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On February 17th, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), the widely discussed $787.2 billion economic.

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Presentation on theme: "On February 17th, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), the widely discussed $787.2 billion economic."— Presentation transcript:

0 The Green New Deal—Energy and the Stimulus Bill
American Recovery and Reinvestment Act of 2009 Stan Renas Scott Sonnenblick April 25, 2009

1 On February 17th, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), the widely discussed $787.2 billion economic stimulus package. “The country that harnesses the power of clean, renewable energy will lead the 21st century.” President Barack Obama, Speech to Congress, Feb. 24, 2009

2 ARRA Policy Goals Immediate economic stimulus Jobs
And…to a lesser degree Innovative technology Reduce greenhouse gases Establish U.S. manufacturing capability Rural development Supply chain completeness Requirements to show goals are being met: Tracking of jobs created and retained Tracking of energy savings versus dollars invested Quarterly reporting of results to DOE Required and aggressive project start dates

3 How Big is the ARRA Commitment to Renewable Energy?
Energy-related direct appropriations roughly equal to $35 billion, with additional funds available for energy from other baskets Stimulus impact of certain tax credit changes falls outside the dollar totals The appropriation for the Loan Guaranty program is $6 billion, but that translates into capacity to guarantee $60 billion in loans Clean Renewable Energy Bonds and Energy Conservation Bonds provide $4 billion for energy projects The Treasury grant in lieu of tax credits program is unlimited, and while not perfect, could be very widely used

4 Department of Energy (DOE)
The DOE has announced the following funding levels for programs and projects on its recovery website: Energy efficient homes and businesses: $5 billion Greening federal buildings: $4.5 billion Renewable energy projects: $2.5 billion Smart Grid technology and transmission infrastructure: $4.5 billion Clean fossil energy technology: $3.4 billion Next generation biofuels: $800 million Science and basic research in the energy technologies of the future: $1.6 billion Battery research and advanced vehicle technologies: $2 billion Advanced Research Project Agency-Energy (ARPA-E): $400 million Cleanup of nuclear legacy: $6 billion

5 What Else Does ARRA Do for Renewables and Sustainable Energy?
Energy efficiency programs flow mostly through existing state programs Municipal bond rules are revised to unlock credits, with potential large benefit for renewables projects Clean Tech research gets a boost Utilities are pushed towards efficiency and renewables New appropriations reinforce Department of Defense initiatives for renewables

6 Impact on Energy Project Developers
The financial and banking crisis of 2008 was debilitating for developers and tax investors All sources of capital shut off No IPO capital, no lenders, no tax equity When Obama won the election, industry participants quickly organized Unprecedented bipartisan support for the industry Immediate industry reaction is very positive The “devil is in the details”

7 Extension of Product Tax Credit
Uncertainty as to tax credit availability has hindered investor confidence in wind, solar and other renewable project development Extend § 45 Production Tax Credit (PTC) Wind projects placed in service on or before Dec. 31, 2012 Biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine renewables projects placed in service on or before Dec. 31, 2013. PTC is an inflation-adjusted tax credit ($/kWh) based on the amount of power generated and sold to an unrelated party each year

8 Election to Claim Energy Investment Tax Credit
Project investors in projects previously qualifying for PTCs may elect to take section 48 investment tax credits (ITCs) Current law allows PTC to be taken over a 5 or 10 year period (10 years for wind). Current law allows ITC to be taken in the year the project is placed in service (30% credit for solar, fuel cell, small wind property; 10% credit for other qualifying technologies). ARRA provides that technologies previously qualifying for the PTC (including wind, biomass, geothermal (previously eligible for 10% ITC), landfill gas, waste-to-energy, hydropower, and marine facilities) may now claim a credit equivalent to the 30% ITC on costs of new equipment in lieu of the PTC for wind facilities placed in service between January 1, 2009 and December 31, 2012, while other facilities may elect to claim the ITC if placed in service between January 1, 2009 and December 31, 2013. Note: A facility owner who elects the ITC option must reduce the depreciation basis for the facility by half the amount of the credit (i.e., 85% of the cost of the facility may be depreciated).

