Incentives for Renewable Energy

Development

Kathy Parker, CPA, MST

Partner

Rodman and Rodman P.C.

Environmental Business Council of New England

Energy Environment Economy

GREEN ENERGY TAX SERVICES

Sustaining Business Growth With Energy Tax Incentives

Presented by

Kathy Parker, CPA, MST

Top” Green Incentives and Credits for

Businesses

FEDERAL INCENTIVES

Copyright Rodman & Rodman, P.C. All Rights Reserved. 3

Renewable Electricity Production Credit -

Section 45 (Production Tax Credit)

Did the taxpayer

produce and sell electricity

from renewable wind sources

that were placed in service or

begun construction before

12/31/2013?

2.3¢/kWh for wind, geothermal,

closed-loop biomass; 1.1¢/kWh for

other eligible technologies*

No additional benefit

available

Did the taxpayer produce

excess electricity from

renewable sources and sell it

back to the grid?

*Note that the duration of the credit is generally 10 years after the date the facility is placed in service, but there are two

exceptions: open-loop biomass, geothermal, small irrigation hydro, landfill gas and municipal solid waste combustion

facilities placed into service after October 22, 2004 and before enactment of the Energy Policy Act of 2005 on August 8,

2005 are only eligible for the credit for a five-year period. Open-loop biomass facilities placed in service before October

22, 2004 are eligible for a five-year period beginning January 1, 2005.

**An irrevocable election can be made to take the Section 48 Investment Tax Credit in lieu of the Section 45 Production

Tax Credit.

***$2.4B in energy conservations bonds for facilities that qualify for the PTC (may be used to finance retrofitting of

existing facilities).

Did the taxpayer produce and sell

electricity from renewable sources

such as biomass, geothermal, landfill

gas, solid waste or hydropower that

begun construction before

12/31/2013?

O

R

N

O

Y

E

S

O

R

Production Tax Credit Issues Summary

• Available for biomass, geothermal, hydropower, marine and hydrokinetic, municipal solid waste, small irrigation and wind

• 10-year credit period

• Requirement for third-party sales

• Reduction of credit for subsidized or tax-exempt financing

• Ownership requirement

• Structuring available to monetize the credit

• No basis reduction in the property

• Can make an irrevocable election for certain qualified property to take the Section 48 Investment Tax Credit in lieu of the Section 45 (see IRB 2009-25)

Business Energy Investment Tax Credit –

Section 48

Is the property:

1. Qualified biomass?

2. Qualified small wind turbines?

3. Solar used to generate electricity for heating

or cooling or to provide solar process heat?

4. Other Property listed on next slide?

Did the taxpayer invest in

alternative energy

property to generate power

for its own use?

Was the property placed in service

on or before December 31, 2016?

30% credit (10% for solar after 2016)

10% credit

Is the property:

1. Equipment for producing or distributing

geothermal energy?

2. Equipment that uses the ground or ground water

to heat or cool a structure?

3. Qualified micro-turbines (small combustion)?

4. Combined heat and power systems?

NO

Y

E

S

No additional benefit

available

N

O

NO

Note that the credit for geothermal property,

with the exception of geothermal heat pumps,

has no stated expiration date.

Y

E

S

Y

E

S

Y

E

S

Y

E

S

NO

Y

E

S

Investment Tax Credit Issues Summary

► Solar, Landfill Gas, Wind, Biomass, Hydroelectric, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, Municipal Solid Waste, CHP/Cogeneration, Hydrokinetic Power (i.e., Flowing Water), Anaerobic Digestion, Small Hydroelectric, Tidal Energy, Wave Energy, Ocean Thermal, Fuel Cells using Renewable Fuels, Microturbines, Geothermal Direct-UseOne-year credit period

► No requirement for third-party sales

► No reduction of credit for subsidized or tax-exempt financing

► No ownership requirement

► Structuring available to monetize the credit

► 50% basis reduction in the property

► Eligible for 50% bonus depreciation through December 2013

► Accelerated five-year life

► Credit is 100% offset to AMT

Payments for Specified Energy Property in

Lieu of Tax Credits - Section 1603

Was the property

placed in service between

1/1/2009

and 12/31/2011?

Did the taxpayer own a

specified energy

property?

