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Aaron Ball Published on the new Stimulus Bill
February 17, 2009
On February 17, 2009, the President signed into law the American Recovery and Reinvestment Act of 2009 ("ARRA") at an alternative energy facility outside of Denver, Colorado. ARRA is the largest single domestic spending program in U.S. history. The enormous and complex legislation provides for $575 billion in new Federal spending. ARRA contains $20 billion in tax incentives and $30 billion in spending for various renewable energy initiatives. In addition to several new programs, many of the appropriations are for pre-existing programs administered by the Department of Energy ("DOE") under existing legislation. ARRA also includes energy-related tax credits and tax-based subsidies. ARRA builds on previous energy policy legislation such as the Energy Improvement and Extension Act of 2008 ("Energy Improvement Act"), the Energy Independence and Security Act of 2007 (the "Energy Security Act"), and the Energy Policy Act of 2005 ("Energy Policy Act").
APPROPRIATIONS FOR ENERGY PROJECTS
| Smart Grid (Grant Programs) | $11 billion |
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"Smart grid" refers to technological improvements to the U.S. electricity grid. The program's goal is to address grid reliability, security, efficiency, and the grid's ability to incorporate renewable energy sources. Previous legislation contained federal and state research and development programs designed to address these issues. The most notable of these was Smart Grid Investment Matching Grant Program, administered by DOE, under which the Federal government would reimburse investors for up to 20 percent of the cost of certain qualifying smart grid investments.
At $11 billion, the appropriations for smart grid development activities are among the largest energy-related appropriations in the ARRA. ARRA's "smart grid" provisions include:
- Appropriating $4.5 billion for electricity delivery and energy reliability programs. This appropriation expressly provides that the funds are also for implementation of the Smart Grid Investment Matching Grant Program. This investment is intended to set up digital technologies in the transmission grid that will modernize the system and save energy and reduce the cost of operation.
- Increasing the eligible percentage of federal matching grant funds available for qualifying smart grid investments from 20 percent to 50 percent.
- Financial support for smart grid demonstration projects, including in areas where transmission and distribution assets are controlled by investor-owned utilities.
- Of the $4.5 billion mentioned above, $100 million will be allocated for worker training activities and $80 million will be allocated to conduct a resource assessment and analysis of future demand and transmission requirements.
| Efficient and Renewable Energy | $2.5 billion |
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ARRA contains a $2.5 billion appropriation for renewable energy and energy efficiency research, development, demonstration and deployment. The largest allocation of these funds goes to biomass and geothermal projects which will receive $800 million and $400 million, respectively. The remaining $1.3 billion will go to research demonstrations for additional renewable energy technologies (including water power and solar energy, and industrial and commercial energy efficiency demonstrations). Within those funds, $50 million is allocated to support research to increase the efficiency of information and communications technology.
| Loan Guarantee Program | $6 billion |
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The DOE loan guarantee program (the "LGP") was established under Title XVII of the Energy Policy Act, and is designed to encourage the early commercial use of new or significantly improved technologies in "qualifying" energy projects. "Qualifying" projects include renewable energy systems, hydrogen fuel cell technology, advanced nuclear energy facilities and carbon capture and storage projects, among others. Upgrades to existing transmission systems also qualify (up to $500 million in funding).
Under the LGP, DOE may guarantee up to 100% of an eligible project's debt (capped at 80% of project cost). Under ARRA, $6 billion in new funds have been appropriated to support the LGP. LGP is, in turn, expected to support loans for renewable energy systems, hydropower and transmission technologies that will commence construction prior to September 30, 2011. This deadline narrows the field for eligible applicants since many projects will be unable to meet this requirement. DOE gives weight to applications with lower guarantee percentages. All projects must comply with the Davis-Bacon prevailing wage requirements.
