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June 23 rd , 2011

Federal Tax Credits and Renewable Energy Financing Environmental Business Council: CT Chapter Solar Energy Programs in Connecticut. June 23 rd , 2011. Federal Tax Credits. Renewable energy projects have historically been supported through the US tax code, primarily through :

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June 23 rd , 2011

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  1. Federal Tax Credits and Renewable Energy Financing Environmental Business Council: CT Chapter Solar Energy Programs in Connecticut June 23rd, 2011

  2. Federal Tax Credits • Renewable energy projects have historically been supported through the US tax code, primarily through: • The production tax credit (“PTC”) in Section 45, • The investment tax credit (“ITC”) in Sections 25D and 48, and • Accelerated tax depreciation in Section 168 (“MACRS”) • Historically, renewable energy developers had two options in order to monetize the favorable tax benefits granted through the tax code: either 1.) offset eligible corporate income, or 2.) utilize tax equity to monetize the PTC, ITC, and MACRS (typically used by developers that don’t manufacture taxable income) • Through the end of 2011, developers have been presented a third option, 3.) utilize 1603 Treasury Grants to monetize PTC and ITC • Recently, developers have also successfully utilized the New Markets Tax Credit as another source of tax credits to be used in the renewable energy sector. • However, developers still need to utilize either 1.) eligible corporate income, or 2.) tax equity to monetize the MACRS

  3. 1603 Grant and Investment in Renewables • Prior to PTC and ITC extensions in 2007‐2008, annual wind and solar installations fluctuated considerably, reflecting inconsistent policy • The introduction of the 1603 Treasury Grant in 2009 had an immediate impact on the U.S. clean energy market • We estimate that over $7 billion of 1603 Treasury Grants have been awarded since 2009, and $5 billion more could be committed during the remainder of 2011.

  4. Investment Tax CreditAfter years of instability ITC is extended for more than one or two years • Based on the cost of qualifying equipment • Generally 30% of tax basis • Credit is claimed entirely in the year in which property is placed in service • To qualify for ITC, solar facility must be placed in service by taxpayer before January 1, 2017 (i.e., no later than December 31, 2016) • Nonrefundable but can be carried back one year and forward 20 years • Basis of property reduced by 50% of ITC • Recapture if disposed of within 5 years • No cutback for subsidized financing

  5. Section 1603 Grant in Lieu of ITCA much needed shot of adrenaline for the industry • Developer can elect to receive cash grant in lieu of ITC • ITC eligibility requirements for apply • Project generally must be: • Placed in service in 2009, 2010 or 2011, or • Construction must begin before 2012 and project must be placed in service by credit termination date • Application due no later than September 30, 2012 • Grant generally operates in the same manner as ITC • 30% of tax basis of qualifying property • Subject to recapture if sold to disqualified person within 5 years • Generally not included in recipient’s taxable income (but may be subject to state tax) • Basis reduced by 50% of grant amount

  6. MACRS (Accelerated Depreciation)Almost as valuable as the ITC but harder to monetize • The level of acceleration in the depreciation of qualified assets depends on type: • Wind and solar qualify for 5-year MACRS • Others generally qualify for 7-year MACRS • Bonus Depreciation: • For projects placed in service after September 8, 2010 and before January 1, 2012, 100% bonus depreciation in first year • For projects placed in service in 2012, 50% bonus depreciation in first year

  7. New Markets Tax CreditNot a silver bullet but can be a helpful tool • In the existence since 2000 with over $3 billion in credits awarded • 39% tax credit • Does not reduce cost basis for depreciation • Can be combined with other Federal tax credits • Previously NMTC has been mostly used for commercial real estate and manufacturing • NMTC is now being considered as a source of low cost capital for renewable facilities • Fairly complex structure, with high transaction costs, and a long lead time

  8. Impact of Federal Tax Credits: Combined with State-level incentives, provides attractive rates, but multiple stakeholders and regulatory frameworks add complexity

  9. Impact of Federal Tax Credits: Complexity of incentives comes with a price. While resource adjusted rates in US are similar to FIT markets, complicated regulatory framework has limited industry growth.

  10. Impact of Federal Tax Credits: How much will really be left after after 1603 Grant expires? $ Billions

  11. Tax Equity Players: Which of them will stick around post 1603?

  12. Financing Solar Projects: Tax Equity is the building block, what happens when 1603 goes away?

  13. John DeVillarsBlueWave Capital, LLC Tel. 617.470.7297 Email. jdevillars@bluewave-capital.com Eric Graber LopezBlueWave Capital, LLC Tel. 617.401.7681 Email. egraberlopez@bluewave-capital.com

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