Grant amount equal to

10% or 30% of the tax

basis of the eligible

property, depending on

the type of property

If construction of the property

began* between 1/1/2009 and

12/31/2011, was the property

placed in service after 2011

and before the credit

termination date?

NO

Y

E

S

Y

E

S

No additional benefit

available

N

O

NO

1. Specified energy properties are depreciable

properties that are, among others, part of

an electricity production facility using wind,

biomass, geothermal or solar energy, or

certain power plants using fuel cells or

micro-turbines.

a. Qualified property includes expansions

of an existing property that is qualified

property under §45 or §48 of the IRC.

2. For property placed in service in 2009 -

2011 OR for properties that were not

placed in service in 2009 - 2011 but for

which construction began in 2009 - 2011,

applications must be submitted after the

property has been placed in service and

before October 1, 2012.

3. Eligible persons must be the owner or

lessee of the property and must have

originally placed the property in service.

4. See

http://www.treasury.gov/initiatives/recovery/

Pages/1603.aspx for more information

regarding credit termination dates and

applicable payment percentages.

5. Independent account attestation for project

costs between $500k and $1mm

is required in the form of agreed upon

procedures; >$1mm require an audit report.

YES

*Safe harbor provisions set the beginning of

construction at the point where the applicant

has incurred or paid at least 5% of the total

cost of the property, excluding land and

certain preliminary planning activities.

**If the total cost ends up being more than

originally estimated when determining the

5%, the safe harbor can be blown.

Section 1603 Grants by Property Type (Awarded through June, 2013)

Biomass - 2% 0.15% 0.08%

0.78%

Geothermal, 3.09%

0.84% 0.79% 0.05%

0.01%

Wind - 68%

Solar- 24%

Biomass

Trash Facility

CHP

Fuel Cell

Geothermal

Hydropower

Landfill Gas

Marine

Microturbine

Wind

Solar

Section 1603 Grants by Property Type (Awarded through June, 2013)

Treasury Grant – Application for Section 1603

Payment

Section 1 – Applicant Eligibility

•Type of applicant

•Applicant’s interest in the property

Section 2 – Property Information

•Depreciation and use of property

• Identification of property

•Placed in service date

•Construction began

•Narrative description of beginning of construction

Section 3 – Applicant Information

•Name of the applicant

•Address

•EIN

•DUNS number (Call1.866.705.5711 to request)

•Contact person

•Previous applications

Section 4 – Property Description

•Type of energy property

•Narrative description of property

•How energy will be used

• Installed nameplate capacity

•Estimated annual production

•Job creation/retention

Section 5 – Cost Basis and Request for Payment

•Qualified cost basis

•Applicable percentage

•Payment assigned

Section 6 – Documentation

•Eligible Property • Design plans

• Certain facility-specific eligibility documentation (see 4A of application)

•Cost Certification • Audit report ($1mm or more)

• Agreed-upon procedures (>$500 but < $1mm)

Section 6 – Documentation (continued)

•Placed in service/under construction but not yet placed in service • Commissioning report

• Interconnection agreement (if applicable)

• Financial documentation demonstrating construction has begun

Section 6 – Documentation (continued)

•Leased property • Pass-through election/waiver agreement

Section 7 – Signature of Applicant

1603 – Frequently Asked Questions from US Treasury Website

Question: Are manufacturers of specified energy property eligible applicants?

► Payments are only available to entities that place specified property into service. Manufacturers that produce specified property but do not place into service do not qualify for the 1603 Payment.

Question: Can a lessee of eligible property receive payment?

► Yes, if the lessor/owner of the property waives their right to payment and elects to pass it on to the lessee and the property in question is eligible.

Question: Is a partnership that has a foreign entity as a partner eligible?

► Yes, as long as the foreign entity is not tax-exempt.

Question: If a business receives a section 1603 payment for energy property used at a residential rental property, and subsequently sells the residential property to the tenant within five years, will the business be required to return all or part of the 1603 payment?

► Yes. The property ceases to be specified energy property when sold to a person who cannot depreciate because of personal use of the property.