Given the time constraints imposed by the ARRA, DOE may not be able to engage in substantial rulemaking and will therefore probably rely heavily on existing Energy Policy Act regulations. The existing regulations do not hold much promise for rapid disbursement of these funds. To date, DOE has not approved or disbursed a single loan guarantee under the original program established under the Energy Policy Act in 2005. Nonetheless, DOE Secretary Steven Chu has stated that he expects that guarantees could be made within five months of ARRA's enactment. He further stated that he intends to streamline the process and give applications less scrutiny.
| Fossil Energy Research and Development | $3.4 billion |
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ARRA makes $3.4 billion available for "Fossil Energy Research and Development." DOE's Fossil Energy Research and Development Program issues grants for the development of emission-reducing technologies, including carbon capture and sequestration projects. Specifically, those include:
- $1.52 billion for a competitive solicitation for a range of industrial carbon capture and energy efficiency improvement projects, including a small allocation for innovative concepts for beneficial carbon reuse;
- $1 billion for fossil energy research and development programs;
- $800 million for additional amounts for the Clean Coal Power Initiative Round III Funding Opportunity Announcement;
- $50 million for a competitive solicitation for site characterization activities in geologic formations;
- $20 million for geologic training and research grants; and
- $10 million for program direction funding.
| Carbon Capture and Storage | |
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Several provisions in ARRA (i) promote investment in advanced energy projects for carbon capture and storage, (ii) clarify the requirements of a carbon tax credit enacted last year, and (iii) increase government funding for existing carbon capture and storage programs.
Last year, Congress provided a $10 credit per ton for the first 75 million metric tons of carbon dioxide captured and transported from an industrial source for use in enhanced oil recovery, and a $20 credit per ton for carbon dioxide captured and transported from an industrial source for permanent storage in a geological formation. Facilities were required to capture at least 500,000 metric tons per year to qualify. The ARRA requires that any taxpayer claiming the $10 credit per ton for use in enhanced oil recovery must also ensure that such carbon dioxide is permanently stored in a geological formation.
| Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds | |
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Clean Renewable Energy Bonds ("CREBs") were created under the Energy Policy Act. Qualified Energy Conservation Bonds ("QECBs") were created under the Energy Improvement Act. Under these programs, project-specific bonds may be issued by state, local, or tribal governments and electricity cooperatives for qualifying public (government) renewable energy projects or energy efficiency and conservation projects.
ARRA authorizes an additional $1.6 billion of new bonds under the CREB program to finance facilities that generate electricity from qualifying renewable energy sources such as hydropower, landfill gas, marine renewable, and trash combustion facilities.
ARRA further authorizes an additional $3.2 billion of new bonds under the QECB program to finance public (government) programs designed to reduce greenhouse gas emissions. ARRA also provides that QECBs may be issued to make loans and grants for capital expenditures to implement "green" community programs.
TAX PROVISIONS
| Production Tax Credits Time Extension | $13.143 billion |
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Owners of qualifying renewable energy projects (e.g., wind and solar) are eligible to take a production tax credit ("PTC") equal to approximately two cents per kilowatt hour of energy produced during the first 10 years of operation, beginning on the placed-in-service date. ARRA extends the placed-in-service date for wind facilities through December 31, 2012. ARRA also extends the placed-in-service date through December 31, 2013, for certain other qualifying facilities such as closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine renewable facilities.
| Investment Tax Credit: Option to Choose PTC or ITC | |
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Currently, owners of qualifying energy facilities that produce electricity from solar technology are eligible to take a 30 percent investment tax credit ("ITC") for facilities placed into service between January 1, 2009 and December 31, 2012. Under prior law, owners of facilities that produce electricity from other sources such as wind, closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine renewable facilities were eligible to claim the PTC but not the ITC. One benefit of the ITC is that it can be claimed in the year when the renewable energy facility is placed into service as compared to the PTC, which is payable over a 10-year period.
