By most accounts, the Section 1603 cash grant program, established under the American Recovery and Reinvestment Act of 2009, was a smashing success.
According to the U.S. Department of the Treasury's website, more than $18 billion has been disbursed through the program, including more than $4.3 billion – representing nearly 3 GW of installed capacity – for solar projects.
Commonly known as the cash grant program, the incentive offers renewable energy project developers cash payments in lieu of the investment tax credit (ITC). The value of the awards, in most cases, is equivalent to 30% of the project's cost.
However, the program has also come under fire from both wind and solar companies claiming the Treasury mismanaged the program. Among the most common charges is that applicants have received an amount less – in some cases, far less – than the submitted amount. The shortfalls in payments have resulted in several lawsuits against the Treasury.
Currently, there are 10 pending cases against the Treasury involving the cash grant program – with many brought by solar applicants.
For example, affiliates of SolarCity filed suit in federal court in February alleging that the Treasury paid smaller grants than they were entitled. The complaint alleges that the Treasury failed to follow applicable law in administering the cash grant program. The complaint – which is still pending – seeks in excess of $8 million in damages. A judge recently dismissed the government's motion to dismiss the case.
Then there's the case involving Dallas-based LCM Energy, whose affiliate company, RCIAC Inc., claims it is still owed $407,134 for work performed on 18 solar installations. That case is still pending.
Further complicating matters, the cash grant payment shortfall comes on top of a 7.2% deduction imposed because of sequestration rules.
The Treasury's scrutiny of cash grant applications has created some uncertainty among developers, explains Jeffrey G. Davis, partner at law firm Mayer Brown.
‘This is having some spillover effect in the ITC world, where solar industry participants are unsure about what markups or developer fees are appropriate in calculating the basis – which, in turn, drives the amount of the ITC.’
So-called developer fees are payment for a wide variety of services, such as managing the construction process, to placing upfront investment capital before obtaining permits, interconnection or power purchase agreements. Simply put, the higher the developer fees, the higher the return of the ITC.
Keith Martin, partner at law firm Chabourne & Parke, confirms that the Internal Revenue Service (IRS) appears to be coordinating the audits. He notes that the Treasury held a webinar for IRS agents in the field last October to educate them about what the agency has learned on basis issues from handling cash grant applications in the wind energy space where similar audits – not to mention acrimony among wind developers – occurred in 2011.
In the typical arrangement, the project owner pays the company that did the actual development work a fee at the end of construction.
According to David Burton, partner at law firm Akin Gump Strauss Hauer & Feld developer fees raise the same issue in the Treasury's view for both wind and solar technologies: Is the developer fee arm's length compensation for work that was actually performed and/or risk that was actually borne?
Burton says the Treasury circulated a memo in June 2011 that suggested that a 10% to 20% developer fee was reasonable. However, others have noted that in recent informal communication in connection with cash grant applications, the Treasury has suggested that a range lower – believed to be between 3% and 5% – is appropriate.
