Energy Tax Credits

By David R. Cook Jr., attorney, Autry, Horton & Cole, LLP

I) Introduction

The tax code currently provides for a number of tax credits available to investors in renewable energy projects. For a discussion of a number of these credits, see “Tax Credits Available to Energy Investors” in Power Engineering’s E-Newsletter, July 22, 2008.1 These tax credits typically have sunset provisions (or in-service deadlines) that terminate the availability of credits after a certain date. Many energy investors were unwilling to invest in renewable energy projects because of the risk that Congress would fail to extend the tax credits. These investors obtained some relief in both 2008 and 2009, when Congress substantially amended the renewable energy tax credits, and extended many of them several years into the future.

This article discusses the recent developments in renewable energy tax credits, including the extension of two very important renewable energy tax credits (the Production Tax Credit under Section 45 and the Energy Credit under Section 48) and the addition of a new credit (the Qualifying Advanced Energy Project Credit under Section 48C).

II) Production Tax Credit

A) Background

The Production Tax Credit (“PTC”) is available to taxpayers that produce and sell energy from certain renewable energy resources at Qualifying Facilities. These resources include:

• wind;
• closed-loop biomass;
• open-loop biomass;
• geothermal energy;
• solar energy;2
• small irrigation power;
• municipal solid waste; and
• qualified hydropower.

Qualifying facilities generally include facilities that produce the above resources, or energy from such resources. The PTC is also available for refined coal production facilities and Indian coal production facilities.

The credit is calculated by multiplying the kWh of qualifying energy produced and sold by 1.5 cents. It is generally available for ten years after the facility is placed in service. The credit rate and credit period are modified for certain types of facilities, usually depending on when the facility was placed in service.3 Before the recent changes, the PTC was subject to many in-service deadlines that ended the credit’s availability for facilities placed in service after 2008.

B) Recent Legislative Activity

The 2008 and 2009 amendments4 changed the PTC by extending the in-service deadlines, by adding additional types of qualifying resources and facilities, and by modifying the rules related to the existing resources.

First, the Acts extended the in-service deadlines for energy facilities as follows:

  • wind facilities must be placed in service before January 1, 2013; 5
  • refined coal production facilities must be placed in service before January 1, 2010;
  • the following facilities must be placed in service before January 1, 2014
    • closed-loop biomass facility;
    • open-loop biomass facility;
    • geothermal facility;
    • landfill gas facility;
    • trash combustion facility; and
    • qualified hydropower facility. 6

Second, the 2008 amendments added Marine and Hydrokinetic Renewable Energy (“MHRE”) as a qualifying energy resource. MHRE is energy that is derived from water movement (e.g., waves, tides, flowing rivers and streams, and irrigation systems) or temperature differential (e.g., ocean thermal energy conversion), but does not include energy derived from dams, diversionary structures, or impoundment. A MHRE facility must be placed in service before January 1, 2014,7 and it must have a nameplate capacity of at least 150 kW.

Third, thanks to the 2008 Act, “steel industry fuel” now qualifies as refined coal resource. “Steel industry fuel” means a fuel used as a feedstock for the manufacture of coke that is produced through a process of liquefying coal waste sludge8 and distributing it on coal. The credit amount is $2 per barrel-of-oil equivalent.9 The facility (or qualifying modification to an existing facility) must be placed in serve before January 1, 2010. The credit is available until the later of December 31, 2009, or one year after the facility (or modification) was placed in service.

Fourth, the 2008 Act made several modifications to the various rules for resources and facilities that previously qualified for the PTC.

  • Refined Coal Requirements: The amendments modified the rules for projects to qualify as refined coal facilities.
    • The “market value test” for refined coal has been eliminated. Before the amendment, the market value test required that fuel be produced in such a manner that would increase the refined coal’s market value by 50%.
    • The “emission reduction test” has been increased from 20% to 40% with respect to the emission of sulfur dioxide or mercury. The test still requires a reduction of 20% in the emission of mercury. 10
  • Municipal Solid Waste - Trash Facility: The definition of “trash facilities” has been broadened to include facilities that use – not merely burn – municipal solid waste to produce electricity.
  • New Open- and Closed-Loop Biomass Units: New units placed in service at a biomass facility, both open- and closed-loop, qualify for the PTC, but only to the extent of the increased production resulting from the new units.
  • Qualified Hydropower – Nonhydroelectric Dam: The 2008 Act also modified the rules for nonhydroelectric dams to qualify as a qualified hydropower project. The hydroelectric project on the dam must be licensed by the Federal Energy Regulatory Commission and meet all other applicable environmental, licensing, and regulatory requirements. The hydroelectric dam must have been operating as of October 3, 2008 for flood control, navigation, or water-supply purposes, but not for producing hydroelectric power. In addition, the FERC must certify that the hydroelectric project is operated so that the water surface elevation at any given location and time is maintained.