ARRA allows owners of certain qualifying renewable energy facilities (biomass, landfill gas, trash, geothermal, marine and incremental hydropower) placed into service between January 1, 2009 and December 31, 2013, to elect to claim the ITC in lieu of the PTC. A facility owner who elects the ITC option must reduce the depreciation basis for the facility by one-half of the amount of the credit. This effectively means that only 85 percent of the cost of the facility can be depreciated. Facility owners can make the ITC election on a project-by-project basis.
ARRA eliminated the prior $4,000 cap on ITC available for qualified small wind energy property as well as the rule that limited the amount of credit for property financed by subsidized energy financing or private equity bonds.
| Treasury Department Grants | |
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ARRA allows taxpayers who are eligible to claim the PTC or ITC to instead elect to receive a grant from the Treasury Department (in lieu of tax credits) in an amount up to 30 percent of the applicant's tax basis in "specified energy property" such as:
(i) solar, wind, biomass, fuel cell, geothermal, trash, landfill gas, incremental hydropower, and marine energy facilities placed in service before the end of 2010;
(ii) geothermal, solar, qualified fuel cell, qualified micro turbine, combined heat and power system, qualified small wind energy, and geothermal heat pump property placed into service in 2009 or 2010; and
(iii) so long as construction begins in 2009 or 2010 and the grant application is received before October 1, 2011, the grants will be available for (A) wind facilities placed into service by January 1, 2013, (B) biomass, trash or landfill gas, hydropower, and marine and hydrokinetic facilities placed into service by January 1, 2014, and (C) geothermal, solar, qualified fuel cell, qualified micro turbine, combined heat and power system, qualified small wind energy and geothermal heat pump property placed in service by January 1, 2017.
The grants are payable on the commercial operation date of the facility. Recipients of grants cannot claim the ITC or PTC.
| QECBs | |
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QECB holders may claim a tax credit equal to the product of their bond's credit rate and the face value of the bond.
| Refueling Property Credit Expansion | |
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ARRA provides for an increase in the alternative fuel refueling property credit for property placed into service during 2009 and 2010. This includes refueling property for ethanol, natural gas, compressed natural gas, liquid natural gas, liquid petroleum gas, biodiesel, hydrogen and electricity.
| Advanced Energy Facilities Investment Credit | |
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A 30% investment credit is available to taxpayers for investment in a "qualifying advanced energy project." These projects include re-equipment, expansion or establishment of a manufacturing facility for the production of "advanced energy property" which includes:
(i) property designed to be used to produce energy from renewable resources;
(ii) fuel cells, micro turbines, or energy storage systems for use with electric or hybrid electric motor vehicles;
(iii) electric grids to support the transmission of intermittent sources of renewable energy;
(iv) property designed to capture and sequester carbon dioxide emissions;
(v) property designed to refine or blend renewable fuels or to produce energy conservation technologies;
(vi) new qualified plug-in electric drive motor vehicles, qualified plug-in electric vehicles or components designed for use with such vehicles; or
(vii) other advanced energy property designed to reduce greenhouse gas emissions.
Products must be certified by the DOE Secretary through a competitive bidding process in order to be eligible. Up to $2.3 billion of credits can be certified.
WHAT'S NEXT?
ARRA's passage is only the beginning. The most difficult part lies ahead. Implementation of ARRA must be carried out by a host of Federal, state and local authorities at a pace that can only be described as "light speed" by government standards. As the Smart Grid program demonstrates, the Federal government does not have the best track record implementing similar initiatives, even with much more time to do so.
A website maintained by the Office of Management and Budget, www.recovery.gov, provides information submitted by the agencies implementing the ARRA. Recovery.gov also provides a link to each implementing agency's website. In turn, each such agency has (or by now should have) a portion of their website dedicated to posting information on ARRA implementation and spending. Effective March 3, 2009, each agency was required to provide a weekly status update, including major planned actions. Not later than May 1, each implementing agency must submit its "Recovery Program Plan" describing in detail how the agency plans to implement its requirements under the ARRA.
