Energy Practice: Renewable Energy -- Now is the Time to Explore Your Options
Renewable Energy: Now is the Time to Explore Your Options
An abundance of potential funding sources
Renewable energy is generally defined as energy derived from on-going natural processes such as solar, wind, biomass, geothermal and flowing water. Historically, energy derived from renewable resources has come at a higher price than energy derived from traditional energy resources such as coal and natural gas. Fossil-fuel producers have had the advantage because they could draw on billions of dollars of infrastructure and developed technology. However, recent government legislation, a societal focus on the reduction of carbon emissions, the growing cost and scarcity of oil, and a policy objective of energy independence has spurred the growth of investors and companies willing to commercialize renewable energy. Investors and companies seeking to enter into the renewable energy arena should be aware of the funding sources available that make up the unique capital structure of renewable energy projects. Many of these funding sources are set forth below.
The American Recovery and Reinvestment Act of 2009 (the “Act”) expands the applicability of tax credits and provides for a Treasury Department Energy Grant.
Prior to passage of the Act, only equipment utilizing solar energy was eligible for the 30% investment tax credit available to businesses. Businesses producing electricity from other renewable energy resources could only utilize the less valuable production tax credit, which would yield a tax credit of 1.5 cents per kilowatt hour of electricity generated each taxable year. The Act now allows the investment tax credit to be taken by businesses that place into service facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, landfill gas, municipal solid waste, hydropower and marine and hydrokinetic. The investment tax credit has a 20 year carry forward and one year look back period.
The Act additionally eliminates the subsidized energy financing limitation on the investment tax credit, which allows businesses to qualify for the full amount of the tax credit even if the facility is also financed with industrial development bonds or through any other federal, state or local subsidized financing program.
Treasury Department Energy Grant
Although the use of tax credits can provide a significant incentive for renewable energy projects, developers must still convert the tax credits into dollars to fund the project. Previously, financial institutions and tax equity investors were prevalent in this market, but the recent credit crunch has significantly limited the number of groups willing to purchase these tax credits. The Act, however, offers a solution by allowing taxpayers to elect a grant from the Treasury Department equal to 30% of the cost of the renewable energy project in lieu of taking the investment tax credit. By opting to take a grant, the taxpayer’s return on investment will be realized much quicker because the grant is paid within 60 days of placing the facility in service.
Individual states have also put together their own renewable energy incentives that can improve the capital structure of a renewable energy project. For example, The Ohio Department of Development is seeking applications to implement renewable energy projects limited to solar, electric, wind electric and solar thermal systems. The maximum incentive level ranges from $150,000 to $200,000, depending on the type of renewable energy and the amount of energy generated.
Renewable Portfolio Standard
A renewable portfolio standard (“RPS”) is a government policy that requires electricity providers to obtain a minimum percentage of their power from renewable energy resources by a date certain. Currently, 24 states1 plus the District of Columbia have RPS policies in place. The RPS creates a market for certificates called Renewable Energy Credits (“RECs”), which are issued to generators that produce electricity from renewable resources. This certificate can then be sold to utilities who must meet their compliance requirements under the RPS. These RECs can be sold in addition to the sale of electricity pursuant to a power purchase agreement.
At the federal level, House Energy Committee Chairman, Henry A. Waxman, and Subcommittee Chairman, Edward J. Markey, introduced H.R. 2454, the American Clean Energy and Security Act of 2009 (the “ACES”), which provides for a combined 20% national renewable energy and energy efficiency standard by 2020. By 2020, utilities would be required to obtain 15% of their electricity from renewable energy sources and demonstrate annual electricity savings of 5% from energy efficiency measures. ACES was approved by the House of Representatives and sent to the Senate to be debated and voted upon.
The market for carbon credits is a trading system that is evolving very quickly as the world responds to demands for reductions in greenhouse gases. There is currently no regulated market in the United States; however, businesses are buying credits or carbon reductions from other businesses, either to demonstrate their corporate responsibility or to prepare for the expected regulation of the market by the current administration.
The price for carbon is extremely variable with significant increases in this year alone. The price is based on the concept that one megawatt hour of energy generates between 0.6 and 1 ton of carbon dioxide (CO2). Currently, in the US, 1 ton of CO2 (A CO2 equivalent or CO2e) is selling for $3 to $10 depending on project type and emission reduction standard.
ACES also includes a carbon cap and trade reduction plan designed to reduce economy-wide greenhouse gas emissions 17% by 2020. More information on cap and trade in general and as provided in ACES can be found on our website (www.mcdonaldhopkins.com) in Issue 1 and Issue 2 of A Special Report on the Environment.
Another source of capital funding for the commercialization of renewable energy projects is Angel Investors. An “Angel” is a high net worth individual who invests his or her own money in start-up companies in exchange for an equity share in the business. Individual Angels will also band together to invest collectively in entrepreneurial firms. Since Angels are investing their own money in companies, they are looking for a solid potential to earn a return on their investment, and there is typically a rigorous application process. There has also been an increase in venture capitalists that are partnering with state and local governments to offer matching funds to companies that secure financing from governmental sources.
In addition to the aforementioned sources of funding, there are dozens of other state and federal programs that can be utilized. Companies that find the proper combination of new debt and equity sources are able to find capital to fund renewable energy projects in a time of capital scarcity. If your company would like to learn more about finding private capital or government incentives for its particular renewable energy project, please contact:
Michael Wise, 216.430.2034, email@example.com or
Christal Contini, 216.348.5455, firstname.lastname@example.org.
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