Tax Support for Green Energy

On Friday, October 3, after more than a year of negotiations and several failed attempts, the House and Senate reached a compromise on an extension of the Production Tax Credit (PTC) and the Energy Credit (ITC). The extension of the credits was signed into law by President Bush late October 3 as part of the Economic Stabilization Act. The Act extends the PTC for wind generated electricity for one year, through December 31, 2009 and, for electricity produced from most other qualifying facilities, for two years through December 31, 2010. The Act extends the 30 percent Energy Credit, or Investment Tax Credit (ITC) for solar and fuel cell property for eight years. In addition to the renewable energy credit extensions, the Act provides extended and expanded tax incentives for energy efficiency and conservation investments.

Specifics for the Alternative Energy: So-So News for Wind Developers, Better Impact for Other Renewables and Some Stability for Solar

The impact of the extension for most wind power developers will be less significant, given that the bill only provides for an additional year of available credit. Given the dynamics of the wind industry, especially the increasingly long lead times for wind turbines, the one-year extension will apply almost exclusively to projects that are under construction or in the latest stages of pre-construction development. The longer-term implications for wind are less clear. While the extension of the credit is generally viewed by most in the industry as positive, there are three points of concern looking forward:

1. This is not a long-term extension and another attempt at extension next year will likely face similar hurdles to this package
2. Accelerating growth in the industry makes Congressional scoring for budget purposes more challenging because the credit gets progressively more expensive (the PTC was not capped or limited by the Act, a move that had been widely anticipated, and will likely be used to limit the total cost of a future long-term extension)
3. The possibility of an attempt at comprehensive energy legislation threatens to muddy the discussion regarding energy incentive policy going forward

The two-year extension of the PTC for other renewables will have a mixed impact. Similar to the impact of the PTC extension on wind projects, for most geothermal and large scale biomass facilities, the lengthy time period from initial planning to commercial operation likely means that the extension will only apply to projects already underway. For smaller projects, such as small irrigation, landfill gas, trash combustion and some modest expansions to hydroelectric facilities, all of which can be completed within a shorter window, there may be significant new interest. Marine and hydrokinetic-produced power were added as qualifying sources of electricity and will be eligible for the PTC through December 31, 2011.

The long-awaited extension for solar property will provide some long-term stability for the industry. While the extension is clearly a positive development for photovoltaic manufacturers and installers, the long-term extension will also be a significant boon for investors and developers of utility-scale solar facilities. These projects typically take years to site, plan and construct and the lack of certainty about the availability of the ITC has made it extremely difficult to clearly define project economics, making it challenging to obtain project financing. The availability of the ITC is critical to the economic viability of these projects; long-term certainty should promote substantial interest in new investments. Other important solar developments are the removal of a cap for residential solar installations and the removal of a prohibition on public utilities claiming the ITC. The Act also made the ITC available to offset the alternative minimum tax, making the incentives available to a wider range of taxpayers.

The Act is likely to spur significant interest in distributed generation of electricity (electricity produced from smaller facilities, typically located at the point of consumption). In addition to the long-term extension for solar investments, small wind property and geothermal heat pump technology will now be eligible for the ITC. As growing ranks of businesses look for ways to manage energy use and define their sustainable business practices, these incentives for locally-produced renewable electricity will likely generate dramatic investment growth. Additionally, as many areas continue to struggle with transmission constraints, especially with regard to getting renewable electricity to market, these incentives for distributed generation potentially make investment in these technologies compelling for not just for electricity consumers, but for power companies and electric utilities as well.

Smart meters and smart grid systems are granted shorter tax lives, reducing the typical 20-year recovery period to 10 years, accelerating the rate of depreciation deductions for qualifying property. For utilities that have already begun installing smart grid upgrades and smart meters, this incentive will provide immediate benefit for their ongoing investments; for those utilities that have yet to do so, this provision may provide not only an incentive to accelerate investment in these technologies, but also an opportunity to revisit economic planning around firm-wide infrastructure investment.

New Bond Funding for Energy Conservation Efforts 

A new type of tax credit bonds, Qualified Energy Conservation Bonds, was created under Section 54D for purposes of financing projects related to energy conservation, with a total allocation of $800 million. The bonds are available for capital expenditures related to reduction of energy consumption, implementation of green community programs, rural development or investment in qualified energy facilities under Section 45. The bonds are also available for certain conservation expenditures for research facilities, mass commuting vehicles, commercialization demonstration projects and public education campaigns that promote energy efficiency. Additionally, exempt facility bonds for qualified green building under Section 142(l) were extended for a period of three years, available for issue until September 30, 2012.

Support for Real Estate 

The legislation includes a measure to promote the construction and maintenance of efficient commercial buildings, as well as a measure promoting the purchase and use of certain efficient new vehicle technologies. Deductions for energy efficient commercial buildings under Section 179D are extended for a period of five years, providing for as much as a $1.80 per square foot deduction for efficiency upgrades completed prior to December 31, 2013. Qualified plug-in electric drive cars are now eligible for a credit under Section 30D. Taxpayers placing qualified vehicles in service are eligible for a credit based on vehicle weight, with a $7,500 maximum credit for passenger vehicles.

Measures to promote the production of energy efficient products are also included in the new legislation. Credits for production of energy efficient appliances under Section 45M are extended until 2008, 2009 or 2010, dependent on the type of appliance. The amounts of the available credits are increased to a maximum of $250 per appliance, depending on type and efficiency of the appliance. For domestic residence production, whether through contracting or manufacture, credits under Section 45L up to $2,000 per new energy efficient home are extended to homes purchased prior to December 31, 2009. The legislation also provides for a special, 50 percent first year depreciation deduction, for certain reuse and recycling property.

Overall, the Act provides a wide range of extended, expanded and new incentives for alternative energy and energy efficiency investments. The legislation provides additional economic certainty for developers and investors previously committed to projects, and it creates significant opportunities for new energy focused investments. Given the potential for sweeping changes in the regulation of energy in the years ahead, and continuing and growing volatility in energy markets, the certainty afforded by the Act may make many of these investments much more compelling in the immediate future.

Contacts 

Elias Hinckley
Senior Manager
Deloitte Tax LLP
Alternative Energy Leader
ehinckley@deloitte.com
+1 202 879 5649

Jenny Bravo
Director
Deloitte Tax LLP
Enterprise Sustainability Tax Leader
jbravo@deloitte.com
+1 714 436 7554

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