In the past decade, many state and local governments have committed both political and financial capital to investing in renewable energy, green buildings, and related sustainability initiatives. Usually they are seeking to reduce their own carbon footprint as governmental entities and to create mechanisms to help their citizens and local businesses to follow suit. The success stories of budgetary savings, new investments, and new jobs are beginning to multiply. 

All such sustainability initiatives have had to compete for funding with other governmental priorities, and increasingly so in current economic conditions. Even before the current economic crisis, many Ballard Spahr governmental clients were reaching beyond traditional funding sources to find both creative financing mechanisms and new forms of public-private partnerships to pursue their goals. Governmental entities pursuing those goals will find substantial new support in the American Recovery and Reinvestment Act of 2009 (ARRA).

Support comes in many forms. At least six new or greatly expanded forms of bond financing are directly intended for, or can be deployed to support, renewable energy and energy efficient programs or other sustainability initiatives. Several loan and grant programs have been adopted or expanded as well. Tax incentives available to private developers, such as investment tax credits and production tax credits, can help draw private capital to fund public-private partnerships. In addition, a number of provisions are aimed at assisting the recovery of bond markets and private finance markets by removing impediments to participation of certain classes of investors.

STATE AND LOCAL DIRECT FUNDING

State and local governments undertaking renewable energy projects to meet their own needs, and energy efficiency and sustainability projects for their own facilities, may take advantage of the following ARRA provisions:

Bonding Authority

  • Clean Renewable Energy Bonds - expansion: Last year, Congress created tax credit bonds known as new clean renewable energy bonds (New CREBs) with an allocation of $800 million. New CREBs are tax credit bonds, the proceeds of which are used by governmental bodies, public power providers, or cooperative electric companies for capital expenditures incurred on one or more qualified renewable energy facilities. ARRA authorizes an additional $1.6 billion of New CREBs, to be allocated 1/3 to state, local, and tribal governments, 1/3 to public power providers, and 1/3 for electric cooperatives.
  • Energy Conservation Bonds - expansion: Last year, Congress created and authorized $800 million in qualified energy conservation bonds (ECBs), another type of tax credit bond. Proceeds of ECBs are used for "qualified conservation purposes." Qualified conservation purposes include a wide range of capital expenditures (such as expenditures incurred for reducing energy use in publicly-owned buildings, implementing green community programs, and rural development involving the production of electricity from renewable energy resources), and expenditures with respect to research facilities and grants. For implementing green community programs, bond funds may be used to distribute "grants and loans or other repayment mechanisms" (which could include repaying grants through charges on utility bills, for example) to parties including private individuals or businesses. Qualified conservation purposes also include certain mass commuting facilities, demonstration projects, and public education campaigns to promote energy efficiency. ARRA changes the previous authorization of $800 million to $3.2 billion.1
  • Other types of bonding authority: ARRA makes a wide variety of changes and additions to existing bonding authority. Click here for a summary of these changes and additions.

Market Enhancements

  • Temporary relief from alternative minimum tax (AMT) treatment for tax-exempt private activity bonds (PABs) issued in 2009 and 2010: Interest on PABs (other than 501(c)(3) bonds) generally is subject to the AMT. Last year, Congress excluded one category of PABs (tax-exempt housing bonds) from the AMT. ARRA excludes the remaining categories of PABs from AMT in the case of new money bonds issued in 2009 and 2010, and bonds issued to currently refund bonds issued in 2004 through 2008.
  • Temporary relief for banks holding tax-exempt obligations: Under present law, banks are not permitted to claim a deduction for interest allocable to holdings of tax-exempt bonds. A limited exception is made for bonds issued by certain small governmental issuers. ARRA modifies these rules in two important respects:
    • Temporary extension of the existing corporate two percent (2%) de minimis rule to banks: ARRA provides that tax-exempt obligations issued during 2009 and 2010 and held by a bank, in an amount not to exceed two percent (2%) of the adjusted basis of a bank’s assets, are not taken into account for purposes of determining the portion of the bank’s interest expense subject to the interest deduction disallowance rules. The two percent (2%) de minimis rule previously applied only to corporations other than financial institutions.
    • Increase of qualified small issuer limit for bank qualifications purposes from $10 million to $30 million of tax-exempt bonds issued in 2009 and 2010, calculated on a per borrower basis: Under current law, the general rule denying a bank's interest expense deductions allocable to tax-exempt obligations does not apply to governmental and 501(c)(3) bonds issued by or on behalf of a "qualified small issuer" and designated by the issuer as "qualified tax-exempt obligations" (QTEOs). The qualified small issuer must expect that the total amount of such bonds to be issued during the calendar year will not exceed $10 million. ARRA increases the limit from $10 million to $30 million for bonds issued during 2009 and 2010. ARRA also provides that the $30 million applies at the borrower level rather than the issuer level. Thus, bonds issued by a 501(c)(3) entity are not counted in a qualified small issuer's limit. Bonds issued in 2009 and 2010 that qualify for the increased $30 million limit will retain their status as QTEOs for the life of the bonds. 

