RenewNewEngland.com

President's Budget: A Few Extensions of Renewable Energy Incentives

Following up on last week's post on the extension of the production tax credit, there were a couple of interesting developments yesterday. 

First, House Republicans offered to decouple the payroll tax cut from other measures to be considered in the payroll bill being negotiated by a House-Senate Conference Committee, and they may not require that the tax cut be offset by spending cuts or tax increases. Unfortunately, a “clean” payroll tax cut would not include an extension of the production tax credit.  There will be more to come as this plays out in the halls of Congress. 

Second, the President released his 2013 Budget which contains some interesting proposals regarding renewable energy that are likely to leave some folks happy and others feeling left out.  The budget is not a great barometer of what will actually be passed later in the year, but it does signal the Administration's priorities. 

The proposal would extend the production tax credit and the investment tax credit for wind facilities and wind property placed in service in 2013, but would not include extensions of the in-service date for any other type of property. The proposal would also extend Treasury's Section 1603 grant program to all otherwise qualifying property placed in service in 2012 (including property on which construction begins in 2012).  The program currently only applies to property for which construction began in 2009, 2010, and 2011. 

For property placed in service after 2012, the proposal would replace the grant with a refundable tax credit administered by the Internal Revenue Service. In other words, a developer would receive a tax refund from the IRS in much the same way the developer receives a grant from Treasury, except that it would be claimed on the developer’s tax return. 

The refundable credit would be allowed with respect to property placed in service in 2013 in the case of wind, biomass, landfill gas, municipal solid waste, incremental hydropower, certain geothermal, and marine and hydrokinetic.  The refundable credit would be allowed for property placed in service from 2013 through 2016 in the case of solar, fuel cells, microturbines, combined heat and power, small wind, and certain geothermal. Qualification requirements for the refundable credit would be the same (except for the effective date provisions) as the qualification requirements currently applicable under the Treasury grant program. 

Renewables Industry Pushes for Production Tax Credit Extension in Payroll Tax Cut Bill

The production tax credit for wind projects is scheduled to expire at the end of the year, and the credit for geothermal, hydropower, and biomass expires at the end of 2013.  Industry executives are vigorously lobbying Congress to extend the credits.  The best vehicle for an extension is the payroll tax cut bill currently being negotiated by a House-Senate conference committee (H.R. 3630). 

At a recent press briefing, Peter Kelley, vice president for public affairs at the American Wind Energy Association, said that “the urgency of this issue calls for extending it in the first quarter of this year because later will be too late.”  The next opportunity for an extension would likely be in the lame-duck session at the end of the year, but executives say that by then the industry will have abandoned projects and manufacturers will be out of business.  Wind industry executives visited Congress on February 8 to ask for a one-year extension of the credit. 

Executives from the National Hydropower Association, the Biomass Power Association, and the Geothermal Energy Association  echo the argument as to their respective industries.  Utility-scale hydropower, biomass, and geothermal projects starting today would find it nearly impossible to be completed by the end of 2013 because of the lengthy licensing and build times required.  For that reason, progress on new projects beyond 2013 has largely stalled.  Industry representatives are seeking an extension through 2016 (currently only solar and a few other resources are extended through 2016).  Read the February 8 letter to Congress from the hydropower, biomass, and geothermal representatives here. 

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.    

Testing the Wind

Today, in accordance with LD 1465 (pdf), “An Act To Facilitate Testing and Demonstration of Renewable Ocean Energy Technology,” Maine’s Governor Baldacci announced the final selection of three offshore wind energy demonstration areas in Maine.  (The four site finalists were announced in October 2009, as discussed in this previous post.)

One of the three sites, located near Monhegan Island, is designated as the “Maine Offshor Energy Research Center,” which will be used for research and development projects run by (or in cooperation with) the University of Maine.

The other two sites – off Boon Island near York and off Damariscove Island near Boothbay - are available for R&D projects by commercial entities.  To obtain a permit for a project in one of these sites, a company must first apply for a general permit for offshore wind energy demonstration project under 38 MRS §480-HH from the Department of Environmental Protection.

