One of the hot topics at last week's Renewable Energy Project Finance Seminar Pierce Atwood co-sponsored with the Environmental Business Council of New England was the Investment Tax Credit (ITC) Cash Grant program created by the American Recovery and Reinvestment Act (ARRA). The ITC cash grant is one of the most anticipated renewable energy incentives included in the ARRA. In short, it transforms the 30% investment tax credit (for which wind, biomass, marine and other renewable facilities are now eligible) into a cash payment from the Treasury Department. The grant must be paid within 60 days of the later of receipt of the application by the Treasury or the facility's in-service date. (For a recap of the changes to the renewable energy tax incentives introduced by the ARRA, check out this previous post.)
The cash grant program was intended to jump-start renewable energy project development after the collapse of the financial industry sharply reduced demand for the tax credits developers relied on to finance their projects. In the short term it has had the opposite effect. The Treasury Department's delay in issuing rules for the new program is part of a larger stimulus-induced slowdown, as developers wait to take advantage of the full range of incentives made available under the ARRA. One of the main reasons for the delay is Treasury's deep concern about the potential for fraud in the new program.
The switch from a tax credit based on the power output of a facility to the cost of construction dramatically changes the incentives for a renewable energy developer. Likely gone, for example, are the detailed siting and wind studies needed to ensure new wind facilities will generate and sell sufficient energy to generate the promised tax credits, since the ITC is not tied to the sale of energy. Unlike other ARRA renewable energy tax incentives, there is no cap on the size of individual grants or the total amount of grants to be issued, so there may be a temptation to pad the costs of the facility with fraudulent expenses and collect a larger cash grant. And unlike the ITC or the Production Tax Credit, the grants are not claimed as part of a tax filing, and the Treasury Department has indicated that it does not intend to audit grant recipients.
The concerns may be overstated: the grants likely remain subject to the reporting requirements and penalties of the Recovery Act itself, and any fraudulent applications would be subject to the treble damages and qui tam enforcement provisions of the civil False Claims Act. And ultimately, any problem is relatively short lived: only facilities that enter service in 2009 or 2010, or begin construction in those years and are completed by 2017, are eligible for the grant. Right now, the primary concern is getting the money out the door, so that the stimulus act will have its intended effect on the renewable energy industry.
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