corporate or government parent. Systems must be new, UL listed, in compliance with all applicable standards and carry a 5-year warranty on all equipment. Systems must be installed by a California licensed contractor to receive full rebate. Rebates for owner installed systems are reduced by 15%. California offers a property tax exemption for solar systems. 9

Buydown/ Rebate Programs Renewable Portfolio Standard Net Metering A property tax exemption of up to 100% of the system value is available for certain types of solar systems including active solar energy systems, solar process heating systems, photovoltaic systems, and solar thermal electric systems. All taxpayers are eligible for the exemption. California s municipal utilities are empowered by the legislature to create their own buydown and/or rebate programs. These programs operate in conjunction with the state ERP to further defray the costs of purchasing and installing photovoltaic systems. The terms of each of these programs vary but most are available to both business and residential customers. California s RPS is currently under review by the California Public Utilities Commission ( CPUC ), the California Energy Commission ( CEC ), and the California Legislature due to problems with efficiency. Eligible resources include biomass, solar thermal, photovoltaics, wind, geothermal, fuel cells using renewable fuels, small hydropower of 30 MW or less, digester gas, landfill gas, ocean wave, ocean thermal and tidal current. Municipal solid waste is generally eligible only if converted to a clean burning fuel using a non-combustion thermal process. Restrictions apply to some of these technologies. Retail sellers of electricity are required to increase their purchase of eligible renewable energy resources by 2% each year, so that 20% of their retail sales will be sourced from renewable energy resources by 2010. Municipal utilities are required by state law to develop and implement their own RPS programs. The California legislature is currently working with the CEC and the CPUC to develop new rules and procedures for more effective administration of the RPS. California s net metering law requires all utilities to allow net metering to all customers for solar and wind-energy systems up to 1 MW. Investor-owned utilities are also required to offer net metering for biogas-electric systems and fuel cells. The aggregate limit of net-metered systems in a utility s service territory is capped at 2.5% of the utility s aggregate customer peak demand. Net excess generation ( NEG ) is carried forward to a customer s next bill for up to 12 months. Any NEG remaining 10

at the end of each 12 month period is granted to the customer s utility. California also allows co-metering, which credits customers for generation on a time-of-use basis for the generation value of their production. However, time-of-use customers who choose to net meter must pay for the metering equipment capable of making such measurements. Customers retain ownership of all RECs associated with their generation of electricity. Interconnection Note: California s Interconnection Standards are currently under review by the CPUC and the CEC. California allows interconnection of small systems and large distributed generation ( DG ) systems. DG systems up to 10 megawatts are screened to determine if they may interconnect under the simplified rules or whether they must undergo supplemental review to be interconnected. Small PV and wind-energy systems under 10 kilowatts qualify for net metering and may be interconnected under the simplified rules Subsidies Renewable Portfolio Standard and Green Tags/ Renewable Energy Credits Net Metering Colorado Colorado offers a solar electric rebate program. Utility customers may receive a $2/W rebate for systems up to 100 kw. Colorado s RPS was passed by ballot initiative in 2004. Colorado utilities with 40,000 or more customers must generate or purchase the following increasing percentage of electricity from renewable sources: 3% from 2007 through 2009, 6% from 2010 through 2014, and 10% by 2015 and thereafter. Of the renewable energy generated, at least 4% must come from solar electric technologies, and one half of that 4% must come from solar electric systems located on-site at customer s facilities. Each kwh of energy produced in Colorado counts as 1.25 kwh for the purposes of meeting the standard. Tradable RECs may be used to satisfy the standard. Colorado has statewide net metering rules. Qualified renewable energy systems up to 2 MW in capacity are eligible for net metering. Net excess generation in a given month will be applied as a credit to the following month. If in a calendar year a customer s generation exceeds consumption, the utility must pay the customer for the net 11