9 Treasury Grant in Lieu of Tax Credit
Senate Finance and House Ways & Means Committees recognized, when conferring on the final draft, that “[b]ecause of current market conditions, it is difficult for many renewable projects to find financing due to the uncertain future tax positions of potential investors in these projects.” As a result, the ARRA includes provisions to fill the private credit void by making cash available for renewable projects in the form of government grants to spur investments in renewable energy. Treasury will provide grants of up to 30% of the basis of “qualified facilities” in lieu of ITCs. “Qualified Facilities” include: wind, biomass, geothermal, solar, landfill, municipal solid waste, hydropower, marine and certain fuel cell facilities; microturbine and cogeneration facilities may be eligible for grants of up to 10% of the facility’s basis Grant money will be obtainable for: Facilities placed in service in 2009 or 2010 and Facilities that initiate construction in 2009 or 2010 and are placed into service before: 2013 for wind (30% credit) 2014 for biomass, geothermal, landfill gas, waste-to-energy, hydropower & marine renewables (30% credit) 2017 for geothermal, microturbine, combined heat & power and geothermal heat pump property (10% credit)

10 Extension of Bonus Depreciation
Extension of 50% first-year Bonus Depreciation In 2008, Congress allowed businesses to recover the cost of capital expenditures faster than the ordinary depreciation schedule. As in 2008, businesses may immediately write-off 50% of capital expenditures related to new equipment placed in service within the United States in 2009. Investment must be made by Dec. 31, 2009. Bonus is only available to taxpayers that were not committed to the investment prior to January 1, 2008. When claiming the bonus, a taxpayer would be able to depreciate 50% of the cost of equipment placed in service for year 2009 (or a lesser percent if the taxpayer also elicits the ITC), and would then follow the regular depreciation schedule for following years

11 DOE Loan Guarantees Renewable energy loan guarantee expansion
$6 billion in appropriated funds should support at least $60 billion in loans “Rapid Deployment” loan guarantees for the following: Renewable energy systems that generate electricity or thermal energy, and facilities that manufacture related components Demonstration or pilot projects using leading-edge biofuel technology that is likely to become commercialized and reduce life-cycle greenhouse gas emissions Electric power transmission facilities that are important in meeting reliability needs and have a positive effect on a state’s or region’s environment (including climate change) and energy needs Loan guarantees for biofuel projects limited to $500 million the limited guarantees may help speed development and commercialization of alternatives to corn-based ethanol, such as cellulosic ethanol Construction must commence by Sept. 30, 2011 only a small number of transmission projects, particularly new projects, could meet this requirement due, among other things, to the typical lengthy siting proceedings

12 Given the speed that will be required to issue loan guarantees for renewable energy and transmission projects that will commence construction by September 30, 2011, DOE will be constrained in its ability to engage in time-consuming rulemaking; accordingly, DOE’s current loan guarantee regulations, issued by final rule on October 4, 2007, are likely to influence strongly how DOE solicits, evaluates, approves and monitors its expanded renewable and transmission project loan guarantee program. Under existing regulations, DOE may guarantee up to 100 percent of a loan, provided that the loan is issued by the Treasury Department’s Federal Financing Bank, while loans from private lenders can be guaranteed, provided that the guarantee is for less than 100 percent of the loan amount. Greater weight will likely be given to applications that rely upon a smaller guarantee percentage. Of note, DOE likely will issue a loan guarantee only where the project sponsors make significant equity contribution toward the project cost. That regulations are in place for the existing loan guarantee program does not provide great assurance that transmission and renewable project loan guarantees will be rapidly approved and disbursed. At this time, DOE has not approved and disbursed a single loan guarantee under the innovative technology program established by EPAct 2005; however, during DOE Secretary Steven Chu’s confirmation hearings, he committed to reform DOE to speed up the loan guarantee process. Secretary Chu stated that he expects the guarantees to start being made within five months of the enactment of the stimulus package and that he would like DOE to spend half of its total appropriations within one year. He also indicated that in order to get more money to the private sector, he will streamline the review process and give less scrutiny to each loan guarantee application.