III) Energy Credit

A) Background

The Energy Credit is available for certain “energy property” placed in service. The credit is calculated by multiplying the energy percentage by the basis of the energy property placed in service. Energy property includes the following:

  • Solar Energy Equipment: Equipment that uses solar energy to
    • generate electricity to heat or cool a structure, to heat water in a structure, or to provide solar process heat, or
    • illuminate the inside of a structure using fiber-optic distributed by sunlight;
  • Geothermal Deposit Equipment: Equipment used to produce, distribute, or use energy from geothermal deposits; 11
  • Qualified Fuel Cell Property: Certain fuel cell power plants that use an electrochemical process; and
  • Qualified Microturbine Property: Certain stationary microturbine power plants.

The applicable energy percentage depends on the type of property used. The following chart provides the energy percentages: 

Energy Property

Energy Percentage

Qualified Fuel Cell Property 30%
Solar Energy Equipment Property 30%
Geothermal Deposit Equipment 10%
Qualified Microturbine Property 10%
All Other Property 10%

B) Recent Legislative Activity

The 2008 Act and 2009 Act modified the existing rules by extending certain deadlines and by adding additional types of energy property. The amendments extended for an additional eight years the credit for Solar Energy Equipment Property (January 1, 2017),12 Fuel Cell Property (December 31, 2016),13 and Microturbine Property (December 31, 2016).14

The recent amendments also added three types of energy property that qualify for the Energy Credit. First, the 2008 Act added Combined Heat and Power System Property, which qualifies for a 10% energy-percentage credit. It is a system that (1) uses the same energy for the generation of electrical power, mechanical shaft power, or both (2) in combination with the generation of steam or other forms of useful thermal energy (including heating and cooling applications).15 It must be placed in service before January 1, 2017, and must meet a 60% energy efficiency percentage. This property is subject to the 10% energy percentage.

The second energy property added by the 2008 Act is the Qualified Small Wind Energy Property, which qualifies for a 30% energy-percentage credit. This type of property uses a small wind turbine to generate electricity. It must have a nameplate capacity of not more than 100 kW, and extends only until December 31, 2016. At one time the credit for Qualified Small Wind Energy Property was limited to $4,000; however, the 2009 Act eliminated this limitation.

The third type of energy property added by the 2008 Act is Geothermal Heat Pump Systems. These systems are subject to a 10% energy-percent credit, but the credit ends on January 1, 2017. They include equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

The Acts also made a number of other important changes to the Energy Credit. Public utility property now qualifies for the Energy Credit as a result of the 2008 Act. The credit limitation for Qualified Fuel Cell Property was increased from $500 to $1,500 for each 0.5 kW of capacity. The 2009 Act eliminated the limitation related to projects that are subsidized by federal, state, or local programs designed to conserve or produce energy.16

Finally, the 2009 Act allows taxpayers to elect to treat certain Qualified Facilities (in connection with the PTC) as Energy Property for purposes of the Energy Credit. Qualified Facilities treated as Energy Property under this election will qualify for a 30% energy percentage. The taxpayer may only select the following Qualified Facilities for the election, and only those placed in service during the applicable in-service dates:

Qualified Facilities

In-Service Dates

Wind Facilities 2009-2012
Closed-Loop Biomass Facility 2009-2013
Open-Loop Biomass Facility 2009-2013
Geothermal or Solar Energy Facility 2009-2013 
Landfill Gas Facilities 2009-2013 
Trash Facilities 2009-2013
Qualified Hydropower Facilities 2009-2013
Marine and Hydrokinetic Renewable Energy Facilities 2009-2013

In addition to the above requirements, the property subject to an election must be depreciable, tangible property or must be an integral part of the Qualified Facility. It does not include a building or structural components.

Unfortunately, the election does not provide a double-credit for the property (i.e., a credit under the PTC and the Energy Credit). Although the election qualifies the property under the Energy Credit, the property no longer qualifies for the PTC.