excess generation at the utility s average hourly incremental cost for the prior 12-month period. Single bi-directional meters are provided by the utility. Systems over 10 kw require a second meter to measure output for the counting of RECs. Customer-generators retain ownership of all RECs associated with their generation of electricity. Interconnection The Colorado Public Utilities Commission has adopted statewide interconnection standards for small generation systems. These standards make it easier for utility customers with on-site renewable energy production capacity to connect into the grid. These standards apply to utilities serving at least 40,000 Colorado customers and generally follow the Small Generation Interconnection Procedures of FERC Order 2006, issued in May 2005. Municipal utilities and cooperative utilities may vote to opt out of these standards. There are three levels of interconnection requirements with breaks at 10 kw, 2 MW, and 10 MW. Systems must comply with IEEE 1547, UL 1741 and other standards. Liability insurance and feasibility study requirements vary according to level. Subsidies Connecticut Connecticut s On-Site Renewable Distributed Generation Program supported by the Connecticut Clean Energy Fund ( CCEF ) provides grants of up to $2 million per project to support the installation of renewable energy systems at commercial, industrial, and institutional buildings. Systems using solar, wind, fuel cells, landfill gas, lowemission advanced biomass-conversion technologies or Class I hydropower (defined below) are eligible, but most support will be provided to photovoltaic and fuel-cell projects. The objective of the program is to assist in contracting for the installation of 5 MW of customer-side distributed generation by mid-2007. In addition to grant awards, a premium of $0.01 per kwh will be disbursed for projects in the congested area of southwestern Connecticut. The actual grant amount is determined by an assessment of the difference between the host site s energy costs that would be displaced by the proposed system and the total cost and value of the energy provided by the system. The following funding limits apply: Solar: $5 per watt; 20-year evaluation time frame; 12

Fuel cells: $4.70 per watt; 10-year evaluation time frame; Small wind: $3.60 per watt; 15-year evaluation time frame; Small biomass: $3.30 per watt; 10-year evaluation time frame; Landfill gas: $3.20 per watt; 10-year evaluation time frame; and Hydro: to be determined; 20-year evaluation time frame. The grants are disbursed in installments to the owner of the equipment based on project milestones: 50% at delivery of generating equipment to the site, 40% at startup, and 10% after six months of successful operation. Applications are accepted on a rolling basis and preapplication discussions with the CCEF are encouraged. Connecticut offers grants to retail end-use customers of electric distribution companies for the installation of new Customer-Side Distributed Resources. Customer-Side Distributed Resources means the generation of electricity from a unit with a rating of not more than sixtyfive megawatts on the premises of a retail end user within the transmission and distribution system including, but not limited to, fuel cells, photovoltaic systems or small wind turbines, or a reduction in the demand for electricity on the premises of a retail end user in the distribution system through methods of conservation and load management, including, but not limited to, peak reduction systems and demand response systems. Eligible projects will receive $450 per kw of capacity and projects placed in operation in southwestern Connecticut before April 30, 2008 will receive an additional $50 per kw of capacity. There is no minimum project size. Projects that receive funding from the Connecticut Energy Efficiency Fund or the CCEF are eligible, but the total grant may not exceed the limits listed above. Grant payments will be issued only after the Department of Public Utility Control ( DPUC ) receives security equal to half of the grant amount, an affidavit that the project has completed final acceptance of the applicable interconnection process, and 13

Low-Interest Loans Renewable Portfolio Standard and Green Tags/ Renewable Energy Credits the project is operational. The DPUC offers low-interest loans for Customer-Side Distributed Resources. The DPUC provides long-term financing to retail end-use customers for the installation of Customer-Side Distributed Resources. The program is administered by Bank of America for the DPUC. The maximum total amount of project financing available from the DPUC is $150 million. Capital costs and project-development costs are eligible. Interest rates are fixed and determined by Bank of America at the time an application is approved. Loans will be collateralized by way of equipment or other collateral or credit enhancements as required by Bank of America. Financing is available for projects with a minimum capacity of 50 kw and a maximum capacity of 65 MW. Financing is available to customers of Connecticut Light and Power and United Illuminating for projects located in the territories of those utilities. Financing is available for projects funded by the CCEF and the utilities energy conservation programs. Connecticut s RPS requires electricity providers to generate 4% of their retail electricity sales using renewable energy by January 1, 2004 and 10% by January 1, 2010. There are separate generation standards for Class I, Class II, and Class III renewables. Class I renewable energy sources include solar, wind, new sustainable biomass, landfill gas, fuel cells, ocean thermal power, wave or tidal power, low-emission advanced renewable energy conversion technologies, and new run-of-the-river hydropower facilities with a maximum capacity of 5 MW. Class II renewable energy sources include trash-toenergy facilities, biomass facilities not included in Class I, and certain hydropower facilities. Class III renewable sources include new (after January 1, 2006) customer-sited combined-heat-and-power systems with an minimum operating efficiency of 50% and electricity savings created at commercial or industrial facilities from conversion and load- 14