13 Impact on Energy Project Developers
Did ARRA address the problems and will it be effective? Tax Benefits are clearly more valuable Does not increase the market for tax equity Individuals cannot use tax credits Complicated tax partnerships and leases remain the only means to monetize tax attributes Cash Grant and Government Guarantee program should increase capital availability Widespread concern that the program will be difficult to implement Also concern about technical rules “Stranded depreciation” widely debated

14 Impact on State & Local Governments
ARRA flows $11.3 billion for State and Local Governments through three Department of Energy programs: Weatherization Assistance Program, which provides energy efficiency services to low-income households Energy Efficiency and Conservation Block Grant Program, which aims to help reduce energy use and greenhouse gas emissions State Energy Program, which provides states with discretionary funding that can be used for various energy efficiency and renewable energy purposes

15 Energy Efficiency & Renewable Energy Grants
$5 billion to fund grants to states under the existing Weatherization Assistance Program to assist low-income families in reducing energy costs by making their homes more energy efficient May include insulation, space-heating equipment, energy-efficient windows, water heaters and efficient air conditioners The income level of eligible households must be less than 150% of the poverty level Somewhat related, $4.5 billion for converting GSA facilities to high performance green buildings Reduce total energy use (relative to 2005 levels) in federal buildings 30% by 2015 Reduce fossil energy use (relatives to 2003 levels) for new federal buildings and major renovations 55% by 2010 and completely by 2030 Funds distributed by September 2011

16 Energy Efficiency & Renewable Energy Grants (cont’d)
DOE Energy Efficiency and Conservation Block Grants $3.2 billion to fund the Energy Efficiency and Conservation Block Grants program ($400 million of which is awarded on a competitive basis to grant applicants) to assist states, local governments and Indian tribes and private entities in implementing strategies to reduce fossil fuel emissions and total energy use. Funded activities include: financial incentive programs for energy efficiency improvements grants to non-profit organizations to perform energy efficiency retrofits programs to conserve energy used in transportation energy efficiency building codes and inspections installing light emitting diodes (“LEDs”)

17 Energy Efficiency & Renewable Energy Grants (cont’d)
DOE State Energy Program and Decoupling Provision $3.1 billion to states and state energy offices to address energy priorities and adopt emerging energy efficiency technologies. Eligibility for most of the State Energy Program funding is conditioned upon enactment of new building codes and adoption of electric utility rate “decoupling” to encourage energy efficiency The decoupling problem involves efforts to encourage utilities to promote customer use of energy efficiency measures. Profitability of electric utilities depends in large part on how much power they sell. Profits also increase with greater capital investment, such as in power plants. These utilities therefore have limited motivation to implement conservation programs that would slow or even reverse the growth of electricity demand. A solution to this problem is a regulatory approach called decoupling, under which utilities that meet energy conservation targets receive payments (funded by ratepayers) that compensate the utility for lost sales. The approach therefore decouples growth in sales from profitability. Retail rate design, of which decoupling is a part, has historically been under exclusive state or local authority. ARRA follows this precedent by offering incentives, instead of creating mandates, for the implementation of decoupling by the states. Specifically, §410 of Division A authorizes DOE to make about $3.05 billion of energy efficiency and renewable energy funds available to states in excess of normal allocation methods if a state meets certain criteria.

