RenewNewEngland.com

Financing Renewable Energy Projects with New Markets Tax Credits

The new markets tax credit program has been around since 2001, but only recently has it received much attention as a means of financing renewable energy projects.  A full description of how new markets tax credit financing works is way beyond the scope of a typical blog post.  Suffice it to say that tax credits are awarded to investors who make investments in certain “community development entities” that in turn take the cash and invest it in businesses located in low-income communities (as determined by census data).

The investor receives a federal tax credit equal to 39 percent of the investment spread over seven years.  The business benefits through very-low-interest financing, and/or a measure of debt relief after the seven-year period.  For projects that qualify and line up all the necessary parties the benefit is substantial. 

A few years ago, Congress mandated that a larger percentage of new markets tax credits be employed in rural, rather than urban, areas. This meant that renewable energy projects, such as large-scale solar, wind, and biomass projects became attractive candidates for new markets tax credit financing.

One such project is Burgess BioPower located in Berlin, New Hampshire, and developed by Cate Street Capital. The 75-megawatt biomass production plant is expected to be the Northeast’s largest when completed and will play a large role in revitalizing an area of New Hampshire that has been struggling to stay afloat.  

The project will benefit from new markets tax credit financing as well as a section 1603 grant roughly equal to 30 percent of the project cost.  It stands as a model for pairing new markets tax credits and renewable energy tax credits to finance a worthwhile and important project.  In total, the project was financed by:

• $65,000,000 new markets tax credit financing
• $55,000,000 bridge loan against the expected grant and
• The proceeds from a taxable bond sale.

For the right project there are intriguing, and creative, ways to leverage a section 1603 grant (or tax credit) to increase the amount of new markets tax credits available.  Also increasing the potential benefit for projects located in Maine is the brand new Maine New Markets Capital Investment Program, which provides a 39 percent Maine tax credit for qualifying investments, thus creating an aggregate new markets tax credit equal to 78 percent of the investment.    

Maine Forest Service Announces Funding for Biomass Heating for Public Buildings

Last Thursday, the Maine Forest Service announced its Request for Application for its Public Building Wood to Energy Program, funded by $11.5 million in funds received under the American Recovery and Reinvestment Act (ARRA).  The Forest Service expects to use approximately $10 million of that money to fund at least fifteen "shovel-ready" projects to convert public buildings to wood or dual-fuel heating. Projects must be completed within one year of receiving a grant. The program is open to all Maine public entities or parties with public buildings, including schools, hospitals, state, county, local and tribal governments.

Two classes of projects will be eligible for awards:

Standard Projects:
Eligible for grants of up to $25,000.  Example projects include smaller conversions to wood based systems such as a small pellet boiler or furnace or appropriately-sized wood pellet stove.  Generally, these systems will be less than 200,000 BTU’s and will involve a single building or other small facility.

Complex Projects:
Eligible for grants of up to $750,000.  Systems in this category will typically be larger systems in excess of 200,000 BTU’s installed in larger facilities or serving multiple building such as heating several dorms on a college campus.

Applications are due by January 5, 2010, with awards granted as soon after reciept.  More information, including the complete Request For Applications, can be found at the Maine Forest Service's ARRA site.

The Forest Service's RFA represents the first significant funds Maine has put toward biomass conversion, despite several years of effort and study by Governor Baldacci's Wood to Energy Task Force and several legislative proposals to support biomass conversion for public buildings.  Many see biomass as essential to help reduce the state's reliance on oil in general and foreign oil in particular, an issue of particular concern in Maine, where over 80% of homes rely on #2 heating oil for residential heating, more than any other state.  New Hampshire's Governor John Lynch has also expressed support for use of biomass for heating. 

The road ahead for biomass is uncertain: industrial biomass development in New England continues, with ten new biomass facilities in the ISO-NE Interconnection queue, totalling 373.65 MW of new capacity.  Together with use of biomass for heating, this has prompted concerns about the capacity of Northern New England's forests, competition with the pulp and paper industry, and the environmental impact of burning all this wood.  Nonetheless, for those facilities eligible for this RFA, these funds offer an opportunity for significant long term savings and reduced reliance on oil. 

New England Governors Release Renewable Energy Blueprint

On Tuesday, the New England Governors' Conference released its Renewable Energy Blueprint. The Blueprint is based in part on a draft study conducted by ISO New England at the Governors' request, the New England 2030 Power System Study (pdf),which explored a range of different renewable energy development scenarios for New England.  The Governors' Blueprint is intended to identify strategies to "help bring new renewable resources to market within the current market structure." To that end, it identifies three main opportunities for New England states:

1) Synchronize states' power procurement and contracts -  Each New England state has authority to procure renewable energy, capacity, energy and RECs, usually in the form of long term contracts with generators selected through a competitive solicitation process.  The blueprint reviews these laws, and proposes synchronizing these approaches to obtain the most cost-effective renewable resources.  This makes some sense: the wind developments needed to meet the domestic wind generation totals envisioned in the ISO-NE study (from 2,000 to 12,000 MW) dramatically exceed the scale of any single state's existing procurement program.  Given the costs and uncertainty involved, offshore wind in particular (the ISO-NE study considers as much as 4,500 MW of offshore wind) will rely on state-mandated long term contracts in the foreseeable future. But state procurement authority is typically tied to in-state development of renewables:  coordinated procurement would not address states' interests in fostering their own in-state renewable energy industries.

