Federal Tax Credits - Environmental Business Council of New

Report
Federal Tax Credits and Renewable
Energy Financing
Environmental Business Council: CT Chapter
Solar Energy Programs in Connecticut
June 23rd, 2011
Federal Tax Credits
•
Renewable energy projects have historically been supported through the US tax
code, primarily through:
–
–
–
•
•
•
•
The production tax credit (“PTC”) in Section 45,
The investment tax credit (“ITC”) in Sections 25D and 48, and
Accelerated tax depreciation in Section 168 (“MACRS”)
Historically, renewable energy developers had two options in order to monetize the
favorable tax benefits granted through the tax code: either 1.) offset eligible
corporate income, or 2.) utilize tax equity to monetize the PTC, ITC, and MACRS
(typically used by developers that don’t manufacture taxable income)
Through the end of 2011, developers have been presented a third option, 3.) utilize
1603 Treasury Grants to monetize PTC and ITC
Recently, developers have also successfully utilized the New Markets Tax Credit as
another source of tax credits to be used in the renewable energy sector.
However, developers still need to utilize either 1.) eligible corporate income, or 2.)
tax equity to monetize the MACRS
1603 Grant and Investment in
Renewables
• Prior to PTC and ITC extensions in 2007‐2008, annual wind and solar
installations fluctuated considerably, reflecting inconsistent policy
• The introduction of the 1603 Treasury Grant in 2009 had an immediate
impact on the U.S. clean energy market
• We estimate that over $7 billion of 1603 Treasury Grants have been
awarded since 2009, and $5 billion more could be committed during the
remainder of 2011.
Type
Wind
Solar
Geothermal
Other
Total
Number of Projects
244
2,185
35
145
2,609
Source: U.S. Department of the Treasury
$
$
$
$
$
Total Amount Awarded ($)
5,614,938,702.00
936,009,351.00
268,124,199.00
183,458,288.00
7,002,530,540.00
$
$
$
$
$
$ per Project
23,012,044
428,380
7,660,691
1,265,230
2,683,990
Investment Tax Credit
After years of instability ITC is extended for more than one or two
years
• Based on the cost of qualifying equipment
– Generally 30% of tax basis
– Credit is claimed entirely in the year in which property is placed in service
• To qualify for ITC, solar facility must be placed in service by taxpayer
before January 1, 2017 (i.e., no later than December 31, 2016)
• Nonrefundable but can be carried back one year and forward 20 years
• Basis of property reduced by 50% of ITC
• Recapture if disposed of within 5 years
• No cutback for subsidized financing
Section 1603 Grant in Lieu of ITC
A much needed shot of adrenaline for the industry
• Developer can elect to receive cash grant in lieu of ITC
• ITC eligibility requirements for apply
• Project generally must be:
– Placed in service in 2009, 2010 or 2011, or
– Construction must begin before 2012 and project must be placed in service by
credit termination date
• Application due no later than September 30, 2012
• Grant generally operates in the same manner as ITC
– 30% of tax basis of qualifying property
– Subject to recapture if sold to disqualified person within 5 years
– Generally not included in recipient’s taxable income (but may be subject to state
tax)
– Basis reduced by 50% of grant amount
MACRS (Accelerated Depreciation)
Almost as valuable as the ITC but harder to monetize
• The level of acceleration in the depreciation of qualified assets
depends on type:
– Wind and solar qualify for 5-year MACRS
– Others generally qualify for 7-year MACRS
• Bonus Depreciation:
– For projects placed in service after September 8, 2010 and before
January 1, 2012, 100% bonus depreciation in first year
– For projects placed in service in 2012, 50% bonus depreciation in
first year
New Markets Tax Credit
Not a silver bullet but can be a helpful tool
• In the existence since 2000 with over $3 billion in credits awarded
– 39% tax credit
– Does not reduce cost basis for depreciation
– Can be combined with other Federal tax credits
• Previously NMTC has been mostly used for commercial real estate
and manufacturing
• NMTC is now being considered as a source of low cost capital for
renewable facilities
• Fairly complex structure, with high transaction costs, and a long lead
time
Impact of Federal Tax Credits:
Combined with State-level incentives, provides attractive rates, but
multiple stakeholders and regulatory frameworks add complexity
$0.45
$0.40
$0.35
$0.30
$0.25
$0.20
$0.15
$0.10
$0.05
$Northeast US
Energy
Ontario, CA
Germany
State Incen ves (SRECs)
Federal Incen ves
Italy
Impact of Federal Tax Credits:
Complexity of incentives comes with a price. While resource
adjusted rates in US are similar to FIT markets, complicated
regulatory framework has limited industry growth.
Impact of Federal Tax Credits:
How much will really be left after after 1603 Grant expires?
10.00
9.00
8.00
$ Billions
7.00
6.00
5.00
4.00
3.00
2.00
1.00
2005
2006
2007
2008
2009
Tax Equity
2010
Treasury Grant
2011
2012
2013
2014
Tax Equity Players:
Which of them will stick around post 1603?
Financing Solar Projects:
Tax Equity is the building block, what happens when 1603 goes
away?
John DeVillars
BlueWave Capital, LLC
Tel. 617.470.7297
Email. [email protected]
Eric Graber Lopez
BlueWave Capital, LLC
Tel. 617.401.7681
Email. [email protected]

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