American Recovery and Reinvestment Act Provides Billions for Biomass
By: TODD A. TAYLOR & SCOTT J. DORFMAN
March 20, 2009
On February 17, President Obama signed into law the American Recovery and Reinvestment Act, a bill that pledges billions of dollars in grants, loan guarantees and tax credits to companies that are developing green energy technologies. The Act, with a total price tag of $787 billion, pledges $43 billion for energy development in the wind, solar, advanced biofuels, biomass, and other renewable energy sectors. In the biomass sector, the Act provides a number of incentives for companies to research, develop, and commercialize next-generation technologies.
Tax and Accounting Provisions
The Act extends the production tax credit (PTC) for qualified biomass and municipal solid waste facilities through December 31, 2013. The PTC is a per-kilowatt-hour based tax credit that can be claimed by qualified taxpaying facilities that generate electricity and sell to an unrelated purchaser during the taxable year. Closed-loop biomass facilities are eligible for a 2.1 cents per kWh PTC and open-loop biomass and municipal solid waste facilities are eligible for a 1 cent per kWh PTC, which is available for ten years from the date the facility is placed in service. Closed-loop biomass is defined in Internal Revenue Code regulations as “any organic material from a plant which is planted exclusively for purposes of being used at a qualified facility to produce electricity.” Open-loop biomass consists of agricultural livestock waste materials and any cellulosic waste material that is derived from forest, wood waste or agricultural sources. The extension of the PTC provides longer-term policy certainty for tax equity investment.
The Act also permits taxpaying biomass, landfill gas, and trash renewable energy facilities to claim an investment tax credit (ITC) in lieu of claiming the PTC, provided the facility is placed in service until December 31, 2013. The ITC was previously available only for solar and geothermal facilities. The ITC provides a credit of 30 percent of the qualifying cost of a facility’s new equipment, but the facility owner must reduce the depreciation basis for the facility by half the amount of the ITC, meaning that 85% of the cost of the facility may be depreciated. New equipment under the ITC means that the equipment must be constructed by the taxpayer or the original use of the equipment must begin with the taxpayer. The Act also repeals an existing limitation that did not allow facilities to claim the full value of the ITC if property was financed through industrial revenue bonds or other subsidized renewable energy financing. The ITC substitution election for all renewable energy facilities is expected to cost roughly $300 million.
The Act also addresses the problem many developers are experiencing in monetizing PTCs and ITCs due to the uncertain future tax appetites of institutional investors. To deal with the problem, the Act provides for the U.S. Treasury Department to issue grants of up to 30 percent of a qualified facility’s tax basis in lieu of claiming the PTC or ITC. The grant in lieu of PTC or ITC is expected to significantly lower project financing costs, and enable a more simple debt and equity financing structure. Closed and open-loop biomass, landfill gas and municipal solid waste facilities are eligible for these grants, but only if they are placed in service in 2009 or 2010, or initiate construction in 2009 or 2010 and are placed in service by January 1, 2014. The treasury department will pay the grant within 60 days of the project’s commissioning.
The Act also creates a new 30 percent investment credit for a “qualifying advanced energy property” project, designed to spur investment in renewable energy equipment manufactured domestically. In the biomass context, a qualifying advanced energy property project is defined as a project that re-equips, expands or establishes a manufacturing facility for property designed to be used to produce energy from biomass. A project must undergo a competitive bidding process and be certified by the Secretary of the Treasury, in consultation with the Secretary of Energy, in order to be eligible for the credit. The Act provides that up to $2.3 billion in credits may be allocated.
Finally, the Act provides for a 50 percent “depreciation bonus” for capital expenditures on new equipment placed in service in 2009, including biomass facility capital expenditures, provided that taxpayers were not committed to the investment before January 1, 2008. The remainder is depreciated over the regular depreciation period. The depreciable amount is reduced if the taxpayer elects to take the ITC, since under the ITC rules the adjusted basis of the facility must be reduced by one-half of the amount of the ITC claimed. Then the taxpayer calculates bonus depreciation using that adjusted basis.
The Act further extends the maximum carryback period for net operating losses from two to five years for losses in 2008 or 2009 for businesses with gross receipts of up to $15 million. The cost of the depreciation bonus and net operating loss carryback period provisions is roughly $6 billion.
Bonds and Loan Guarantees
In addition to the above tax and accounting incentives, the Act provides an additional $1.6 billion in funding for Clean Renewable Energy Bonds (CREBs). CREBs are bonds issued by a qualified issuer, such as a governmental body, mutual or cooperative electric company, public power provider, or clean energy bond lender, to fund certain qualified renewable energy facility expenditures, including closed and open-loop biomass facility capital expenditures. The holder of a CREB can claim a tax credit that is equal to the product of the CREB’s face value and the CREB’s credit rate.
The Act also contains a “rapid deployment” Renewable Energy Loan Guarantee Program, which is a temporary loan guarantee program for projects that begin construction by September 30, 2011. The $6 billion appropriation is projected to support at least $60 billion in loans for renewable energy systems, including energy systems using closed-loop and open-loop biomass, and transmission technologies. Loan guarantee recipients must be entities borrowing to develop projects using current commercial technology for renewable energy systems that generate electricity or thermal energy, and facilities that manufacture related components.
Direct Spending
The Act dramatically increases the amount of federal government spending on renewable energy and energy efficiency programs, providing $16.8 billion in direct spending over the next ten years. The money will specifically be appropriated to the Department of Energy’s Office of Efficiency and Renewable Energy (EERE). While the majority of direct spending, some $11 billion, goes to modernizing the U.S. electricity grid using smart grid technology, the Act does provide $2.5 billion for renewable energy research, development, demonstration, and deployment.
Biomass-related projects receive roughly $800 million of this renewable energy funding, twice as much as geothermal projects. EERE will make determinations on which biomass projects to fund in the coming months and years.
Finally, the Department of Defense will receive $300 million in funding for research, development, testing and evaluation of renewable energy technologies, including research and development of bioenergy technologies.
Takeaway
Congress recently passed and the president recently signed the Omnibus Appropriations Act of 2009, which will provide hundreds of millions of dollars to biomass projects, and the American Recovery and Reinvestment Act pledges billions more. The agencies charged with implementing both still have a lot of work to do in setting forth the regulations that will guide the billions of dollars to be spent on the tax credits and grant programs outlined above. However, that should not stop opportunistic investors and biomass companies from getting a head start on the competition. With literally billions of dollars newly available in the form of tax credits, bonds, loan guarantees and grants, now is the time for biomass companies to determine how best to utilize new sources of funding to develop new projects or expand existing projects. If you have any questions regarding the American Recovery and Reinvestment Act, please call a member of Fredrikson & Byron’s Energy Group.