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Federal Incentives for Renewable Energy Projects
Production Tax Credit (PTC)
The Federal PTC provides an inflation-adjusted tax credit for electricity produced from renewable energy sources, including wind, biomass, and geothermal. For electricity produced and sold during 2006, the adjusted PTC amount is 1.9¢ per kWh. Given that typical sale prices of electricity range from 3–6¢ per kWh, the PTC, at 1.9¢, represents a substantial portion of the revenue stream of a renewable energy project, and project sponsors should carefully consider ownership scenarios that take advantage of the PTC. Note that the PTC amount is reduced for open-loop biomass and landfill gas, and that as of 2006 solar energy systems are NOT eligible for the PTC.
To qualify for the PTC, electricity must be produced by the person taking the credit, and sold to an unrelated party. In a project with multiple owners, allocation of credits must be in direct proportion to ownership interests. The entity using the credit must either take an active role in project management or else use of the credit is restricted to tax liability incurred through other “passive” investments. Various strategies exist for capturing the value of the PTC, and analysis of the requirements for claiming the credit and evaluating interactions with other subsidies is complex. We recommend expert assistance be sought on the latest information in this ever-changing area, including the current status on the PTC expiration.
Renewable Energy Production Incentive (REPI)
The REPI provides financial incentive payments for electricity produced and sold by new qualifying renewable energy generation facilities. Eligible electricity production facilities are those owned by state and local government entities (such as municipal utilities and PUDs) and not-for-profit electric cooperatives. Unfortunately, incentive availability is subject to annual appropriations, and incentive payments are prorated if funds are limited. While this incentive offers an alternative for entities not eligible for the PTC, the uncertainty of annual appropriations substantially reduces its value to many projects.
Accelerated Depreciation
Wind, solar, and geothermal projects are eligible for Accelerated Depreciation through the Modified Accelerated Cost Recovery System (MACRS), which allows a project to be depreciated over five years for tax purposes. The depreciation benefits, however, will only apply to that part of the project that has been financed with equity. The portion of the project financed by non-recourse debt—i.e. financing that is tied solely to the project and not the assets of the borrower—is not eligible for the depreciation benefits. If taking the PTC, individuals and closely held corporations can only use this depreciation tax benefit if they are actively involved in the project or have offsetting passive income.
Clean Renewable Energy Bonds (CREBs)
Created by the 2005 Federal Energy Policy Act, CREBs can be issued to finance the development of renewable energy projects. CREBs are similar to a “tax credit bond” that currently exists in the tax code for school construction under the Qualified Zone Academy Bond (QZAB) program. Qualified issuers of the bonds include political subdivisions of the state such as local governmental bodies (including municipal utilities), tribal governments, and mutual or cooperative electric companies. In essence, a clean energy bond would provide these issuers with interest-free loans for financing qualified energy projects. CREBs do not require any corporate contribution and do not limit which parties can invest in the securities. The bonds must be issued in 2006 and 2007, but their proceeds can be spent at a later date. The anticipated term of such bonds is approximately fifteen years and is periodically adjusted by the U.S. Treasury along with the amount of the credit that can be claimed against bondholders’ federal taxes.
With a conventional bond, the issuer must pay interest to the bondholder. But with a CREB, the federal government pays a tax credit to the bondholder in lieu of the issuer paying interest to the bondholder. The U.S. Treasury Department sets the rate of the credit on a daily basis, in an amount that permits the issuance of the tax credit bond without discount and without interest cost to the issuer. A bondholder can deduct the amount of the tax credit from the total income tax liability. The bonds are taxable, so if the credit is worth $1,000 and the bondholder is in the 35% tax bracket, the bondholder’s tax liability would be reduced $650.
U.S. Department of Agriculture (USDA)
USDA programs are excellent sources of funding and can provide valuable financial support at various project phases—including the difficult-to-fund feasibility phase—and for various project costs. The USDA Renewable Energy System and Energy Efficiency Improvements grant and loan program, also referred to as Section 9006 of the Federal Farm Bill, provides grants and loan guarantees for purchases of renewable energy systems and energy improvements for agricultural producers and rural small businesses. The grant maximum is 25% of eligible project costs, up to $500,000 for renewable energy system grants, and up to $250,000 for energy efficiency grants. The maximum loan guarantee is 50% of eligible project costs, as is the maximum combination of loan guarantee and grant funds. To learn more about section 9006 and other USDA grant programs supporting renewable energy projects, visit the: USDA Energy Systems website.
US EPA Financing Programs Guide & Decision Tool for Communities
EPA’s new Decision Guide, "Clean Energy Financing Programs: A Decision Resource for States and Communities," will help state and local governments design the appropriate finance programs for their jurisdiction. The "Financing Program Decision Tool" is for state and local governments interested in developing a financing program to support energy efficiency and clean energy improvements for large numbers of buildings within their jurisdiction.
