Alert 7/17/2009 5:00:00 AM

Treasury Releases Guidance for Renewable Energy Grants in Lieu of Tax Credits

Many clean energy companies are grappling with the question of how to optimize the federal benefits available to them, often comparing tax credits and grants in lieu of tax credits available from the U.S. Department of Treasury (“Treasury”) under Section 1603 of the American Recovery and Reinvestment Act of 2009 (“Section 1603”). On July 9, 2009, the question was clarified when Treasury issued guidance on its grants in lieu of tax credits program. The new guidance includes three documents – an application form, a statement of terms and conditions and a 20-page instruction booklet (“Program Guidance”) – which can be found on Treasury’s website here.

Section 1603 establishes a program whereby an eligible person may, in lieu of claiming the production tax credit or the investment tax credit (under Sections 45 and 48 of the Internal Revenue Code (“Code”), respectively), apply to Treasury for direct reimbursement of a portion of the expense of “specified energy property.” When enacted, the program was designed to respond to the diminished demand for tax credits as a result of compromised debt markets. While those markets are reviving, the program continues to offset project development costs and, therefore, improve opportunities for obtaining debt for qualifying projects. Although it is estimated that $3 billion will be awarded pursuant to the program, there is no limit on the individual grant or program totals. Indeed, a Treasury official has indicated that the application process is not competitive and all eligible applicants will receive cash grants. The grant functions similarly to a refundable tax credit in that the taxpayer need not pay any taxes to receive payment. Moreover, unlike a loan, the taxpayer does not have to repay any of the grant so long as the property is owned and used in accordance with program guidelines.

More specifically, Section 1603 provides a grant to persons who place in service specified energy property either (i) during 2009 or 2010, or (ii) after 2010 if construction began on the property during 2009 or 2010 and the property is placed in service by the “credit termination date.”  Depending on the type of property, the amount of the grant generally equals either 10% or 30% of the basis of the property, and the credit termination date is January 1 of 2013, 2014 or 2017. The table below outlines the credit termination date and percentage of eligible cost basis for each type of energy property.

Specified Energy Property

Credit Termination Date

Applicable Percentage of Eligible Cost Basis

Large Wind

Jan 1, 2013

30%

Closed-Loop Biomass Facility

Jan 1, 2014

30%

Open-Loop Biomass Facility

Jan 1, 2014

30%

Geothermal under Section 45 of the Code

Jan 1, 2014

30%

Landfill Gas Facility

Jan 1, 2014

30%

Trash Facility

Jan 1, 2014

30%

Qualified Hydropower Facility

Jan 1, 2014

30%

Marine & Hydrokinetic

Jan 1, 2014

30%

Solar

Jan 1, 2017

30%

Geothermal under Section 48 of the Code

Jan 1, 2017

10%1

Fuel Cells

Jan 1, 2017

30%2

Microturbines

Jan 1, 2017

10%3

Combined Heat & Power

Jan 1, 2017

10%

Small Wind

Jan 1, 2017

30%

Geothermal Heat Pumps

Jan 1, 2017

10%

The Program Guidance clarifies certain requirements for the grant program and defines key terms, including “specified energy property,” “placed in service” and “beginning of construction.”  For example, the beginning-of-construction requirement is satisfied when “physical work of a substantial nature begins.”  Pursuant to a safe harbor, an applicant may treat physical work of a significant nature as beginning when the applicant incurs more than 5% of the total cost of the property (excluding the cost of any land and certain preliminary activities). The Program Guidance also explains who can apply for Section 1603 payments (entities that do not pay federal taxes are generally ineligible unless they invest through a taxable blocker corporation), which units of property may be grouped together in a single application, when a lessor may pass the payment through to a lessee and what amount of the payment must be returned if the property is disposed of to a disqualified person or ceases to be specified energy property. The Program Guidance additionally lists the supporting documentation necessary to demonstrate that a particular type of property is eligible, that construction has begun and that the property has been placed in service.

Application Procedures

Treasury will be accepting applications online via a web-based application that is designed to expedite program implementation. Although the form is available presently, applications will not be accepted until on or about August 1, 2009. A completed application will include the application form, supporting documentation, signed terms and conditions, and complete payment information. Applicants must have a Data Universal Numbering System number, which may be requested by calling 1-866-705-5711, and must register with the Central Contractor Registration.

In short, Treasury has provided useful information about a program that is significant for the current clean energy sector and, therefore, likely to inform key decisions being made by new ventures and investors alike.