management programs. Electric providers must meet the RPS according to the following schedule: On and after 1/1/2006: 2.0% Class I and 3.0% Class I or II. On and after 1/1/2007: 3.5% Class I and 3.0% Class I or II. On and after 1/1/2008: 5.0% Class I and 3.0% Class I or II. On and after 1/1/2009: 6.0% Class I and 3.0% Class I or II. On and after 1/1/2010: 7.0% Class I and 3.0% Class I or II. Electricity suppliers must also acquire 1% of their supply of electricity from Class III renewables by January 1, 2007. This requirement increases to 4% by January 1, 2010. RPS requirements may be satisfied by purchasing electricity generated within the jurisdiction of ISO New England or within the jurisdictions of New York, Pennsylvania, New Jersey, Maryland or Delaware provided that the DPUC determines that these states have an RPS comparable to Connecticut s. Alternatively, compliance can be achieved by participation in an approved REC trading program. NEPOOL Generation Information Systems has an approved trading program. The Massachusetts Energy Consumers Alliance ( Mass Energy ), a non-profit organization based in Boston, has offered to purchase RECs at a rate of $60 per MW for a period of three years from photovoltaic systems located in Connecticut and Massachusetts installed after 1998. Mass Energy and its Rhode Island based partner package the RECs and sell them as New England GreenStartSM, a renewable energy based product sold through National Grid, the utility serving most of Massachusetts and Rhode Island. Net Metering Connecticut requires investor-owned utilities to provide net metering to residential customers who generate electricity using Class I renewable resources. The maximum capacity eligible is 100 kw. Although the law only requires utilities to offer net metering to residential customers, Connecticut Light and Power Co. and United Illuminating Company offer net metering to businesses under certain conditions. Interconnection Connecticut has interconnection rules for distributed generation technologies, including renewable systems, up to 25 MW in capacity. There are five categories of distributed generation systems, based on capacity with breakpoints at 10 kw, 100 kw, 1 MW 15

and 5 MW and corresponding technical and procedural requirements. There is a standard application and form agreement, as well as a simplified application and agreement for systems up to 10 kw. Tax Credits Renewable Portfolio Standard Net Metering Hawaii Hawaii Energy Tax Credits allow individuals or corporations to claim an income tax credit, subject to certain maximums, of 20% of the cost of wind system equipment and installation, and 35% of the cost of solar thermal or photovoltaic system equipment and installation. These tax credits may not be claimed in conjunction with the state s Capital Goods Excise Tax. The solar thermal energy system maximum credit for commercial property is $250,000. The photovoltaic system maximum credit for commercial property is $500,000. The wind powered energy system maximum credit for commercial property is $500,000. The credits may be carried forward until exhausted. Hawaii s renewable portfolio requirement mandates that each electric utility within the state include energy from Renewable Energy sources as an incrementally increasing percentage of its net electricity sales. As of December 31, 2005 each electric utility was required to provide 8% of its net electricity sales from renewable resources; the requirement increases to 10% by December 31, 2010. Renewable Energy means electricity produced by wind, solar energy, hydropower, landfill gas, waste to energy technology, geothermal resources, ocean thermal energy conversion, wave energy, biomass, biofuels, hydrogen fuels derived from renewable energy, or fuel cells. If electricity is produced by a combination of renewable and nonrenewable means, the proportion attributable to the renewable source shall be credited as renewable energy. Renewable Energy also means electrical energy savings brought about by a variety of methods. The rate paid to a renewable energy generator may not be more than 100% of the avoided cost, but a temporary waiver of this rule is available. Hawaiian law requires utilities to offer net metering to residential and commercial customers (including government entities) with solar, 16

wind, biomass, or hydroelectric generating systems on a first-come, first-served basis up to 0.05% of the utility s peak demand. Excess kwh credits can be carried forward for a maximum of 12 months. Credits not used within the 12 month period are granted to the utility without compensation to the customer/generator unless the customer/generator enters into a purchase agreement with the utility. Generation systems exceeding a capacity of 50 kw are not eligible for net-metering. Interconnection Hawaii has established simplified interconnection rules for small renewable systems. Small renewable systems are solar, wind, biomass, and hydroelectric systems up to 50 kw in capacity. No additional insurance requirements apply. A manual, lockable disconnect is required. A Public Utility Commission proceeding to review and improve the state s interconnection rules has been under way since October 2003. Subsidies New Jersey Under the New Jersey Clean Energy Rebate Program, the New Jersey Board of Public Utilities ( BPU ) will pay a rebate on new installations of wind, sustainable biomass, or solar electric systems from the New Jersey Societal Benefits Charge fund. The fund is supported by a levy on all customers of electric public utilities. The incentive amount varies from $0.15-$5.00/W, depending on the type of technology, the capacity of the system and the customer class (public and nonprofit applicants are eligible for higher rebates than private sector applicants). Owners of wind and sustainable biomass systems of up to 10 kw are eligible for rebates $5.00/W up to a maximum of 60% of eligible system costs. Owners of wind and sustainable biomass systems greater than 10 kw are eligible for rebates $3.00/W for the first 10 kw, $2.00/W for 10 100 kw, $1.50/W for 100 to 500 kw, and $0.15/W for 500 kw to 1000 KW, up to a maximum of 30% of eligible system costs. Private sector owned solar electric systems are eligible for rebates of $3.80/W for 0 to 10,000 W, $2.75/W for 10,001 to 40,000 W, $2.50/W for 40,001 to 100,000 W, $2.25/W for 100,001 to 500,000 W, and $2.00/W for 17

