On February 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 (ARRA). In so doing, the Federal Government gave more support in one day to developers and investors in the "green" energy industry than most observers one year ago would have expected in the next decade. The impetus for these changes was a perfect, but friendly, storm that combined the President's determination to make a down payment on a new "energy future" for the country with congressional support for enhanced measures to keep the tax-credit dependent renewable energy industry from a prolonged slump. 

The renewable energy industry has been financed primarily through "tax equity" structures that allow developers to monetize the tax benefits related to these projects. A collapse of corporate earnings in general, coupled with the fact that several financial institutions – the traditional source of tax equity – have disappeared, including Lehman Brothers, means that the investor base for tax equity investments has dried up during the past six months. Renewable energy developers and the tax-motivated investors they rely on for capital emerge from the stimulus debate with three kinds of help:

  • A loosening of the restrictions on qualifying for tax incentives;
  • A new grant program to temporarily stand in for the missing-in-action tax equity investors; and
  • A hodgepodge of market-stimulating and funding measures that may increase the appetite of cities, states, universities, and other large energy users to sign up for renewable energy supply.

Advocates for the renewable energy industry did not check off every item on their lobbying agenda, but came away, nonetheless, with the greatest burst of federal governmental support for this industry in decades.

THE ENHANCED TAX BENEFITS

The tax law changes in ARRA enhanced a broadening of the applicability of the Section 48 Investment Tax Credit (ITC) that was initiated in October 2008. For many years, the tax credits available to renewable energy projects annually were held hostage by congressional renewal debates. In October 2008, the Emergency Economic Stabilization Act and related tax legislation extended the ITC for eight years for solar energy projects as well as fuel cells and microturbines, and added a new credit for small wind and combined heat and power systems. In addition, at that time, the prohibition on public utility use of the energy ITC was eliminated.

The October 2008 changes, however, extended the production tax credit (PTC) under Section 45 for wind only through 2009, and for other systems through 2010. ARRA extends the Section 45 PTC for three additional years, through December 31, 2012 for wind projects, and through December 31, 2013 for closed and open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine renewables projects. This change should allow developers to plan for sustained growth.

In addition to the tax credit extension, the ARRA also:

  • Extends the fifty percent (50%) bonus depreciation created in 2008 through the end of 2009;
  • Eliminates the subsidized financing reduction for Section 48 credits. (Prior law stated that a Section 48 credit would be reduced if the qualifying property also was being financed by government-subsidized programs.) This change, among others, is expected to lead to more public-private partnerships in the renewable energy sector, but also is especially helpful for biomass projects, since they often are eligible for tax-exempt bond financing; and
  • Allows investors in projects that historically could generate only Section 45 production tax credits to elect, instead, to claim otherwise available Section 48 ITCs. This change means that any electing project will get a faster payback from its tax credits, since the Section 45 PTCs are otherwise claimed over a ten-year period based on the amount of electricity actually produced.

FILLING THE TAX EQUITY VOID

Throughout the debate, Congress was mindful of how the recession and financial industry crisis had dried up the renewable energy industry's critical pipeline for "tax equity" investment. Competing proposals surfaced to address this gap, and finally in the House-Senate conference, the idea of a specialized Energy Grant program won out over providing a five-year carry back for the existing tax credits.

The Grant Program will provide a direct cash payment from the Treasury Department to project owners in lieu of tax credits. The Grant Program stands in for the ITC and PTC. Specifically, the Treasury will issue a grant in an amount equal to thirty percent (30%) of the cost of qualifying renewable energy facilities within 60 days of the in-service date or, if later, within 60 days of submission of the grant application. Note that Congress introduced new flexibility in the timing for submission - in comparison to the ITC rules - making it apparently easier for a project to change ownership hands and then still qualify for the grant. For example, although this program is generally limited to projects placed in service in 2009 and 2010, projects also may qualify if construction began in 2009 or 2010 and is completed after 2010, but before the applicable ITC or PTC credit termination date. Federal, state and local governments, and other tax-exempt organizations may not participate in this program.

