Analyzing The Tax Bill’s Implications On Solar Project Finance

The bill language seeks to implement the tax package that the White House negotiated with Congressional Republicans, which now includes a one-year extension in the deadline to start construction of new renewable energy projects to qualify for U.S.Treasury cash grants. The grants are 30% of the project cost.

The bill also would allow a 100% depreciation bonus on new equipment placed in service after Sept. 8, 2010, through the end of next year. However, the bonus could be claimed only if the taxpayer was not committed on or before 2008 under a binding contract to invest in the project. The bonus is a timing benefit. Instead of depreciating a project over the normal depreciation period, the entire cost could be deducted in the year the project goes into service.

The cash grant would be extended by simply changing dates in the existing program. It would not be turned into a tax-refund program. Owners of new renewable energy projects that are completed in 2009, 2010 or 2011, or that start construction in those three years and are completed by a deadline, would qualify for cash grants.

The deadlines to complete construction will not change. They remain the end of 2012 for wind farms, 2016 for solar and fuel cell projects and 2013 for other renewables.

Because of the way the cash-grant extension is drafted, developers that complete projects in 2011 would not have to worry about whether their projects started construction before 2009. This relieves a concern that some geothermal developers have that might have started construction of projects before 2009 but will not complete them until after 2010. Under the existing program, they would have been out of luck. As long as such projects are completed in 2011, they do not need to worry about having started construction too early.

Meanwhile, the House Democrats voted in a closed-door caucus to reject the bill ‘as currently written.’ Some House Democrats are upset about the deal that Obama cut with Republicans, as well as having been frozen out of the negotiations.

House Speaker Nancy Pelosi said changes will have to be made to the bill before she will allow it to come to the House floor. The Senate is expected to pass it first. The caucus vote suggests a potentially complicated path forward for the bill since any significant changes to appease House Democrats risk alienating Republicans.

The 100% depreciation bonus is equivalent to an additional 5.2% investment tax credit on a wind farm or solar project – if a developer can use it. Many developers are expected to have a hard time converting the bonus into cash in the tax-equity market. Some developers are also concerned that the bonus could reduce overall tax capacity in the market.

A number of other provisions in the bill will affect the project finance market, including the following:

– The measure opens the door to place additional facilities for making ‘refined coal’ in service and qualify for 10 years of tax credits on the output. Refined coal is coal that is less polluting than the raw coal used to produce it. Facilities put into service by December 2011 would now qualify for tax credits;

– The bill would extend income and excise tax credits for ethanol, biodiesel, renewable diesel and alternative fuels at the existing rates, and the tariff on ethanol imports at the U.S. border at the existing level, through December 2011;

– Projects on Native American reservations would qualify for faster depreciation (e.g., example, three-year instead of five-year depreciation for wind farms and solar projects) provided they are completed by December 2011;

– The bill would authorize another $3.5 billion in additional ‘new markets tax credits’ in 2010 and 2011 each as an inducement to make loans or equity investments in projects in census tracts with lower-than-average family incomes or with poverty rates of at least 20%; and

– The bill would give utilities more time through December 2011 to shed transmission assets to independent transmission companies or regional transmission organizations and spread the tax on any gain over eight years.

Keith Martin is a partner in the Washington, D.C., office of Chadbourne & Parke. He can be reached at (202) 974-5674.

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