Renewable Energy Excitement Continues!
Corporate & Finance Alert
December 17, 2010
Late last night, Thursday, December 16, 2010, the House joined the Senate in approving the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” expected to be signed by President Obama this afternoon, December 17, 2010. To the delight of many in the renewable energy sector, the new law will contain a late Senate amendment that provides a one-year extension of the grant in lieu of tax credit for specified energy property, otherwise known as the “Section 1603 Grant.” The grant, which is generally equal to 30% of the cost basis of the property, is applicable to solar, wind, geothermal and other types of property that produce clean and renewable energy, and without such extension was due to expire at the end of the year.
The cash grant program was enacted by Section 1603 of the American Recovery and Reinvestment Act of 2009. The program allows eligible applicants to apply to Treasury for a grant with respect to certain renewable energy property in lieu of claiming the production tax credit under Internal Revenue Code (“IRC”) Section 45 or the investment tax credit under IRC Section 48. Originally, in order for renewable energy property to qualify for a grant under Section 1603, it must have been placed in service in 2009 or in 2010, or construction must have begun by the end of 2010. In light of the anticipated expiration, Treasury had revised the Program Guidance to clarify the rules regarding the beginning of construction, and clients and advisors raced to come to terms with the “safe harbor” requirements. Today’s extension effectively postpones these concerns until late 2011.
The late amendment, which did not feature in the draft bill agreed between the White House and Republican leaders, is significant because many developers and potential investors in renewable energy assets often lack the taxable income – “tax appetite” – to efficiently use federal tax credits and deductions. One result of the impending expiration of the 1603 grant, was that many developers were seeking ways to realize the value of the incentives by entering into “partnership-flip” and “sale-leaseback” transactions, whereby institutional investors (who do have tax appetite and funding capability) leverage the tax benefits and share the economic benefits with developers. The key benefit to such developers of the continuation of the grant program is to allow the value of the ITC to be more readily monetized in the form of a grant, instead of requiring “tax appetite” for its use. Thus, instead of depending on an institutional tax equity investor (and a complicated partnership or sale-leaseback financing structure), a developer can now simply forgo that capital and instead collect the cash grant in an amount equivalent to the ITC and otherwise finance projects through more traditional sources (e.g. debt). Invariably the extension means that the renewable energy market, although becoming increasingly sophisticated, will continue to be extremely crowded and competitive for at least the next 12 months.
Gibbons currently is working with a variety of businesses involved in various aspects of energy projects, including for-profit companies, independent power producers, financial institutions, state governments, commercial energy consumers, and private investment funds. We are advising clients on all components of energy projects, including project finance, infrastructure development, grant qualification, federal tax credits, solar renewable energy credits (SRECS), project structures, federal and state regulatory compliance matters, special purpose vehicles (SPVs), power purchase agreements (PPAs) and other long-term contracts, tax-exempt energy users, construction and development loans, bridge loans, and long-term finance, as well as mergers, acquisitions, joint ventures, joint bidding arrangements, and revenue securitizations.