THE DIRECT MARKET STIMULUS – A SHOPPING LIST FOR RENEWABLE ENERGY DEVELOPERS AND INVESTORS

Just as Congress has tried both to shore up and diversify away from the dependency relationship between developers and tax-driven investors, it also has created an array of subsidies, market interventions, and support programs for particular types of customers. The net effect should be that renewable energy developers have nooks and crannies to search nationwide for project funding, and may encounter a substantial increase in opportunities for public-private partnerships, as well as more public sector RFPs for energy projects and programs. This is so because governments can enter into various types of contractual "partnerships" that allow private investors to retain ownership of energy projects for tax purposes. Among the new and expanded programs are:

  • $3.2 billion is provided to fund the Energy Efficiency and Conservation Block Grants program ($400 million of which must be awarded on a competitive basis to grant applicants).1 While targeted mainly at stimulating energy conservation investments, the program also is available to fund onsite renewable energy projects on government buildings.
  • $6.0 billion is appropriated to support loan guarantees for transmission projects and renewable energy projects.2 That amount of federal funding, based on applicable government accounting rules, is expected to underpin $60 billion of borrowing. To be eligible, projects must commence construction not later than September 30, 2011.  
  • The size of the Clean Renewable Energy Bond program was increased by $1.6 billion (the additional allocation is to be divided among eligible borrowers, which are cooperatives; municipal power companies; and state, local, and tribal governments).
  • The Energy Conservation Bond program, created in 2008, is increased from $800 million to $3.2 billion and its scope is expanded to include loans, grants, and other repayment mechanisms for green community programs. The new boundaries of this program are not particularly clear, though these changes appear to allow funds from these bonds to go to private individuals involved in qualified purposes. A number of ambiguities may need to be resolved at the state government level, since the allocations are awarded by the IRS to states based on population, with direct allocations to cities.3
  • The allocation for New Markets Tax Credits was increased from $3.5 billion to $5.0 billion for 2009 and retroactively for 2008 (to benefit unfunded and under-funded requests in 2008). This credit is unusual in that it can be structured into renewable energy projects that also utilize the ITC Section 48 credits.
  • Large programs are established to finance weatherization of homes of low income families ($5.0 billion); efficiency in HUD-sponsored low income housing ($250 million); and efficiency and conservation in federal government buildings ($4.5 billion).

SUPPORT FOR FOSSIL AND NUCLEAR PROGRAMS

ARRA also provides $3.4 billion for various programs related to fossil energy R&D, "clean coal" demonstration projects (the "FutureGen" program that had been cancelled last year by the Bush Administration), and demonstration projects for carbon capture.

THE UNIQUE DEPARTMENT OF DEFENSE MARKET FOR RENEWABLES

During the past few years, the Department of Defense has shown increasing interest in renewable energy. According to published interviews with high ranking officers, this trend has reflected a focus on hardening bases and making military missions less susceptible to energy interruption threats. The renewable energy industry should now look to increased buying power within the armed forces. Specifically, ARRA provides $4.24 billion in funding for the facilities sustainment, restoration, and modernization programs of the Department of Defense. These programs improve, repair and modernize Department of Defense facilities; renovate Army barracks; and invest in the energy efficiency of Department of Defense facilities. ARRA also includes $120 million for the Department of Defense Energy Conservation Investment Program. These funds may be used for planning, design, and military construction projects in the United States.

Further, ARRA provides $100 million for Navy energy conservation and alternative energy projects, including acquisition, construction, installation, and equipment. The Secretary of Defense must submit to the Committees on Appropriations of both houses of Congress an expenditure plan for these funds within 30 days of ARRA's enactment.

CONCLUSION

Ballard Spahr has long represented energy project developers and investors, and assisted them to utilize federal and state tax incentives. Looking ahead over 2009-2010, perhaps the significant differences from the recent past are:

  • obviously, a much deeper pocket in the Treasury Department from which to tap resources as a private developer; and
  • a jigsaw puzzle of new and old programs to be fit together for optimal impact on a project-specific basis. Nowhere is this more true than the arena of public-private partnerships.

For more information please contact R. Thomas Hoffmann (hoffmannrt@ballardspahr.com; 202.661.2215); Howard H. Shafferman (hhs@ballardspahr.com; 202.661.2205); Daniel R Simon (simond@ballardspahr.com; 202.661.2212), or Charles S. Henck (henck@ballardspahr.com; 202.661.2209).

  1. ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects funded directly by, or assisted in whole or in part by and through, the Federal Government under ARRA. 
  2. ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects supported by these loan guarantees. 
  3. ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects financed by Clean Renewable Energy and Energy Conservation Bonds.

ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects funded directly by, or assisted in whole or in part by and through, the Federal Government under ARRA. 


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