Gregory Burkart, Managing Director and Practice Leader, Site Selection & Business Incentive Advisory Services, Duff & Phelps, LLC (Apr/May 10)
The American Recovery and Reinvestment Act continues to spur entrepreneurial activity in clean energy and sustainable business. Projects in solar power, geothermal energy, hydropower, and bio-fuels - and the manufacturers that support them - are still vying for a slice of the $67 billion in federal grants, credits, and financing of direct loans or loan guarantees. States have also created incentives for projects, including tax exemptions or abatements and cash grants.
The wind energy industry has especially benefited from these incentives. According to the U.S. Department of Energy, the wind industry finished 2009 with 34,863 megawatts of installed capacity, a 37 percent increase from 2008. Fourteen states reached 1,000 megawatts or more of installed capacity, as compared to only seven states that reached that mark in the previous year. Thanks to incentives, Texas and Iowa led the nation for installed capacity in 2009.
The federal government has lent significant financial support to the wind industry. In a recent survey by the National Renewable Energy Laboratory, 73 percent of the respondents indicated that the new Section 1603 grants, in lieu of production and tax credits, were either "extremely important" or "very important" to renewable energy project development. The dollar figures provided support those responses. Since August, the U.S. Treasury has approved $2.6 billion of Section 1603 grants. Eighty-five percent of the grants have gone to the wind industry, with an average project award of $47 million.
Section 1603 provides cash grants equaling 30 percent of the basis of "specified energy property" (only 10 percent in certain instances). The term "specified energy property" generally includes two broad categories of property: renewable-based electricity production property (IRC Section 45) and qualifying alternative energy credit property (IRC Section 48). More specifically, "specified property" is depreciable (or amortizable in lieu of depreciation), tangible personal property, and other tangible property (excluding buildings) as defined in the Income Tax Regulations. The "tangible personal property" must be an integral part of the facility and must be located at the facility.
To determine the basis of the "specified energy property," the Treasury has adopted the general rules of determining the basis for federal income taxes. Typically, the basis is the cost of the property placed in service after 2008, "unreduced by any other adjustments to basis, such as that for depreciation, and includes all items properly included by the taxpayer in the depreciable basis."
While the Section 1603 grant program will expire on October 1, 2011, eligible projects must commence in 2009 or 2010, and the projects must be serviceable by various credit termination dates. "Placing the property in service" means that the specified energy property is ready and available for its specific use. Where a project contains used parts, the property still qualifies for "original use" if the cost of the used parts is not more than 20 percent of the total cost of the facility.
To be eligible for the Section 1603 Grant, the specified energy property must be originally placed in service by the owner or lessee. The four categories of persons who are not eligible for the Section 1603 Grant are:
• Any federal, state, or local government;
• Any organization described in IRC Section 501(c) and exempt from taxation under IRC Section 501(a);
• A clean, renewable energy bond dealer, or a cooperative electric company;
• Any partnership or pass-thru entity, any direct or indirect partner that is an organization or entity described above, unless the person only owns an indirect interest in the applicant through a blocker sub (i.e., a taxable C corporation).
To attract program beneficiaries, the Treasury has been paying the grants within 60 days of receiving a completed application for property that has been placed in service. The grant is not subject to federal income tax (with exceptions for certain leases), although it may be subject to state income and franchise or gross receipts taxes. Instead, the basis of the "specified energy property" is reduced by an amount equal to 50 percent of the cash grant.
Since 1603 grants are available for projects in all 50 states, individual states compete to attract new wind projects by offering a full range of incentives, including exemptions, credits, grants and rebates, and abatements. According to the Database of State Incentives for Renewable Energy (DSIRE), at least half of states offer incentives. Many states offer a variety of incentives to support specific industries.
In Texas, Iowa, and California - states that cumulatively represent more
than 15,000 megawatts of installed capacity - programs offer favorable
financing for wind projects. The Iowa Energy Center administers a state
loan program called the Alternate Energy Revolving Loan Program. Through
a competitive process, developers can apply for a zero percent interest
loan with a maximum term of 20 years. The maximum loan amount is $1
million, and a lender provides the remainder of the funding at market
For wind projects in Colorado, Texas, Florida, or California, developers
can tap into what DSIRE calls Property Assessed Clean Energy (PACE)
financing. In each of these states, the legislatures have authorized
local communities to offer long-term financing to property owners for
alternative energy improvements. In exchange, the property owner must
agree to a contractual assessment on the property that is used to repay
the loan. The programs share similarities with tax-increment finance
districts. While each state differs, the laws generally require each
local community to adopt a formal plan that may include:
• A map delineating the area where the contractual assessments may be
• A model agreement between the property owner and local government;
• A requirement whereby the property owner may contract for the
installation or purchase the systems directly;
• A requirement of whether the installers of the alternative energy
improvements must be licensed;
• A method for determining whether property owners have the financial
clout to repay the assessments;
• Types of eligible facilities and improvements;
• A maximum aggregate dollar amount of contractual assessments;
• A method for prioritizing applications if requests exceed the
• A plan for raising capital required to pay for the improvements,
including whether local communities may issue bonds to fund the program;
• An itemization of the transaction costs and professional fees
associated with the financing, administration, and collection of the
Some local governments - like Boulder, Colorado and Berkeley, Sonoma
County, and Palm Desert in California - have already adopted PACE.
In addition to offering favorable financing, Iowa and Texas offer
corporate tax credits and exemptions as incentives for wind energy
projects. The legislature in Iowa enacted two separate production tax
credits, according to DSIRE. The Section 476C credit is $0.015 per
kilowatt hour for facilities placed in service on or after July 1, 2005
and before January 1, 2012. Under Section 476B, the credit is $0.010 per
kilowatt hour for facilities placed in service during the same time
period. But the Section 476C credit may be transferred only once to a
third party, while a Section 476B credit is freely transferrable. This
difference can affect financing for wind projects.
In Texas, corporations or other entities subject to the state's modified
franchise tax may deduct the cost of wind energy devices from their tax
liabilities, according to DSIRE. (The original language referred to
"solar energy devices," but House Bill 3 revised the overview to qualify
wind energy devices for exemptions and deductions.) The deduction is 10
percent of the amortized cost of the system from the taxpayer's
apportioned margin. Manufacturers, sellers, and installers of wind
technologies receive a franchise tax exemption, along with wind power
Texas and Iowa also offer specific property tax relief for wind
projects. Local Iowa communities may adopt an ordinance assessing wind
energy equipment at a special property tax valuation. The rate commences
at zero percent of the net acquisition cost in the first year, and
increases incrementally to a maximum of 30 percent of the net
acquisition cost in the seventh year and on. The special valuation is
permissible for 20 years, and at the end of the period, the property is
appraised at fair market value rather than 30 percent of the net
acquisition cost. To further benefit projects in Iowa, the Department of
Revenue will not assess wind property until the project is complete.
Additionally, wind projects are exempt from the state's Energy
Replacement Generation Tax, a replacement tax on generation facilities
in lieu of property taxes.
Texas permits a property tax exemption for wind projects. The exemption
is for the amount of the appraised property value that results from the
installation of a wind project. The exemption requires a completed Form
50-123, "Exemption Application for Solar or Wind Powered Energy
Other states also offer enticing incentives, and the winds of change may
mean new wind energy leaders are on the horizon.
Note: Detailed information on
the state and local tax exemptions and credits described above, in
addition to incentives not mentioned, can be found at the Database of
State Incentives for Renewable Energy (www.dsireusa.org).
For information relating to Treasury's Grant in Lieu of Tax Credits,
please see Treasury's Guidance (www.treasury.gov/recovery/1603.shtml).