2009 ECONOMIC STIMULUS LEGISLATION

Tax Provisions for Renewables and Conservation

The American Recovery and Reinvestment Tax Act of 2009 (the "Tax Act") contains a dizzying array of tax provisions designed to foster the development of renewable energy and energy conservation.

For the domestic renewable energy development industry, three sets of related tax provisions of the Tax Act are of principal interest. For a selected grouping of renewable energy generating facilities, these provi­sions (1) extend for an additional three years (for wind projects) or two years (for certain other types of projects) the period during which facilities qualifying for production tax credits ("PTCs") may be installed (Tax Act Sec. 1101); (2) allow the taxpayer to elect to claim a 30% investment tax credit ("ITC") instead of the PTCs (Tax Act Sec. 1102); and (3) allow the taxpayer to elect to receive a cash grant from the Treas­ury equal to 30% of the cost of certain of such facilities (and 10% of others), instead of either PTCs or the ITC (Tax Act Sec. 1603).

This range of new choices, together with the expansion of DOE's Loan Guarantee Program to cover renewable energy projects using current commercial technologies (discussed below), will challenge tax­payers and their advisors to devise new financing structures that can most efficiently use the incentives.

PTC Extensions to qualify for PTCs, wind energy facilities must be placed in service by year-end 2012; qualifying closed- and open-loop biomass, geothermal, landfill gas, municipal solid waste, hydropower, and marine and hydrokinetic facilities must be placed in service by year-end 2013. No extensions have been provided for refined coal or Indian coal production facilities.

For the facilities eligible for these PTC extensions (the "Eligible Facilities"), the extensions should be a sig­nificant aid to construction, equipment ordering, and financial planning. It is unclear, however, what level of demand will exist within the banking, insurance, and other markets for the "tax equity" capital that has supported the use of these credits.

The 30% ITC Election For the same Eligible Facilities, the option to claim a 30% ITC instead of the PTCs is an interesting new tax alternative. While the present value of this benefit may be somewhat less than that of the PTCs, its realization "up-front" (on placement in service of the facility) may present different structuring choices, and possibly access to different capital-market sources (such as, for example, the sale-leaseback market). In addition, for longer-term projects, this benefit may be available on a "progress expenditures" basis during construction.

The 30% Cash Grant Election the option to claim a cash grant in lieu of tax credits is the most striking new choice. It applies to 30% of the cost of the Eligible Facilities and 30% of the cost of fuel cell, solar, and small wind-energy properties that qualify for the ITC under Code Sec. 48, and to 10% of the cost of geo­thermal, microturbine, combined heat and power system and geothermal heat pump properties that qualify under Sec. 48. (For qualified fuel cell, microturbine and combined heat and power system properties, the grants are limited to the same amounts as the applicable ITC.) Significantly, there is appropriated to the Secretary of the Treasury "such sums as may be necessary" to effect this provision. The grant amount is not includible in the gross income of the taxpayer, and appears to reduce the tax basis of the property by only 50% of the amount of the grant.

For developers and others who do not have sufficient tax liabilities to use tax credits, this new cash grant option should be very significant. Some guidance from the Secretary will be needed on the procedure to claim these grants.

The Tax Act requires that grants be paid within a period of not more than 60 days after the later of the date of application or placement in service of the facility. Thus, this will not directly assist the provision of con­struction financing. Parties may wish to consider whether this might be combined with other advantages (such as ITCs on a "progress expenditures" basis, for appropriate projects) to fashion a workable strategy.

CREBs and QECBs.  We note that the Act also expands by $1.6 billion the authority to issue Clean Renewable Energy Bonds ("CREBs"), and by $2.4 billion the authority to issue Qualified Energy Conser­vation Bonds ("QECBs"). These are bonds that entitle the holder to a federal tax credit in lieu of interest payments. CREBs may be issued to provide Eligible Facilities for public power, electric cooperative and governmental entities. QECBs are to provide a variety of energy conservation and energy-related improvements and expenditures primarily for governmental agencies. It is not yet clear to us that this tax credit financing mechanism will be effective in practice.

For other projects, improvements and applications, the Act provides numerous additional tax incentives that may be available in individual cases.

Other Stimulus Provisions

Transmission and Smart Grid

Transmission projects and smart grid get a major boost from the Act. A total of $4.5 billion is appropriated for "electricity delivery and energy reliability," including modernizing the electric grid to include demand response, equipment to enhance grid security and reliability, and energy storage research, development,  and demonstration. The Secretary of Energy is directed to consult with FERC and other agencies, electric utilities, states, and other stakeholders to develop techniques for measuring peak load reductions and energy efficiency savings. The Act also authorizes grants to cover up to 50% of the cost of qualifying smart grid technology investments in urban, suburban, tribal and rural areas.

Federal Power Marketing Administrations

The Western Area Power Administration (WAPA) is provided with $3.25 billion in loans for new or upgraded electric power transmission lines, including transmission for renewables. Continuing a concept begun with Trans-Elect's participation in the Path 15 upgrade in California, and embodied in the 2005 Energy Policy Act, WAPA may permit other entities, including private parties, to participate in the funding, construction, or ownership of transmission projects financed under this section. The Bonneville Power Administration is given additional borrowing authority of $3.25 billion for transmission construction.