18 Energy Efficiency Grants/Loans
HUD Energy Retrofits and Green Investments (Assisted Housing Stability) $250 million for grants or loans to property owners to upgrade HUD-assisted housing to increase energy efficiency, including new insulation, windows and furnaces “assisted housing” typically refers to multifamily housing properties owned by private landlords which serve low-income tenants and receive rental assistance payoffs from HUD The funding will remain available until September 30, 2012

19 Build America Bonds New category of taxable government bonds
Prior to December 31, 2010, a state or local government can issue Build America Bonds in lieu of ordinary tax-exempt government bonds by making an election to designate the issue as Build America Bonds Build America Bonds may be used only for purposes for which tax-exempt government bonds may currently be issued, including the funding of infrastructure, public improvements and public buildings The same restrictions that apply to tax-exempt governmental purpose bonds also apply to Build America Bonds (e.g., private use prohibition and arbitrage), but the bonds are not tax-exempt government bonds; rather, a bondholder is entitled to a tax credit of 35% of the interest paid on the bonds Alternatively, the issuer can elect to receive a cash grant directly from the federal government equivalent to the value of the tax credit if the proceeds of the cash grant are used for capital expenditures, funding of reserves and limited issuance costs

20 Clean Renewable Energy Bonds (CREBs)
For nonprofit entities to finance facilities that generate electricity from wind, biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewable and municipal waste / combustion facilities ARRA authorizes additional $1.6 billion 1/3 to state, local & tribal governments 1/3 to public power providers 1/3 for electric cooperatives Holders of such bonds may claim a tax credit equal to the product of their bonds credit rate and the face value thereof

21 Qualified Energy Conservation Bonds
Last year, new bonds similar to New CREBs were created – Qualified Energy Conservation Bonds (ECBs) with $800 million authorized. ARRA authorizes a total of $3.2 billion (including last year’s $800 million) May be issued only by state and local governments May be issued for qualified conservation purposes, including: Capital expenditures to reduce energy use in publicly-owned buildings by at least 20% Implementing green community programs Rural development involving production from renewables Research facilities and grants for the development of cellulosic ethanol or other nonfossil fuels Technologies to capture and sequester carbon dioxide produced by fossil fuel use Increasing the efficiency of technologies for producing nonfossil fuels Automobile battery technologies and other technologies to reduce fossil fuel use in transportation, or technologies to reduce energy use in buildings Mass community facilities that reduce energy use (including pollution reduction for vehicles used for mass commuting) Demonstration projects that promote commercialization with green building technology Conversion of agriculture waste for fuel production Advanced battery manufacturing technologies Technologies to reduce peak electricity demand Technologies that capture and sequester carbon dioxide emitted from fossil-fueled power facilities Public education campaigns to promote energy efficiency

22 Private Activity Bond AMT Exemption
Interest on tax-exempt private activity bonds (PABs) (i.e., state and local bonds issued to provide financing for private projects) is generally exempt from federal income tax, but the exception does not apply for purposes of the alternative minimum tax (AMT) – tax-exempt interest on such bonds is a tax preference item that increases an individual’s taxable income in calculating AMT income. Last year, one category of PABs, tax-exempt housing bonds, were exempted from AMT Under ARRA, remaining categories of PABs are exempted Applies to life of bonds if issued in 2009 or 2010 Also applies to interest on refunding bonds if the original PAB was issued after December 31, 2003 and before January 1, 2009, and refunded during 2009 or 2010.

23 Advanced Energy Project Credits
New 30% Investment Tax Credit for Qualifying Advanced Energy Projects, which is a project that re-quips, expands or establishes a manufacturing facility to produce the following equipment: Renewable energy systems (including solar, wind and geothermal) Fuel Cells Microturbines Electric/hybrid Cars, Batteries & Equipment Renewable Grids/Smart Grids Carbon Capture & Sequestration Renewable Fuels Refining or Blending Energy Conservation Technologies To be eligible for the credit, a project must be certified by the Secretary of Treasury, in consultation with the Secretary of Energy, through a competitive bidding process. Up to $2.3 billion may be allocated under the program.

24 Grants for Advanced Battery R&D
Advanced battery research, development, demonstration and deployment $2 billion for facility funding grants to manufacturers of advanced batteries and battery system components Covered activities include the production of lithium ion batteries, hybrid electrical systems, system components and software. On a related point, the ARRA provides $4.5 billion to the Office of Electricity Delivery and Energy Reliability, for grid modernization and related technologies, such as electricity storage. It includes funds for the smart grid and grid modernization provisions.