    Grant and Loan Provisions

    • Energy efficiency grants and loans
      • $3.2 billion is provided to fund the Energy Efficiency and Conservation Block Grants program.2 This program assists states, local governments, Indian tribes, and private entities in implementing strategies to reduce fossil fuel emissions and total energy use. Activities that may be eligible to receive funding include: establishing financial incentives programs for energy efficiency improvements; grants to non-profit organizations to perform energy efficiency retrofits; developing/implementing programs to conserve energy used in transportation; developing and implementing building codes and inspections services to promote building energy efficiency; and installing light emitting diodes (LEDs).
      • $3.1 billion is provided in grants to the states for the State Energy Program. This program provides grants to states and funding to state energy offices to address energy priorities and to adopt emerging energy efficiency technologies. It includes residential, commercial, and governmental building energy efficiency retrofits.
      • Grants for smart grid investments. ARRA provides $4.5 billion to DOE's Office of Electricity Delivery and Energy Reliability for activities to modernize the electric grid, including a program to provide matching grants up to fifty percent (50%) of the costs of qualifying smart grid investments in urban, suburban, tribal, and rural areas, including areas where electric system assets are controlled by nonprofit entities and areas where electric system assets are controlled by investor-owned utilities. DOE is required to initiate the matching grant program within sixty (60) days of the enactment of ARRA.
      • Appropriation to the Public Housing Capital Fund for energy efficiency housing retrofits:ARRA provides for $4 billion in funding for the Public Housing Capital Fund to carry out capital and management activities for public housing Of that amount, $1 billion may be used by competition for priority investments, including investments that leverage private sector funding or financing for renovations and energy conservation retrofit investments.

      PUBLIC-PRIVATE PARTNERSHIPS

      Many ARRA incentives are designed for tax-paying entities. By entering into various contractual "partnership" arrangements that allow private energy companies to retain tax ownership of projects, governments can engage the operating and technical expertise of private entities that will use their own funds in support of the project. In addition, state and local governments can facilitate access to private funding for projects initiated by their citizens and local businesses who can also take advantage of these taxpayer benefits. Transmission to connect renewable energy facilities with the grid is also encouraged by ARRA incentives.

      Tax Incentives

      • Bonus depreciation extension: In 2008, Congress allowed businesses to recover the cost of capital expenditures faster than the ordinary depreciation schedule by permitting those businesses to immediately write-off fifty percent (50%) of the cost of depreciable property. ARRA would extend this temporary benefit for capital expenditures incurred in 2009.
      • Three-year extension of Section 45 production tax credits (PTCs):The Section 45 PTC for wind facilities is extended for three years (through Dec. 31, 2012). The placed-in-service dates for closed-loop biomass, open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower facilities, and marine renewable facilities is extended through Dec. 31, 2013.
      • Availability of ITC for wind and other PTC-type technologies: Under current law, the Section 48 investment tax credit (ITC) is thirty percent (30%) of the basis of qualifying solar, fuel cell, and small wind property, and is claimed in the year the property is placed in service. By contrast, the Section 45 PTC is claimed over a 10-year period based on the amount of electricity produced and sold from renewable electricity production facilities. ARRA would allow certain Section 45 PTC facilities to elect to claim the 30 percent (30%) Section 48 ITC in lieu of the PTC. Renewable electricity production facilities that qualify for the election include wind facilities placed in service in 2009-2012, plus closed-loop biomass, open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine facilities that are placed in service in 2009-2013.
      • New Markets Tax Credit: Under current law, an investor may claim a new markets tax credit for qualified equity investments made to acquire stock in a corporation or a capital interest in a partnership that is a qualified community development entity (CDE). A "qualified community development entity" includes any domestic partnership whose primary mission is serving or providing investment capital for low-income communities or low-income persons. The maximum annual amount of qualified equity investments is capped at $3.5 billion for calendar years 2006 through 2009. Under ARRA, for calendar years 2008 and 2009, the maximum amount of qualified equity investments is increased to $5 billion (an increase of $1.5 billion each year). ARRA requires that the additional amount for 2008 be allocated to qualified CDEs that submitted an allocation application for 2008 and (1) did not receive the allocation or (2) received an allocation less than what they requested.
      • Removal of Section 48 ITC cap for small wind systems: ARRA removes the $4,000 cap on the amount of the Section 48 ITCs claimed for small wind projects.