With a MDEP general permit approval in hand, the company must then apply for a submerged lands lease from the Department of Conservation.  Because these sites are designated for research and development uses rather than permanent, commercial installations, permits for the Boon Island and Damariscove Island sites will good for five years from the date they were granted or three years from the date construction starts (with certain term extensions available); in applying for the permit, applicants must provide a project removal plan that details how they will remove the project at the end of the permit period.

More details about the demonstration areas, including interactive maps of the designated areas, are available at the Department of Conservation site.

This site selection process complements the work of the Ocean Energy Task Force and its recommendations concerning legislation to make near-shore and off-shore sites available for both R&D and ultimately commercial renewable energy projects.  The draft final report of the OETF can be found here. 

Maine Issues RFP for Efficiency and Conservation Grants

After months of anticipation, on Friday, Maine’s Energy and Carbon Savings Trust and Efficiency Maine announced two RFPs for Energy Efficiency and Conservation Projects.  Together, the RFPs offer over $15 million in funding for efficiency and conservation projects by businesses and municipalities.

Competitive Grants for Large Energy Efficiency and Conservation Projects

The first RFP offers grants for “large energy efficiency and conservation projects.”  These grants will be funded by a combination of approximately $6 million in ARRA funds administered by the MPUC and designated for “job creation, energy efficiency, renewable energy, weatherization, and workforce development” and $3 million in RGGI auction funds administered by the Energy and Carbon Savings Trust.  ARRA funds must be spent or committed within two years.

Pursuant to a competitive grant program, Efficiency Maine and the Trust are seeking applications for large energy efficiency and conservation projects with the primary goals of reducing kilowatt hour (kWh) consumption, encouraging alternative and renewable energy, and decreasing greenhouse gas (GHG) emissions.  Grant awards will range from $100,000 to $1 million and will be used to support eligible commercial and industrial projects that will save or create jobs, achieve energy savings and GHG reductions, and are “project-ready.”  Applications for eligible projects that accomplish these goals will be evaluated on the criteria of cost effectiveness, management and resource adequacy and readiness, and economic impact.

To be eligible, projects must be at a single commercial or industrial location and at least 30 percent of the total project cost must come from private funding, including financing.  Examples of eligible projects include energy improvements for industrial and commercial processes and equipment; compressed air systems; boilers and steam systems including biomass fired; combined heat and power systems in various settings; waste-heat recovery; and solar and wind systems.  Ineligible projects include those mandated by law or required by standard industry practice, feasibility studies and projects where funds will be used at multiple locations.

Energy Efficiency and Conservation Block Grants

The second RFP offers more than $5.7 million in grants for Municipal and County energy efficiency and conservation projects, including renewable energy projects, from units of local and county government.  This program is funded by the ARRA’s Federal Energy Efficiency and Conservation Block Grant (EECBG) program.  Maine’s ten largest cities received formula grants earlier this year (see our earlier post).  Now, Maine’s remaining communities and counties may obtain support for energy use planning, action-ready projects that previously could not be funded, and/or the initial stages of projects promising long-term energy savings and emissions reductions.  This opportunity consists of two alternatives, one for “Custom Projects” and another for standardized or “Template” projects.  Custom project grants, which assist communities to bring planned projects to realization, may be up to $85,000 each (or up to $500,000 regionally) and are awarded on a competitive basis; template project grants, which assist communities with planning and/or energy use analysis, may be up to $10,000, as funds allow.  Efficiency Maine expects that a second round of these RFPs will be issued in early 2010.

Proposals for both RFPs must be submitted by 2:00 pm on November 4, 2009.

If you would like more information about the program, please contact John Gulliver, Bill Hewitt or Patty Aho. 

New Rhode Island law resolves state renewable energy disputes

On Friday, Rhode Island Governor Donald Carcieri signed into law a bill that will require National Grid to enter into long term contracts for renewable energy.  Rhode Island is the latest New England state to supplement its renewable portfolio standard with a long term contract requirement. The law also includes rules tailored to bring Deepwater Wind's proposed offshore wind farm closer to fruition.

The law requires National Grid, the state's distribution company, to solicit and enter into ten to fifteen year energy contracts for 90 MW of new renewable generation located in Rhode Island, of which at least three MW must be solar photovoltaic.  The company has four years to enter into these contracts, which are subject to approval by the state Public Utility Commission. The law also lays out the procedure for a separate Commission proceeding to require National Grid to enter into long term contracts for energy from a "utility scale offshore wind farm" of up to 150 MW.  In both cases, National Grid received authority to charge an additional 2.75% bonus from ratepayers on sale of the electricity from the renewable sources.