2) Coordinate siting of interstate transmission facilities - The Blueprint offers an overview of state transmission siting laws, and explores the possibility of coordinating these processes to facilitate building large interstate transmission lines.  Right now, there aren't any existing plans to build any such lines in New England (at least onshore: there are a number of proposals to link Maine and Massachusetts underwater), but the ISO Report states the need for a lot of new interstate transmission lines to support New England's renewable energy goals.  For example, the 12,000 MW wind case contemplates "a new three-subloop, dual circuit overhead 500 kV or 765 kV backbone transmission system overlaying most of the interior of New England."  The cases involving expanding interconnections with Quebec and New Brunswick propose two lengthy +/- 450 kV HVDC lines, including a 400 mile line stretching from the Maine-New Brunswick border to Millbury, Massachusetts.

3) Strengthen federal support for state and regional renewable development - This last category is more a hodge podge of things that New England would like the federal government to do, including prioritizing and expediting federal permitting for off-shore wind projects in state and federal waters, and providing additional funding for development of renewable resources and transmission infrastructure.  Most important, though is a general plea that the federal government:

Respect regional system planning processes and consider the results of regional transmission system plans and renewable resource scenario analysis as guidance in connection with interconnection wide analyses and any federal financial support for renewable energy infrastructure development

This hints at what's really driving the blueprint: New England governors' concerns about federal intervention forcing New England ratepayers to contribute to massive transmission projects needed to bring the huge amounts of wind planned in the Midwest to New England markets.  (For an example of what this might look like, see the Joint Coordinated System Plan (pdf), released by MISO, PJM and other regional entities in February, or our previous post on the subject.) In addition to the costs, those projects, backed by federal subsidies, could crowd out renewable energy investment in New England.  The Blueprint, along with the ISO-NE study, represent New England's latest efforts to show that New England can meet its renewable energy goals with intra-regional solutions.

Forest Carbon Incentives Program

Earlier this week, Sen. Jeanne Shaheen (D-NH) introduced legislation that would establish a system of incentive payments to qualifying forest-land owners who create permanent conservation easements or agree to undertake certain forest-management techniques to maximize the amount of carbon sequestered by their trees. 

In introducing the bill, Sen. Shaheen pointed out that NH is the second most forested state in the nation (Maine is the first) and noted that while large forest owners have the opportunity to achieve carbon offset goals by participating in carbon offset markets, family and smaller landowners usually lack the efficiencies of scale to handle the substantial transactional costs that go along with market participation.  (For example, the Chicago Climate Exchange requires forestry management offset projects to go through a forestry management practice certification process and to quantify annual carbon sequestration through modeling or annual inventory.)

According to Sen. Shaheen, if conserved and managed properly, our forests could capture up to 20% of US carbon emissions, so it makes sense to provide some incentives to property owners to do so.  And since more than half of private forestland is privately owned in parcels of 100 acres or less, it makes sense to provide incentives to small property owners.  (New Hampshire law affords a similar incentive to small renewable energy generators by allowing behind-the-meter renewable generation--and even solar hot water heaters--to generate RECs, starting in 2010.)

Whether Sen. Shaheen’s bill ultimately succeeds is anyone’s guess, though it has garnered the support of a broad spectrum of organizations, from conservation organizations like the Trust for Public Land to timber industry organizations like the New Hampshire Timberland Owners Association.  But her comments suggest that carbon markets are the most effective way to provide forest management incentives, begging the question:  why not propose a program that lets small forest owners aggregate their acreage and participate in the offset markets along with larger forest owners?  This might save the Department of Agriculture the trouble of re-creating the wheel, since markets have already developed standards and protocols for offset projects.  Turns out, in fact, the markets have already thought of that, and there are many organizations registered as aggregators of small offset (and renewable energy) projects.  (An EPA report (pdf) describes how aggregators work with the Chicago Climate Exchange – see page 10 for a helpful flow-chart.)  In the end, the incentives in Shaheen's legislation may actually be an attempt to address a different but related issue:  carbon offset prices that are too low to adequately incentivize small forest owners to participate in the market through an aggregator.

Like Water to DC

In a recent decision (pdf), the FERC granted preliminary approval to a single transmission line, proposed by Hydro-Quebec, NStar and NE Utilities.  The line will be a high-voltage direct current (DC) line, bringing 1,200 MW of hydropower from Canada to the ISO-New England region via a southern New Hampshire tie-in.  The project is proposed as a participant-funded project, meaning the proposal does not seek to socialize the costs among the ISO-New England states.  Instead, the project will essentially be funded by a long-term contract for the energy it’s designed to transmit. 

Canadian officials cheered this decision by the FERC; in their view, this is the first FERC approval of a major long-term contract for Canadian hydropower since the 1980s and marks the first time hydro power has been acknowledged by a federal agency as a clean source of power.  Canadian hydropower developers – on both coasts – are cheering these developments, too, concluding that Canadian hydropower will now be a welcome player under the Obama Administration’s energy policy. 

But south of the border, several developers of smaller renewable projects in northern New Hampshire claim the Hydro-Quebec transmission project will have a chilling effect.  These wind and biomass projects face a host of technical, regulatory and financial hurdles, but they also require transmission upgrades in order to be viable, and interconnection with the Hydro-Quebec line is not an option.  The Hydro-Quebec line would be a high-powered direct current line, requiring expensive transformers to change it into alternating current that goes to people’s homes.  Developers in New Hampshire worry that the massive Hydro-Quebec line would make improvements to the existing transmission system seem unnecessary to NH officials and ISO-New England, and they can’t afford the upgrades without socializing the costs or receiving financial support from the state.