Accelerated Depreciation

• MACRS 50% bonus depreciation (federal) on qualified

property

• Must be placed in service by December 31, 2013

• Set to expire December 31, 2013

• Cost basis is reduced by half of the ITC or 1603

STRUCTURING OPTIONS

FOR PTC & ITC MONETIZATION

FEDERAL INCENTIVES

Copyright Rodman & Rodman, P.C. All Rights Reserved. 14

TAX EQUITY

• Limitation on credit for those who have losses

• Hard to find

• Some deals are “too small”

• Passive issues

• At Risk Rules

• Recourse debt (at least 80%)

• Tax Structure

• Partnership flip

• Sale – lease back

• Consider bundling projects

Developer Tax Equity

Investor

Project

Utility

State/Local

Incentives

Nontax

Government

Subsidy

Interest &

Principal

Back Leverage

Returns

Funding

Project Debt

Interest & Principal

mWh $/mWh

Equity Investment

Tax Benefit/Grant

Equity Flip Partnership (PTC & ITC)

This structure provides the tax investor with special allocations of the credits and depreciation in order

to provide a return on their investment, although they will bear some amount of operations risk during

the early years, while the developer is able to monetize the tax benefits that could not be utilized and

bears the operating risk throughout the investment.

Note: Federal income tax rules must be followed for the structure and allocations to be respected; this

structure may not work for tax-exempt investors.

Equity Flip Partnership (Cont.)

FORMATION:

• The Tax Equity Investor’s contribution is derived based on anticipated return:

• Cash

• Tax Credits

• SALT Incentives

• Depreciation Deductions

YEAR 1:

• Tax Equity Investor receives a substantial percentage of:

• Cash

• Tax Credits

• SALT Incentives

• Depreciation Deductions

PS

HP

Developer

Tax

Equity

Investor

Developer

Tax

Equity

Investor

Higher %

Lower %

PS

HP

Equity Flip Partnership (Cont.)

AFTER RATE OF RETURN IS ACHIEVED:

• The partnership allocations “flip” to previously agreed upon

percentages

• Developer has option to purchase Equity Investor’s interest in the

partnership

Developer

Tax

Equity

Investor

“Flip” increases %

“Flip” decreases %

PS

HP

Partnership potentially terminates upon exercise of option.

Developer (Seller, Lessee)

Tax Equity

Investor (Owner)

Utility

State/Local

Incentives

Nontax

Government

Subsidy

Real Returns mWh $/mWh Tax Benefit/Grant

Project

Sale

Proceeds

Lease

Payments

Sale Leaseback (ITC Only)

In this structure, the tax investor is the owner/lessor and, as such, is entitled to the credits and depreciation.

The tax investor further benefits by being able to mitigate operations risk through locking in purchase price

and stream of rental payments. The developer is able to receive up-front proceeds from the sale of

property, while transferring full ownership of the property. This transaction must occur within 90 days of the

original placed-in-service date.

Note: A PPA should be examined for sale of electricity to a third party to mitigate potential price shifts.

*Recapture potential of credit if developer buys back the property in a certain time period.

Sale Leaseback (Cont.)

► The developer sells eligible equipment to Tax Equity Investor at retail.

► Tax Equity Investor subsequently leases back to developer

► Tax Equity Investor benefits by reaping tax credits, SALT incentives, depreciation deductions, and payments

► Tax Equity Investor:

1.Responsible for all capital infusion

2.Calculates lease payments to achieve return

Tax Equity

Investor Developer Equipment

Equipment Sale

Developer

$$$ for Purchase

Equipment

$$$ Lease Payments

Equipment Lease

► Developer: responsible for maintenance on equipment

► Developer sells energy to utility

► Payments are mandatory regardless of profitability or revenue streams

► Buy out option usually exists at conclusion of lease

Summary of Two Investment Options

► Choice of transaction depends on Investor’s capital, liquidity, need for return:

1. The “flip” affords investor more flexibility

2. Leaseback does not require substantial initial capital infusion

Leaseback:

• If the equipment operates effectively early, “flip” occurs earlier.

• If equipment performance is lacking, “flip” is delayed.

“Flip”:

► If the equipment operates effectively early, more revenue is generated.

► If it under performs, less revenue materializes.

Either way the lease payments are constant and for a defined term.

THANK YOU

Kathy Parker, CPA, MST

Rodman and Rodman, PC

3 Newton Executive Park

Newton, MA 02461

617-965-5959

kathy@rodmancpa.com