Energy Efficiency

A total of $16.8 billion is allocated to energy efficiency. The largest amounts are $6 billion for the cost of loan guarantees for renewable energy and electric transmission projects, sufficient to fund up to $60 billion of such guarantees (discussed below) and $5 billion to weatherize low and middle income housing through the Weatherization Assistance Program. In addition, $3.2 billion is allocated for the Energy Efficiency and Conservation Grant Program and $3.1 billion for State Energy Programs (SEP). Renewable energy research and development is allocated $2.5 billion, including $800 million to biomass projects and

$400 million for geothermal projects. At least $4.5 billion allocated to the federal building fund is available for measures necessary to convert GSA facilities to high-performance green buildings. Similarly,

$4.2 billion is allocated for facilities restoration and modernization for the Department of Defense.

A. Advanced Batteries

Of the $16.8 billion for "Energy Efficiency and Renewable Energy" programs, $2 billion is available for grants for the manufacturing of advanced batteries and components. The Secretary of Energy will provide grants to manufacturers of advanced battery systems and vehicle batteries that are produced in the United States, including advanced lithium ion batteries, hybrid electrical systems, component manufacturers, and software designers.

"Qualified Energy Conservation Bonds" can be used for research facilities and grants to support research in automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation, as well as to demonstration projects designed to promote the commercialization of advanced battery manufacturing technologies. The Tax Act increases to $3.2 billion the investment tax credit for all investment in advanced energy facilities, such as facilities that manufacture compo­nents for the production of renewable energy, advanced battery technology, and other innovative next-generation green technologies.

B. Clean Coal and Carbon Capture

The Act allocates $3.4 billion for "Fossil Energy Research and Development." Of this amount, $1 bil­lion is earmarked for fossil energy research and development programs, $800 million for the Clean Coal Power Initiative and $1.52 billion for a competitive solicitation for projects that demonstrate car­bon capture from industrial sources, including plant efficiency improvements for integration with car­bon capture technology. Qualified energy conservation bonds may also be used to support research and grants in technologies for carbon capture and storage as well as demonstration projects designed to promote the commercialization of such technologies designed to produce electricity. The Tax Act provides for $2.3 billion in tax incentives that can be used for investment in several categories of advanced energy facilities, including carbon capture and storage projects.

 Loan Guarantees

In addition to the tax incentives for renewable energy projects, Title IV of the Act adds a new Section 1705 to Title XVII of the Energy Policy Act of 2005 ("Title XVII"), which is expected to support more than $60 billion of loan guarantees by the Department of Energy for renewable energy projects and transmission projects that commence construction not later than September 30, 2011.

For renewable energy, projects using current commercial technologies will be eligible (in contrast to the previously authorized DOE loan guarantees, which were limited to innovative technologies). The eligible projects include not only renewable energy systems, but also facilities that manufacture components for such systems.

Eligible transmission projects include not only new transmission lines but also the upgrading of existing transmission lines. In determining whether to grant guarantees, the Secretary of Energy may take into account various factors, including the viability of the project without guarantees, the availability of other federal or state incentives, the importance of the project for reliability, and the project's impact on environ­mental and energy goals. However, since major transmission lines often take up to five years of permitting before construction begins, the September 30, 2011, deadline for commencement of construction may limit the applicability of these loan guarantees to projects well along in the pipeline, instead of operating as a stimulus to new projects.

DOE's Final Rule implementing Title XVII (the "Final Rule") describes detailed terms and conditions for its loan guarantees, and specifies a complex and highly specific process for the filing and consideration of applications, including both pre-application and full application phases requiring substantial factual sub­missions. We assume that the renewable energy and transmission projects now authorized for loan guar­antees will be subject to similar terms and conditions, and a similar application process, in each case with adaptations suitable to the expanded loan guarantee program now authorized by the Act. One significant difference is that, whereas under existing programs each borrower is required to pay a significant credit subsidy fee to cover DOE's cost of issuing the guarantee, the Act provides for an appropriation of $6 billion for the "costs of the guarantees" for renewable energy and transmission projects. This appropriation obvi­ates the need for DOE to recover the costs of its guarantees through the imposition of credit subsidy fees.

In the absence of tax credits, wind and other renewable energy projects are often unable to produce suffi­cient revenues to cover the debt and equity investments necessary to develop and complete the project. Unlike tax credits and other tax incentives, a loan guarantee does not supplement the revenues of a pro­ject so as to make it economically viable, although it does reduce the financing cost. For such projects, the loan guarantee may have to be combined with other incentives, such as investment tax credits or produc­tion tax credits (to the extent that a market for the same may exist), or the cash grant option discussed above.

Nothing in the Act suggests that a single project could not utilize both a loan guarantee and one of the tax incentive alternatives discussed above. In addition, the existing Final Rule directs the Secretary to con­sider, as one of the factors in determining whether to grant a loan guarantee, whether and to what extent an applicant will rely on tax incentives and other grants or subsidies at the federal or state level, supporting the project. However, the existing Final Rule does not require that any negative weight be given to the use of other incentives; indeed, in the preamble, the DOE stated that it recognized that "in certain circumstances, the multiple forms of Federal assistance to the same project could enhance important national energy policy priorities." The availability of these combined benefits presents interesting structuring opportunities for project developers and financing parties.

Conclusion

These are the highlights of the major spending, tax, and investment programs in energy infrastructure and renewable energy. Pillsbury has the details on how to understand the Act in all areas of infrastructure, so please do contact us for more specific information about how your business or project is affected by this landmark legislation.  For information on software and modeling of the economics of benefits that can be realized under this legislation, please contact Competitive Energy Insight Inc.  at  (858) 566 - 0221  (www.CEInsight.com)