Stimulus Act offers tax credit choices for renewable developers

    Renewable energy developers have been hit harder than most by the ongoing financial crisis.  Tax equity financing provided vital capital for renewable energy projects, but the banks that drove this market no longer have profits to offset, have profits but don’t need the credits, or have gone bankrupt. Congress stepped in with three key changes to the Production Tax Credit and the Investment Tax Credit when it passed the American Recovery and Reinvestment Act in February:

• PTC Extension - Extension of the Production Tax Credit to facilities placed in service before 2013 (wind) and 2015 (biomass, geothermal, landfill gas, hydropower, and marine renewable).
•  Expansion of ITC Eligibility – Owners of facilities eligible for the Production Tax Credit can now elect to receive the Investment Tax Credit instead, equal to 30% of the tax basis of the facility.
• Cash Grants In Lieu of ITC- Owners of ITC-eligible facilities which begin construction in 2009 or 2010 and are completed within 4 -8 years may elect to receive a cash grant from the DOE equal to the amount of the ITC.

These changes are good news for the renewable energy industry. The PTC extensions bring some much-needed long term stability to the industries, eliminating (at least for the next 3-5 years) the biannual boom-bust cycle and frantic lobbying linked to the short term extensions of the PTC. The cash grants should help to mitigate the disastrous effect of the financial crisis. One exciting result of these changes is that while the production tax credit is limited to electricity sales from renewable facilities to unrelated third parties, the investment tax credit has no such limitation. This means that previously PTC-ineligible on-site renewable power or new biomass cogeneration may now be eligible for the investment tax credit or cash grant.

PTC, ITC or cash grant? Which makes the most sense for your project?  A recent report by researchers at NREL and Lawrence Berkeley National Laboratory takes a first look at the math for wind, biomass, landfill gas and geothermal projects. Their conclusions? On the numbers alone:

• The ITC or cash grant is much better than the PTC for closed-loop biomass under all scenarios.
• PTC is generally better than ITC/grant for wind and geothermal.
• Landfill gas is evenly split, though the ITC becomes more attractive as installed costs increase.

The authors are sure to point out that qualitative factors, such as the availability of tax equity financing, performance risk, or the decision to use subsidized energy financing may be even more important than the results of any quantitative analysis.  Ultimately these decisions should be made on a project-by-project basis.

Comments

[Tim]

Wow, this is really clever. Thanks!

[Nolan]

I think it is fantastic how the stimulus funds are making a difference. They are being taken advantage of all the time with the installation of geothermal heat pumps to replace high energy heating and cooling systems.