A Lot To Like In The House's Economic Stimulus Package
The federal economic stimulus package passed by the House of Representatives on January 28 (H.R. 1) contains numerous provisions that should put a smile on the face of renewable energy advocates. Some key provisions of the bill include:
• $18.5 billion to promote energy efficiency and renewable energy, including $2 billion for renewable energy research and development and $1 billion to promote development of advanced battery technologies.
• $4.5 billion to fund "smart grid" research and improvements.
• Authorization for up to $3.25 billion in loans to the Western Area Power Administration (WAPA) to upgrade the transmission grid in the western United States, specifically to accommodate renewable energy.
• Authorization for the Bonneville Power Administration (BPA) to borrow up to $3.25 billion to improve its transmission system in the Pacific Northwest.
• Extension of the production tax credit (PTC) for wind energy to the end of 2013, and for other renewables (including biomass and geothermal) to the end of 2014. The PTC for these resources currently expire at the end of 2009 and 2010, respectively.
• Termination of a rule reducing the cost basis for government-subsidized renewable energy projects. That rule had limited the ability of some government-sponsored projects (mostly solar) to take full advantage of the investment tax credit (ITC).
The truly new ground in H.R. 1, however, concerns alternative financing for renewable energy projects. First, Section 1602 of the bill gives developers of PTC-eligible facilities that come online in 2009 or 2010 the option to take the ITC instead. The primary distinction is that the PTC is a credit based on electricity produced, whereas the ITC is calculated as a percentage of the cost basis of the facility.
Second, Section 1721 of H.R. 1 allows renewable projects of all types to receive a grant from the Department of Energy of up to 30% of the cost basis of the facility, in lieu of tax credits (either the PTC or the ITC). To qualify for a grant, construction of the project must start by September 30, 2011.
To date, renewable energy projects have been financed largely with tax credits, either the PTC or the ITC. Developers rarely owe enough federal taxes to use all the credits, so they finance projects by selling those credits to another party with a large tax appetite. Historically, those partners have been big banks and investment houses, but the recent sharp decline in financial sector profits has significantly reduced the demand for tax credits. The loss of a market for tax credits has trickled down to cause a sharp decline in the number of renewable energy projects moving forward.
Sections 1602 and 1721 of H.R. 1 aim to break this logjam in two ways. First, the option to take the ITC instead of the PTC hopefully will make it easier to finance smaller projects and newer technologies that have high capital investment costs but comparatively low energy output. Also, the ITC allows the party using the tax credit to take the entire credit in the year the project comes online, whereas use of the PTC must be spread out over several years. Even in situations when the PTC for a particular project may be worth more when discounted to net present value (i.e. a large wind farm), most tax investors would rather realize the full tax credit value up front rather than spread out over time.
Section 1721 goes a step further, and recognizes that in the absence of a robust market for tax credits, the government can instead stimulate renewable energy development by providing direct grants in an equivalent amount. The cost to the Treasury is the same, but development is not dependent on finding a partner hungry for tax credits.
Renewable energy advocates should work to ensure that these provisions survive the Senate and make it to President Obama's desk for signature as soon as possible.
Post authored by David Petersen, partner practicing in the Sustainability and Real Estate and Land Use Groups.