IV) Qualifying Advanced Energy Project Credit Under Section 48C

The 2009 Act brought about a new credit for renewable energy projects, known as the Qualified Advanced Energy Projects (“QAEP”). This credit equates to 30% of the basis of eligible property placed in service and certified by the IRS pursuant to the QAEP Program.17 Under the program, the IRS and the Department of Energy certify projects to receive up to $2,300,000,000 in credits.18

Only certain projects may qualify for the credit. Some of the relevant investments include projects that re-equip, expand, or establish a manufacturing facility for the production of

  • Property designed to use renewable energy (e.g., sun, wind, or geothermal deposits) to produce energy;
  • Fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles;
  • Electric grids to support the transmission of intermittent sources of renewable energy, including storage of such energy;
  • Property designed to capture and sequester carbon dioxide emissions; and
  • Property designed to refine or blend renewable fuels or to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies).

The applicable property must be necessary for the production of the above resources, and must be depreciable, tangible personal property (not including a building or its structural components).

In determining which projects will receive QAEP credits, the IRS and the Department of Energy will consider the following factors: expectation of commercial viability; domestic job creation; reduction of air pollutants and greenhouse gases; potential for technological innovation and commercial deployment; lowest levelized cost of generated or stored energy; and the amount of time required for completion of the Project.

V) Conclusion

Congress’ recent amendments to the renewable energy tax credits may provide an incentive for energy investors, developers, and entrepreneurs to participate in a growing industry. Such persons should, however, be cautious before incurring any risk and check the specific standards applicable for each credit. As with any other tax credit, the taxpayer must strictly comply with the requirements of the applicable Internal Revenue Code section and the administrative procedures set forth by the IRS.

While the recent amendments extended many of the in-service dates and sunset provisions, investors seeking to take full advantage of these credits should begin preparations soon to obtain the most benefit.

1 http://newsletters.pennnet.com/powerengineering/25728139.html

2 Solar energy facilities qualify only if they were placed in service before January 1, 2006. I.R.C. § 45(d)(4).
3 See I.R.C. § 45(b).
4 Pub.L. 110-343, 122 Stat 3765 (Oct. 3, 2008) (the “2008 Act”); Pub.L. 111-5, 123 Stat 115 (Feb. 27, 2009) (hereinafter, the “2009 Act”). 
5 The 2008 Act extended it until the end of 2009. The 2009 Act extended it an additional three years.
6 The 2008 Act provided an in-service deadline of December 31, 2010. 
7 The 2008 Act required the facility to be placed in service before January 1, 2012; however, the 2009 Act extended it an additional two years. 
8 “Coal waste sludge” means the tar decanter sludge and related byproducts of the coking process. 
9 The term “barrel-of-oil equivalent” means the amount of steel industry fuel that has a Btu content of 5,800,000 Btus. The phase-out applicable to other refined coal facilities is not applicable to steel industry fuel, but both are subject to the inflation adjustment. Interestingly, this Code section contains an error in § 45(b)(2), which refers to the “$3 amount in subsection (e)(8)(D)(ii)(I). Obviously, this amount should be the “$2 amount.”
10 Both tests are based on a comparison with emissions release when burning the feedstock coal or comparable coal predominantly available in the marketplace as of January 1, 2003. 
11 In the case of electricity generation, the equipment qualifies only up to (but not including) the electrical transmission stage. 
12 Extended from January 1, 2009, to January 1, 2017. 
13 Extended from December 31, 2008, to December 31, 2016.
14 Extended from December 31, 2008, to December 31, 2016.
15 The system must produce at least 20% of its energy in the form of thermal energy (not used as electrical or mechanical) and at least 20% in the form of electrical or mechanical energy (or combination thereof). 
16 The rules still apply to periods before December 31, 2008.
17 For more information on the QAEP Program, see IRS Notice 2009-72.

18 Currently, Senate Bill 2857 would increase this amount to $4,800,000,000.

 


 

David R. Cook Jr. is an attorney at the energy and construction law firm of Autry, Horton & Cole, LLP in Atlanta. AHC formed a practice group that focuses on the development of energy projects, with regard to financing, construction contracting, claims avoidance and power transactions. Cook is a member of the American Association of Attorney-Certified Public Accountants, American Bar Association, American Society of Certified Public Accountants, and the Construction Financial Management Association. Contact Cook by phone at 770-818-4442, or by email at cook@ahclaw.com.

Founded in 1996, Autry, Horton & Cole, LLP (AHC) advises clients on a wide variety of business and litigation matters with strong practice areas focused on energy and utilities, business and corporate law, construction and taxation. With offices in Atlanta and Tucker, Georgia, attorneys have decades of experience serving individuals, business and governmental entities throughout the country. AHC has extensive expertise representing cooperatives and partners Charles Autry and Roland Hall authored “The Law of Cooperatives” published by the American Bar Association in 2009. For additional information visit www.ahclaw.com.



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