Tax Exemption Green Power Purchasing/ Aggregation Renewable Portfolio Standard 500,001 to 700,000 W. Public and non-profit sector owned solar electric systems are eligible for rebates of $4.40/W for 0 to 10,000 W, $3.45/W for 10,001 to 40,000 W, $2.80/W for 40,001 to 100,000 W, $2.60/W for 100,001 to 500,000 W, and $2.05/W for 500,001 to 700,000 W. Systems must be new and in compliance with all applicable performance and safety standards, and must carry a minimum 5-year warranty on all equipment. Photovoltaic systems must be UL-listed. For photovoltaic systems, systems up to 1 MW are eligible but incentives will only be paid for the first 700 KW of capacity. The rebate is reduced by 15% for self-installed systems. Where a material interest between the applicant and installer exists, the program treats systems installed by such installer as selfinstalled. Financial incentives for systems larger than 1 MW are available through the state s Renewable Energy Project Grants and Financing Program. Eligible systems should be sized to produce no more than 100% of the historical or expected (if new construction) amount of electricity consumed at a system s site. Solar and Wind Energy Systems Exemption Full exemption from state s sales tax is given for all solar and wind energy equipment. All major types of solar energy equipment, including equipment for passive solar design, is considered eligible for the exemption. All taxpayers are eligible. New Jersey state agencies are using renewable energy to meet approximately 12% of their electricity usage. This use meets a goal set by the governor in 1999 for the state agencies to purchase at least 10% of their electricity needs from renewable sources. New Jersey s RPS requires each electricity supplier/provider serving retail customers in the state to use 22.5% qualifying renewables by 2021. Qualifying renewable energy sources are broken down into Solar, Class I and Class II. Each of these classes is required to be present in different percentages in the power grid; solar may be used to fulfill any of the three required categories. 18

Net Metering Interconnection Supplier/providers must meet their requirements by submitting a Class I REC, a Class II REC, or a Solar REC ( S- REC ), all of which will be issued either by the BPU or by PJM-Environmental Information Services. Supplier/providers will not be permitted to use RECs associated with electricity generated at a customer-generator s premises unless the facility is eligible for net metering. Any supplier/provider not in compliance for a reporting year will be required to remit an alternative compliance payment and/or a solar alternative compliance payment for the amount of RECs and S-RECs required but not submitted. These prices will be higher than the estimated competitive cost of 1) purchasing the REC or S-REC, or 2) meeting the requirement by generating the renewable energy. The BPU has expanded the state s net metering standards to include all Class I renewable energy systems. A Class I renewable energy system includes solar technologies, wind, fuel cells, geothermal technologies, wave or tidal action, and methane gas from landfills or a biomass facility. The maximum capacity of these systems is 2 MW. The utility must credit the customer-generator at the company s full retail rate for each kwh produced on the customer s side of the electric revenue meter, up to the total amount of electricity used by that customer during an annualized period. At the end of the annualized period, the utility must compensate the customer for any remaining credits, at a rate equal to the company s avoided cost of wholesale power. Customers retain ownership of all RECs associated with the electricity they generate. Customers with photovoltaic systems may apply to the BPU to participate in New Jersey s S-REC program which tracks and verifies solar certificates, and allows the certificates to be sold to electric suppliers to meet suppliers solar RPS requirements. The utility must either credit the customer for the net energy supplied at the utility s energy rate or credit the customer with the net kwh supplied to be carried forward to the next month. In 2004, New Jersey increased the types and sizes of systems eligible for interconnection, and simplified the interconnection of residential and small commercial facilities 19

