The Energy and Treasury departments released eagerly awaited guidance Thursday to help renewable energy project developers apply for roughly $3 billion in stimulus funds, which experts say will open the market to many technologies that weren't economically feasible before.

The American Recovery and Reinvestment Act offers project developers the option of taking tax grants in lieu of tax credits, which became less useful when the economic downturn shrank tax liabilities and tight credit made it difficult, if not impossible, to secure financing.

The departments released the guidance, terms of conditions and a sample application, although applications won’t be accepted until next month. The rules are a major step that will spur private sector investment in clean energy and move the U.S. closer to President Barack Obama’s goal of doubling renewable energy capacity in three years, according to Matt Rogers, a Department of Energy (DOE) senior advisor charged with implementing ARRA funding.

“By getting these rules out there and making it clear how to apply we’re hoping this will bring that private capital back from the sidelines and into the market quickly,” Rogers said during a conference call with reporters Thursday.

The tax grants will offset between 10 percent and 30 percent of the project’s cost, depending on the technology type. Construction must begin by the end of 2010 and the projects must be placed into service by 2017 at the latest for certain types of technologies. The Treasury Department expects the program will benefit some 5,000 projects, and seems ready to boost funding from an estimated $3 billion if demand warrants an increase.
Credit termination date and credit percentage, by project type
Courtesy of Energy and Treasury departments

Under this temporary program, developers who previously qualified for the production tax credit can now opt for the investment tax credit, which is based on the cost of the project, not the amount of electricity to be generated. Those eligible to claim the investment tax credit may then elect to receive a direct payment, rather than having the credit paid over 10 years and based on the amount of electricity generated. Cash grant recipients must agree to give up future tax credits.

The program allows project developers to structure transactions in a different way, according to Minneapolis-based attorney Greg Jenner. Previously projects eligible for the production tax credit secured financing from large banks and other institutions carrying big tax liabilities, which made them interested in investing in green power projects to take advantage of the tax credit benefit. Many projects stalled when the tax equity market dried up in late 2008 but now the cash grant takes the place of the tax equity financing.

“All of a sudden because the government is providing the equity, these deals can get done with debt now,” Jenner said. “It opens up a range of opportunities.”

Jenner, a partner with Stoel Rives law firm, has several clients around the country with shovel-ready projects who have been waiting for the details of this program to be released, he said, adding that some wind developers are “chomping at the bit.”

The tax grant program has opened the market to many renewable energy technologies that may not have been economically feasible before, according to John Gimigliano, a principal in charge of KPMG’s energy sustainability tax practice.

“I call it the democratization of the production tax credit,” Gimigliano said.

Biomass, in particular, can be characterized as a winner in the program, both men said. Previously, biomass received half the credit as solar and wind, but under the tax grant program, its credit increased to 30 percent.  

“Biomass has gone from the poor stepchild to equal with the others,” Jenner said.

Gimigliano has a client that previously would’ve been too small to secure tax equity financing to turn its biomass into electricity. It would have instead used its biomass for other purposes but now is reconsidering since the government will offset 30 percent of the project.

Although projects must meet size thresholds to qualify for the grants for certain technologies, other projects, such as solar, can be of any size. There could be lots of small-scale or distributed generation projects launched "at a scale we haven’t seen before,” Gimigliano said.

The guidance removes much of the uncertainty surrounding the program. “Treasury has come up with a set of rules that will make it as easy as possible for people to get this grant,” Jenner said. “Now that lenders know it’s going to be a piece of cake, they now know what they can lend against.”

The Treasury and Energy departments aim to issue the cash grants within 60 days of receiving completed applications, but they could receive more applications than they expect. If there is a flood, applications may not receive an exhaustive review, Gimigliano said, although he does expect the program to receive a certain amount of scrutiny on the back end. Previously, the Internal Revenue Service audited tax credit recipients, but he said it’s unclear if the agency will continue doing so or if the Treasury or Energy departments will assume the responsibility.

“Getting the money will be easy part,” Gimigliano said. “The challenge may be keeping all of it (on subsequent audit by the federal government).”

Image CC licensed by Flickr user Scott Ableman.