The law resolves two thorny issues involving the state, National Grid, and renewable energy development in Rhode Island. The first involves National Grid's electricity supply.  In March, the PUC rejected National Grid's 2010 electricty supply plan for lacking any long term contracts for renewable energy sources, a ruling the utility appealed to the Supreme Court.  Both sides blinked: the PUC backed off its requirement, and National Grid withdrew its appeal.  The new law appears to resolve the dispute, though some PUC commissioners have expressed displeasure, particularly with the incentive rate.  The second involves a proposed offshore wind farm that could bring the state as many as 800 new jobs. Last September, Rhode Island selected Deepwater Wind to build a 150 MW, $1.5 billion wind farm off the coast of Rhode Island.  The developers had been unable to find a buyer to commit to purchasing power from the massive project, which made the project impossible to finance.  By guaranteeing a purchaser for the power, the new law enables the developers to move forward with the permitting process. 

On that front, this week the Department of Interior issued its first exploratory leases for offshore wind projects, the result of a compromise with FERC we've discussed previously.  Offshore wind in the US may soon be a reality.

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. 

Know Your Neighbors: The Lower Churchill Project

Last week ten eastern governors (including the governor of every New England state except Connecticut) sent a letter (pdf) to Congress criticizing current legislative proposals regarding transmission.  The governors noted that the current proposals

would designate national corridors for transmission of electricity from the Midwest to the East Coast, with the costs for that transmission allocated to all customers. While we support the development of wind resources for the United States wherever they exist, this ratepayer-funded revenue guarantee for land-based wind and other generation resources in the Great Plains would have significant negative consequences for our region

According to the governors, the current proposals would hinder the development of offshore and onshore wind and other renewable sources in the northeast by subsidizing competing onshore generation in the Midwest. They advocate a regional approach to transmission planning that doesn't favor one region's resources over another.

The letter prompted us to start what we hope will be a continuing feature here, profiling renewable energy projects in northeastern Canada.  After all, if we're going to contemplate a transmission superhighway to bring wind power from the Dakotas, we may as well look to our (considerably closer) neighbors to the North.  Our very own Tom Welch made this point earlier this year in an article in Law360 (subscription req), arguing that with proper stewardship, regional energy self-sufficiency could be a reality.

With all the excitement around wind, tidal and wave energy, there are still plans to construct large scale hydro-electric facilities on the Lower Churchill Project, on the Churchill River in Labrador.  If you're not familiar with the Churchill River, perhaps a map will help:

According to project sponsor Nalcor Energy (formerly Newfoundland and Labrador Hydro), the Lower Churchill Project's sites at Gull Island and Muskrat Falls represent "two of the best undeveloped hydro sites in North America" with a total potential capacity of between 2,800 and 3,000 MW.  Even at that size, the Lower Churchill project would still not be the largest hydro facility on the Churchill River: that title belongs to the 5,428 MW Churchill Falls facility, 100 miles to the west.  The bulk of the energy from that facility is committed to Hydro Quebec through 2041 under a much-reviled power purchase agreement signed in 1969 (at a price of between $2 and $2.50 a MWh!). 

The Lower Churchill project is currently undergoing environmental review: documents filed in that proceeding optimistically suggest that the project could begin construction in 2009 and be completed by 2018, but much work remains before construction can begin. Not suprisingly given its remote location, one major holdup is transmission lines to get the power out (the energy generated by the facility would far exceed the electricity needs of Labrador). The easiest solution would be an overland route linking the facility to the existing transmission link from Churchill Falls, but Labrador politicians are resistant to any plan that would make the new facility reliant on Hydro Quebec for access to markets.  A number of undersea cables have been proposed that would link the project to the New England markets by island-hopping via some combination of Labrador, Prince Edward Island, Nova Scotia and New Brunswick. The plans are nothing if not ambitious: in 2007, Newfoundland and Labrador signed an MOU with Rhode Island to study a long term power purchase agreement for Lower Churchill power.