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What’s New? Keith Martin kmartin@chadbourne.com
Companies are rushing to take delivery of equipment this year in order to qualify for Treasury cash grants on projects built after this year. Some of these plans cross a line. The Treasury does not want to see trafficking after 2011 in stockpiled inventory.
The cash grant is not expected to be extended. Projects must be under construction by year end to qualify for grants. There are two ways to start construction, but banks and tax equity investors have a clear preference for the 5% test. (More than 5% of eligible project cost must be "incurred" by December 2011. It is not enough simply to pay money.)
Companies will have to be careful about bringing in investors or transferring projects after this year while projects are still under construction. In general, a sale of a project while it is still under construction after 2011 must be a sale of the project company. Eligibility for a grant will be lost if assets are sold. It may be lost in some cases if the project is transferred by capital contribution to another entity unless the entity is wholly owned. This will affect how tax equity transactions are structured and how lenders foreclose after this year.
Developer fees are becoming more common in renewable energy projects. They add to basis on which the Treasury cash grant is calculated. However, more aggressive schemes where fees are paid out of circled cash or over an extended period by having the project company give the developer a note are expected to attract attention from Treasury.
Treasury appears to be considering in more cases whether part of the basis claimed in a project should be allocated to intangible assets like power contracts, interconnection agreements and extended warranties.
Improvements to existing projects qualify for cash grants, even if one grant has already been paid on the project. This applies to improvements made during 2009 through 2011 or that start construction by the end of 2011. NREL confirmed in late August that the improvements do not have to increase the electricity output.
The IRS said in June that more equipment at substations qualifies for grants than was thought previously. People drew the line earlier at equipment through the step-up transformer. The IRS said that downstream circuit breakers, switches and surge arrestors that insulate the transformer from damage also qualify. The Treasury said it will not revisit this equipment at projects on which grants have already been paid.
The IRS ruled privately in July that a large battery installed at a wind farm qualifies for an investment credit. Only generating equipment -- not transmission equipment -- qualifies. It helped that the battery was treated for regulatory purposes as generating equipment and only 3% of the charge was expected to come from the grid. The battery must be owned by the same legal entity that owns the power project or at least leased to it. Another ruling is expected next month with slightly more difficult facts. • molten salt • compressed air storage
Deal volume in the tax equity market is roughly equivalent to 2007. However, tax equity yields are 220 to 245 basis points higher. There are 18 active tax equity investors, with several others on the verge of entering the market. The market will need to increase significantly in capacity to cover the same volume of transactions after the cash grant expires. New structures are seeing greater use, including fixed-flip and modified pay-go partnerships, flips based on pre-tax yields, new markets tax credit structures, prepaid service contracts and inverted leases.
Roughly 30 banks are active currently in the project finance market. However, some French banks have put their project finance loan books up for sale. Basel III is expected to turn banks eventually into bridge lenders with the loans moving eventually to institutional investors. Bank yields are in the 225 to 275 bp range above LIBOR. Tenors have hit 17 to 18 years for bank debt and longer for capital markets debt, but are expected to tighten.
Hopes that the "super committee" of 12 members of Congress will be able to agree on at least $1.2 trillion in deficit reduction are receding. It is not clear whether any across-the-board reduction in federal spending would affect Treasury cash grants since they have an open-ended appropriation.
Congress is likely to extend the 100% "depreciation bonus" into next year. There was likely to be little other forward progress on renewable energy incentives before the November 2012 election even before the Solyndra bankruptcy, but the odds are against any backtracking either. Broad corporate tax reform in 2013 or 2014 is a longer-term threat to tax subsidies.
There is increasing interest in the potential uses of REITs by solar, wind and geothermal companies. In general, a weakening economy means that there will be greater interest in ways to squeeze money out of rocks. The potential for a Greek default is already starting to be felt in the market.
Projects that are in line for section 1703 DOE loan guarantees still have time to close. Apool of another $3.5 billion in new loan guarantee authority remains. Access to roughly half of it will require paying credit subsidy costs. No new solicitations have been announced. A USDA loan guarantee program remains an alternative for projects in rural areas.
Percentage of Americans who believe the free market is “the best system on which to base the future of the world”: 59%
Number of times that calculation of the Consumer Price Index has been “improved” since 1980: 20
Percentage of Afghanistan’s gross national product that comes from US and other foreign aid: 97%
What’s New? Keith Martin kmartin@chadbourne.com
