House Bill To Include Billions In Grants For Wind Projects

Monday, Jan 19, 2009

"House lawmakers are proposing to give solar and windenergy producers billions in government grants instead of tax credits to buildrenewable energy capacity, potentially transforming the way renewable energyprojects have been financed for years. The new grant program, which will beadministered by the Department of Energy, is part of House economic stimuluslegislation announced Thursday, details of which are still emerging.

The new funding, which temporarily replaces the tax creditthat wind and solar projects have long relied on with direct governmentspending, underscores President-elect Barack Obama's commitment to doublerenewable electricity production in three years.Obama will give a speech oneconomic recovery Friday at a wind-turbine manufacturing plant in Ohio.

The grant program is meant to address the collapse of themarket for renewable energy tax credits, part of the fallout of last fall'sfinancial meltdown. Solar, wind, geothermal and other renewable forms ofelectricity production are now subsidized through federal tax credits.Developers of solar projects can receive a tax credit for 30% of theirinvestment costs. Wind, biomass, geothermal and other alternative sources gettax credits based on how much electricity they produce, spread out over a10-year period.

Large financial firms, including American InternationalGroup Inc. (AIG), Citigroup Inc. (C) and Wachovia Bank, historically have beenthe biggest users of the tax credits. But with the collapse of the bankingsector and financial profits, banks no longer had enough tax liability to usethe credits, putting new renewable power projects in jeopardy.

Solar and wind groups lobbied Congress to make the taxcredits refundable, so that they could get cash directly from the governmentand wouldn't need the middle-man tax credit investor.

But lawmakers rejected that approach, and instead proposed amove away from tax credit financing altogether to support the industry throughgrants. While full details of that approach had still not been made public lateThursday, a House Ways andMeans Committee spokesman said the grant programs would be temporary.

John Gimigliano, a principal in the national tax practice ofaccounting firm KPMG, said it is unclear what long-term impact the changes willhave on the traditional model of tax credit financing.

""I think this has potential to change the whole dynamicof the way these deals have been done,"" he said. ""Onequestion is, does " the developer need the investment bank anymore to getthe deal done? If I'm going to get a big slug of money to service the debt, Imay not need an equity partner in this deal anymore.'

Besides the new grant program, the House stimulus bill wouldextend the production tax credit for wind by three years. Under current law,the credit expires at the end of 2009. Solar tax credits are already in placeuntil 2016, after a multiyear extension in last year's financial rescuelegislation.

'We are grateful for the three-year extension of theproduction tax credit and the new DOE grant program to ensure that renewabletax credits have value,' said Denise Bode, chief executive of the American WindEnergy Association. 'This bill puts us on the path to meet thepresident-elect's ambitious goals for clean energy.'

The bill would also give wind farms the choice of either theproduction tax credit or the 30% investment tax credit now available only to solarand qualified fuel cell projects.

Gimigliano said it is unclear how much of a benefit thatwill provide to the wind industry. The advantage is that investors in theprojects could now claim the whole 30% tax credit in the year the facility isplaced in service, instead of reaping benefits over 10 years under theproduction tax credit.

However, most industry observers believe the value of theproduction tax credit well exceeds 30% of the initial investment costs for mostwind projects, Gimigliano said.

Congressional staff on the House Ways and Means and Senate Finance committees werewary of proposals to make the tax credits refundable, because refundable taxcredits for businesses might be seen as corporate welfare, and there is littleprecedent for them.

They explored several alternatives, including allowing thecredits to be carried back for five years. That would have allowed firms thathad profits as many as five years back to get refunds for any credits theygenerated.

The majority of wind energy producers, including Spain'sIberdrola, the world's largest producer of wind energy, opposed that approachbecause they did not have enough U.S.tax liability to make it worthwhile.

Some utilities, including Florida Power & Light, lobbied for a 10-year credit carry back. But industry officials said a five-year credit carry back would have been much less helpful to the utility. That is because net operating losses incurred due to hurricanes in recent years have allowed the firm to recoup most of its federal tax liability in the last five years,according to these people.

Source: CNNMoney.com