The
American Recovery & Reinvestment Act of 2009, an economic stimulus package with tax and spending provisions totaling nearly $800 billion, was signed into law on February 17. The act contains a number of tax provisions that provide significant value to companies and individuals that are focused on producing renewable energy or reducing energy use through efficiency. By extending, modifying and enhancing several renewable energy and energy efficiency incentives, the stimulus package creates many opportunities for taxpayers to get paid for going green.
Adding Value for Renewable Energy Producers and Investors
The act expands support for renewable electric generation projects by providing an extension for the production tax credit and enhanced options for companies to choose between a longer-term production credit, an immediate credit or a cash grant. As difficult as it has been to finance any project in the current economic environment, renewable energy project financing has faced an additional hurdle because the tax investment that so many of these deals relied on for economic viability has become extremely difficult to secure. The act provides critical flexibility for investors and developers to realize federal incentive dollars needed for supporting renewable projects.
By extending the production tax credit for three years for most qualifying resources (wind, geothermal, biomass and others), the act provides longer-term stability for investment and strategic planning. The three-year extension is most advantageous to those projects that are, or are nearly, shovel ready, providing developers with a period of certainty and flexibility in which to plan, site, obtain financing and acquire construction materials.
Tax investors have provided a critical source of capital for renewable energy projects by investing cash into joint ventures in exchange for tax attributes, or through sale-leaseback structures. The number of available investors and the amount of investable capital, however, have contracted severely in the market. The act includes two changes to the basic operation of the tax credits that are designed to provide structuring and credit recognition flexibility. The first provides owners or investors in facilities that would otherwise be eligible for the production tax credit with the ability to elect the 30 percent investment tax credit in lieu of the production tax credit. The second allows qualified taxpayers the option to apply to the Treasury for a direct grant in lieu of the investment credit.
The investment tax credit election provides a significantly higher degree of certainty of returns to tax equity investors that may have loss carryovers or other uncertainties with respect to future tax liability needed to recognize the full value of the production credits as the credits accrue over a 10-year period. As the investment tax credit is based on initial cost instead of highly variable electricity production over the 10-year period, investors have a greater level of certainty with respect to the potential stream of available tax attributes. In addition to the certainty with respect to available tax liability and available tax attributes, there is a net present value advantage, as well as a cash flow advantage, to receiving the value in the first year a project is placed in service.
The option of grants in lieu of tax credits provides developers and investors yet another way to recognize the value of the tax incentives. The act authorizes the Treasury to provide grants in lieu of tax credits for property placed in service in 2009 or 2010 (or placed in service after 2010 and before the credit would otherwise terminate, if construction began in 2009 or 2010) that is otherwise eligible for the production tax credit or the investment tax credit. The grants are, in effect, a refundable income tax credit and can be paid to a developer or investor irrespective of current or anticipated tax liability (though certain types of entities, such as not-for profit organizations, are not eligible). Therefore, in certain circumstances, the grants allow the monetization of the tax credits through a direct government payment, rather than through the use of some form of structured tax financing. Which option a developer or investor should pursue depends on several factors, including project cost, projected project output, current and future tax liability, and others. Careful consideration of all these factors and modeling of project economics are necessary for choosing the ideal approach.
In addition, the act repeals the reduction to the investment tax credit for subsidized energy financing, and lifts the cap on the credit for small wind projects.
Providing Value for Producers of Renewable Energy and Energy Efficient Property
The act contains an important new incentive for companies investing in facilities that manufacture renewable energy and energy efficient property. This new qualifying advanced energy project credit provides a 30 percent tax credit for investment in advanced energy projects that assist in the establishment of manufacturing facilities that produce:
• Property designed to produce energy from the sun, wind, or geothermal deposits
• Fuel cells, microturbines, or an energy storage system for use with vehicles
• Electric grids to support intermittent sources of renewable energy
• Property designed to capture and sequester carbon dioxide
• Property designed to refine or blend renewable fuels or to produce energy conservation technologies
• New qualified plug-in vehicles and components
• Other property designed to reduce greenhouse gas emissions
This new credit serves the dual intent of further extending the value of tax credits up the renewable energy supply chain and further lowering the cost of renewable energy development through reduced material costs, while also increasing renewable energy-related manufacturing jobs.
Increasing Value for Reducing Energy Demand
The act contains incentives for individuals and companies that reduce total energy demand through investment in energy efficient property and vehicles, providing additional cost offsets for individuals and companies that go green.
The credit for qualified energy efficiency improvements, as well as residential energy property expenditures for items such as windows, insulation, or doors, was increased to 30 percent from 10 percent, and several credit limitations were raised through the extended December 31, 2010, sunset date. Additionally, the limits for the individual credit for residential energy efficient property, including solar electric, solar water, fuel cell, small wind and geothermal heat pumps, was lifted, and the reduction in the credit for subsidized energy financing was also repealed. Each of these modifications significantly decreases the cost for individual taxpayers to green their homes.
The act also amends the treatment of the credit for certain plug-in electric vehicles. The number of plug-in hybrid vehicles eligible for the full credit amount is limited to 200,000 per manufacturer, with the credit phasing out over a four-quarter period. Credit amounts for vehicles purchased after December 31, 2009, range from $2,500 to $7,500 per vehicle, depending on the battery capacity. The act also includes a credit with respect to the costs associated with converting any motor vehicle into a plug-in electric drive motor vehicle. The credit amount is 10 percent of qualified costs, up to a $4,000 maximum credit, until December 31, 2011. There is a provision increasing the credit rate for non-hydrogen alternative fuel vehicle refueling property to 50 percent, up to $50,000 for property placed in service during 2009 and 2010, and the maximum credit available for hydrogen refueling property is increased to $200,000. While plug-in cars are currently not slated for commercial availability until 2010, the provisions serve to establish a framework for accessing value for reducing reliance on fossil fuels.
The energy and efficiency provisions in the stimulus act create a number of opportunities for individuals and businesses to utilize government support to invest green. Support for renewable energy, energy demand reduction and advanced vehicle technologies provide an excellent opportunity to manage the cost of technologies for consumers and businesses trying to manage energy usage today or trying to prepare for a future in which regulation will change the way that energy is consumed.
Emily Cashwell is a manager in the Washington, D.C., office of Deloitte Tax LLP, and is a part of the organization's National Energy Tax Services team.
This article does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader's particular situation.
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