                   Market Enhancements

      • Treasury Department grants for specified energy property in lieu of tax credits: Under current law, an income tax credit (the renewable electricity PTC under Section 45) is allowed for the production of electricity from qualified energy resources at qualified facilities. An ITC also is permitted for certain energy property placed in service (energy credit under section 48). These tax credits offset income tax on a dollar-for-dollar basis. 
        • ARRA authorizes the Treasury Secretary to provide a grant to each person who places in service during 2009 or 2010 energy property that is either: (1) an electricity production facility otherwise eligible for the PTC or (2) a qualifying property eligible for the energy ITC.
        • For Section 45 PTC properties, the grant amount is equal to thirty percent (30%) of the property basis of wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine renewable facilities. For Section 48 ITC properties, the grant amount is equal to thirty percent (30%) of the cost basis of fuel cell, solar and small wind property, and ten percent (10%) of the basis of geothermal, micro-turbine, combined heat and power, and geothermal heat pump property. 
        • ARRA also permits taxpayers to claim the credit with respect to otherwise eligible property that is not placed in service in 2009 and 2010 so long as construction begins in either of those years and is completed prior to 2013 (in the case of wind facility property), 2014 (in the case of other renewable power facility property eligible for credit under Section 45), or 2017 (in the case of any specified energy property described in Section 48). 
        • No grant may be awarded to any federal, state, or local government (or any political subdivision, agency or instrumentality thereof), any Section 501(c)(3) entity, any clean renewable energy bond lender, cooperative electric company, or a governmental body under Section 54(j) of the tax rules. However, such grants may be awarded to private entities that are part of a public-private partnership. Applications for the grant must be received before Oct. 1, 2011.
        • Removal of limitation on ITC for projects financed with tax-exempt bonds or other subsidized energy financing: Under current law, the ITC under Section 48 must be reduced if the property qualifying for the credit is also financed with tax-exempt private activity bonds or through any other federal, state or local subsidized financing program. ARRA permanently removes this limitation.

                     Grant and Loan Provisions

        • DOE renewable energy loan guarantees: ARRA includes $6 billion in “rapid deployment” loan guarantees for both renewable energy power generation and electric transmission projects. Recipients must be entities borrowing to develop/construct projects using current commercial technology for: (i) renewable energy systems, including incremental hydropower facilities, systems that generate electricity or thermal energy, and facilities that manufacture related components; (ii) electric power transmission systems, including upgrading and re-conductoring projects; and (iii) leading edge biofuel projects that will use technologies performing at the pilot or demonstration scale that the Secretary of DOE determines are likely to become commercial technologies and will produce transportation fuels that substantially reduce life-cycle greenhouse gas emissions compared to other transportation fuels. Construction on such systems must commence no later than Sept. 30, 2011. The $6 billion in appropriated funds is expected to support more than $60 billion in loans for these projects. Loan guarantees for leading edge biofuel projects are limited to $500 million.3

        SUSTAINABILITY ASSISTANCE

        Many states and local governments are looking beyond their own facilities and seeking to assist citizens and local businesses with sustainability solutions. They can aggregate residential projects to make them attractive to larger project developers, bring in private developers who are willing to offer standardized terms and to own and finance renewable energy improvements, and create pooled financing mechanisms. A number of our governmental clients have created, or are exploring the creation of, governmental offices or authorities to centralize these efforts, and are enacting new legislation to streamline and support those efforts.

        Many of the ARRA programs and authorities described above can be used by state and local governments or newly created sustainability initiatives to assist citizens and local businesses initiate renewable energy and energy efficiency projects. These include: CREBs, Recovery Zone Bonds, Energy Efficiency and Conservation Block Grants, and State Energy Program Grants.

        In addition, the incentives available to private taxpaying entities described above in connection with private partnerships can also be used by citizens and local businesses that own their own renewable energy projects and energy efficiency improvements. Governmental sustainability initiatives can educate stakeholders about these benefits and provide structured solutions, including certified contractors, standard documentation and access to grants, and other funding.

        Lawyers in Ballard Spahr's Energy and Project Finance Group, Public Finance Group, and Climate Change Practice stand ready to provide additional information about the ARRA, obtaining grants and loan guarantees, and implementing sustainability initiatives.

        For assistance, please contact:  R. Thomas Hoffmann (hoffmannrt@ballardspahr.com; 202.661.2215; Blake K. Wade (wadeb@ballardspahr.com; 801.531.3031); Charles S. Henck (henck@ballardspahr.com; 202.661.2209); or Robert B. McKinstry, Jr. (mckinstry@ballardspahr.com; 215.864.8208). 

        RELATED PUBLICATIONS

        For further information on ARRA provisions relating to Hospitals and Universities, click here.

        For further information on ARRA provisions relating to investments in Alternative Energy Technologies, click here.

        For further information on ARRA provisions relating to Bonding Authority, click here.

        1  ARRA makes the Davis-Bacon labor standards, requiring generally that prevailing wages must be paid on public works projects, applicable to projects financed by New CREBs and ECBs.

        2  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. 

        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.


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