25 Renewable energy and energy efficiency R&D
DOE Renewable Energy and Energy Efficiency R&D $2.5 billion for applied research, development, demonstration and deployment activities at DOE’s Office of Energy Efficiency and Renewable Energy. Includes $800 million for biomass, $400 million for geothermal energy, and $1.3 billion for other technologies such as water power, solar energy and energy efficiency The conference report further directs that DOE use $50 million for R&D to increase the efficiency of information and communications technology and to improve standards.

26 5-year Carry Back of Net Operating Losses
Extends Carry Back period for next operating losses from 2 to 5 years for losses in 2008 or 2009 Only applies to small businesses Small businesses defined as those with gross annual receipts of $15 million or less Substantially narrowed from the House version, which would have applied to all businesses that were not beneficiaries of the Troubled Asset Relief Program

27 Impacts on Electric Utilities
Utilities can benefit from the same incentives as other renewable energy developers Transmission and smart grid get a major boost ($11 billion) Fossil fuels not left out Decoupling: A regulatory paradigm shift impending?

28 Utilities and the Section 48 Investment Tax Credit
In October 2008, as part of the Emergency Economic Stabilization Act of 2008: The definition of energy property in Internal Revenue Code section 48 was modified to allow renewable energy property owned by utilities to qualify for the energy investment tax credit (ITC) Eligible property includes solar (electric and hot water), fuel cells, microturbines, small wind property, geothermal heat pumps and combined heat and power systems The extensions of the ITC and the Treasury grant program in lieu of ITC and PTC are thus relevant for utilities as well

29 Smart Grid Demonstration Grants
The Smart Grid is a system that uses digital technology to enhance the delivery and utilization of electricity through intelligent, real-time, distributed two-way communications Under the smart grid concept, the power system would interactively and automatically facilitate energy conservation and the hook up of new renewable power systems (even at the level of, for example, home rooftop solar energy units), and it would detect and respond to incipient failures in order to sever or minimize blackouts. The appropriations for activities related to smart grid development are among the largest of the energy appropriations in the ARRA, totaling approximately $11 billion. Within this amount, DOE will receive $4.5 billion for investment in “smart grid” technologies. The DOE Smart Grid investment is intended to set up digital technologies in the transmission recovery from disruptions to the energy supply. Of the $4.5 billion that DOE will receive, $100 million will be available for worker training activities and $80 million will be allocated to conduct a resource assessment and an analysis of future demand and transmission requirements after consultation with the Federal Energy Regulatory Commission. DOE is also directed to provide financial assistance to utilities of up to 50 percent of the costs of qualifying advance grid technology investments.

30 DOE Fossil Energy R&D Grants
Grants for fossil energy R&D $3.4 billion for the Fossil Energy Research and Development program, including: $1 billion for fossil energy research and development programs $800 million for selection under DOE’s clean coal round III (which includes petroleum coke fuel input). The program targets coal-based systems that capture and sequester, or reuse, CO2 emissions $1.52 billion in competitive solicitation for a range of industrial carbon capture and energy efficiency improvement projects, including a small allocation for innovative concepts for beneficial CO2 reuse. $50 million for a competitive solicitation for site characterization activities in geologic formations $20 million for geologic sequestration training and research grants If the majority of the $3.4 billion is used for CCS activities, it would constitute a major increase of funding relative to the current level. It would also be a large and rapid increase in funding over what Doe spent on CCS cumulatively over the 11 years from 1997 through 2007 (slightly less than $500 million).

31 Buy American / Davis-Bacon Requirements
Generally, funds appropriated by the bill may not be used for a project for public infrastructure or public works unless all of the iron and steel used in the projects is produced in the U.S. Federal department and agency heads may approve exemptions from this provision The Davis-Bacon labor standards, generally requiring that prevailing wages must be paid on public works projects, are applicable to projects financed by New CREBS or ECBs, or funded directly or indirectly by the Federal Government under ARRA

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