We have published our Legal Update on the Federal Circuit’s opinion in the Alta Wind case involving the calculation of eligible basis for 1603 Treasury cash grant purposes. The 1603 Treasury cash grant rules “mimic” the investment tax credit (ITC) rules, so the case has implications for ITC transactions being structured and end executed today.
The National Renewable Energy Laboratory (NREL), a federally-owned laboratory that is funded through the U.S. Department of Energy, recently released a report titled Wind Energy Finance in the United States: Current Practice and Opportunities. The report provides a thorough overview of the capital sources and financing structures commonly used in wind energy finance. Below are quotes from the report that are of particular interest to tax equity market participants. We applaud the authors for writing a comprehensive report on a topic that is extremely technical. Also, below we include comments clarifying certain tax or legal concepts referenced in particular quotes.
Wind Expansion in 2016
• By the end of 2016, cumulative U.S. wind generation capacity stood at 82.2 gigawatts (GW), expanding by 8.7 GW from 2015 installations levels. Wind energy added the most utility-scale electricity generation capacity to the U.S. grid in 2015 and the second most in 2016. Project investment in wind in the United States has averaged $13.6 billion annually since 2006 with a cumulative investment total of $149 billion over this time period. The investment activity demonstrates the persistent appeal of wind energy and its significant role in the overall market for electricity generation in the United States.
• Looking ahead, the near-term outlook for wind energy reported previously suggests a continued need for capital availability at levels consistent with deployment seen in 2015 and 2016. The market has shown the capacity to finance projects at this level using current mechanisms at economically viable rates; however, increased deployment could necessitate new sources of capital. Broad changes to the financial industry—such as the possibility of major corporate tax reform, the currently scheduled phase out of the PTC and ITC for wind, and, specifically, a change in the role of tax equity—could fundamentally reshape the predominant mechanism for wind energy investment. It is possible that financing practices may need to evolve, while the growing body of wind energy deployment and operational experiences could help to attract new market participants.
PTC and Accelerated Tax Depreciation
• The United States Federal Government incentivizes renewable energy projects principally through the tax code. As of this writing, wind technologies are eligible to receive either the production tax credit (PTC) or the investment tax credit (ITC) (one or the other, but not both) as well as accelerated depreciation tax offsets through the Modified Accelerated Cost Recovery System (MACRS).
• The tax credit incentives (the PTC and ITC) provide an after-tax credit on tax liabilities (i.e., the taxes paid) and thus are often described as dollar-for-dollar tax incentives. As of this writing the PTC is currently worth $0.024 for every kWh generated over a 10-year period while the ITC is structured as a one-time credit valued at 30% of eligible system costs. For projects to claim the aforementioned full PTC or ITC values, however, the project is required to have begun construction prior to December 31, 2016. Projects that begin construction in 2017 through 2019 are available for a reduced-value PTC or ITC.…
On October 31, 2016, the US Court of Federal Claims decided that Halloween was the perfect day to release its opinion in Alta v. United States, and the plaintiffs no doubt are enjoying this treat.
The case came about when the plaintiffs brought suit against the Treasury for the alleged underpayment of over $206 million in grants under section 1603 of the American Recovery and Reinvestment Tax Act of 2009. That section provides the owners of certain renewable energy projects with a grant equal to 30 percent of the specified energy property’s basis.
As the court aptly stated: “And therein lies the dispute.” Importantly, the court emphasized the general rule that “[b]asis, as defined in the IRC, is the cost of property to its owner” and, while there are “exceptions to the general rule that purchase price determines basis,” such exceptions did not apply under the facts of this case. Accordingly, the court found that the plaintiffs were entitled to the full amount of their grants and awarded damages equal to the shortfall plus reasonable costs.
The cases involved 20 plaintiffs, all of which were special purpose limited liability companies organized for the benefit of various institutional investors. For 19 of the plaintiffs, the purported basis was set via a sale of a wind project or an undivided interest therein to it from the developer that was followed by a lease back to the developer. For one plaintiff, the basis was set in outright sale from the developer to the plaintiff without a lease; that is, the plaintiff operated the project directly. All of the wind projects were contracted to Southern California Edison pursuant to a long-term fixed-price power purchase agreement (“PPA”). All of the projects were sold prior to their start of commercial operation.
The government, in denying payment of the full amount of the grant applied for, argued that basis should be calculated from “the value of each wind farm’s grant-eligible constituent parts and their respective development and construction costs.” Everything else would be categorized as either goodwill or going-concern value. Accepting the plaintiffs’ argument, argued the government, would mean accepting an inflated and improper number far in excess of what the assets would justify.
The plaintiffs’ determination of eligible basis was purchase price “minus small allocations for ineligible property such as land and transmission lines.”…
Last week’s American Wind Energy Association’s annual conference , WindPower, was informative and useful as it has been in the past. Please click here to read the article containing sound bites, many of which address the tax equity market, from panelists who spoke at the conference: Blog-Post-Sound-Bites-5-25-2016-6-1-16-revised.pdf