Tax Credits Use Tax Deduction Green Level 1 applies to inverter-based systems with a capacity rating of 10 kilowatts or less. Level 2 applies to systems with a maximum capacity of 2 megawatts and that are certified by nationally recognized testing and certification laboratory. Level 3 applies to systems up to a maximum capacity of 2 megawatts that do not meet the Level 1 or Level 2 standards. Fees for interconnection vary by level. Level 1 has no fee. Interconnection to networks is permitted. New Mexico New Mexico offers a renewable energy production tax credit: Tax credit of $0.01 per kwh of electricity of the first 400,000 kwh produced annually to be applied to New Mexico Corporate income tax liability. Credit calculated as the lesser of the electricity actually produced or the annual estimated production potential as certified by the Energy, Minerals, and Natural Resources Department. The credit is available for the ten consecutive years from the date the Qualified Energy Generator begins producing electricity. Excess tax credits may be carried forward for five consecutive years. This credit is available only to corporations. To claim the credit, a corporation must own a Qualified Energy Generator or lease property upon which such a generator operates from a county or municipality under authority of an industrial revenue bond. A Qualified Energy Generator is a generator with at least a 10 MW generating capacity using a Qualified Energy Resource, located in New Mexico, and that sells that electricity to an unrelated person. Qualified Energy Resource means a resource that generates electrical energy by means of a fluidized bed technology or similar low emissions generation technology that has substantial long term production potential and that uses only solar light, solar heat, wind, or biomass. New Mexico allows a compensating tax deduction for biomass equipment and biomass materials. Businesses may deduct the value of biomass equipment and materials used for the processing of biopower, biofuels, or biobased products when calculating the amount of Compensating Tax (Use Tax) owed. PNM, the largest electric utility in New Mexico, offers its customers a 20

Tags/Renewable Energy Credits Renewable Portfolio Standard Net Metering solar photovoltaics program under which it offers to purchase RECs generated by the customer. PNM s REC purchase program is available to customers who install solar photovoltaic systems up to 10 kw in capacity. PNM will purchase the RECs at $0.13 per kwh through 2018. Electricity output of the photovoltaics is used onsite and customers retain their net-metering benefit for excess generation. The New Mexico Renewable Energy Act (the Act ) creates an RPS requiring investor owned utilities to produce 5% of all of the energy they generate for New Mexico customers from renewable sources. Solar, wind, hydropower, biomass, and geothermal sources qualify. Generation from renewable sources requirements increase at 1% per year until 2011. One kwh of electricity generated by biomass, geothermal, landfill gas, or a fuel cell is worth two kwh toward the RPS. One kwh of electricity generated by solar resources is worth three kwh toward the RPS. The Act also requires utilities to offer a renewable-energy tariff to customers. The New Mexico Public Regulation Commission ( New Mexico PRC ) requires all utilities it regulates to offer net metering to customers with cogeneration facilities. A 10 kwh generating capacity maximum applies. The utility must either credit the customer for the net energy supplied at the utility s energy rate or credit the customer with the net kwh supplied to be carried forward to the next month. Customer generators retain ownership of all RECs associated with the generation of electricity. Interconnection New Mexico provides simplified interconnection rules for small cogeneration and renewable energy systems up to 10 kw in capacity. The interconnection rules do not apply to municipal utilities. A manual external disconnection device is required unless the customer and the utility agree that the meter can be used to disconnect the system in the event of a power outage. The New Mexico PRC strongly recommends co-generating 21

customers purchase liability insurance and may require the customer to do so at the request of the utility. Facilities over 10kW are subject to the general interconnection rule (New Mexico PRC Rule 570), which was enacted to comply with PURPA regulations. Texas Tax Exemptions Texas offers a franchise tax exemption for manufacturers, sellers, or installers of Solar Energy Devices. Corporations engaged solely in the business of manufacturing, selling, or installing Solar Energy Devices are exempted from the franchise tax. Solar Energy Device means a system or series of mechanisms designed primarily to provide heating and cooling or to produce electrical or mechanical power by collecting and transferring solar generated energy. The term includes a mechanical or chemical device that has the ability to store solar-generated energy for use in heating or cooling or in the production of power. Tax Deductions Renewable Portfolio Standard and Green Tags/ Corporate deduction for Solar Energy Devices. The corporation has the option to deduct the cost of a Solar Energy Device in one of two ways: (1) the corporation may deduct the total amortized cost of the system from the corporation s taxable capital; or (2) the corporation may deduct ten percent (10%) of the system s amortized cost from the corporation s taxable income. The Solar Energy Device must be used in Texas by the corporation claiming the deduction. The amortization of the cost of the Solar Energy Device must: be for a period of at least 60 months; provide for equal monthly amounts; begin on the month in which the device is placed in service in Texas; and cover only the period in which the device is used in Texas. Texas s RPS program is designed to meet goal of adding 2,000 MW of new renewable generating capacity by 2009. Renewable resource requirements are apportioned among all competitive retailers by the program administrator. Each competitive retailer must retire sufficient 22