On July 9, 2009, the U.S. Department of the Treasury issued much-anticipated guidance for Treasury’s renewable energy grant program.1 That grant program provides a cash grant for the development of certain renewable energy projects equal to 30% (or 10% for certain technologies) of the eligible costs of the project. The Treasury grant is available in lieu of the Internal Revenue Code (IRC) § 45 production tax credit and the IRC § 48 investment tax credit.
The Treasury grant program was enacted on February 17, 2009, as part of the American Recovery and Reinvestment Act of 2009, more commonly referred to as the Stimulus Package.2 In the July 9 Treasury guidance, Treasury:
- Responds to many of the questions surrounding the Treasury grant program left unanswered by the Stimulus Package;
- Clarifies the availability of the grant to tax-exempt entities, electric cooperative companies, governmental entities and pass-through entities that have tax-exempt and governmental entity investors, including private equity and hedge funds; and
- Describes the grant application and payment procedures.
Provided below is an overview of the Treasury grant program.
Treasury Grant Eligibility
As described in more detail below, the Treasury grant is generally available to each person who places in service specified energy property: (1) if such property is placed in service during 2009 or 2010; or (2) if construction of such property began during 2009 or 2010 and the property is placed in service after 2010 and before a termination date that varies based on the technology of the project.
- Persons Ineligible for the Grant: The Stimulus Package provides that the Treasury grant is not available to ineligible persons, which include: (1) cooperative electric companies; (2) tax-exempt entities; (3) federal, state or local governments; and (4) partnerships or pass-through entities that have as a direct or indirect investor any of the other types of ineligible persons. However, the Treasury guidance has significantly minimized the reach of that ineligibility provision.
The Treasury guidance provides that the ineligibility provisions can be avoided by the use of a “blocker” corporation. The guidance states that a pass-through entity, including private equity and hedge funds, will not be considered an ineligible person if it has as an investor a taxable corporation, all or some shares of which are held by a governmental entity, tax-exempt entity or cooperative electric company.
- Lessees Entitled to the Grant: Although the Treasury grant is generally available to the owner of the entity holding the renewable energy facility, the Treasury guidance provides that the grant is also available to a lessee of a renewable energy facility if the lessor/owner is entitled to receive the Treasury grant and elects to pass through the grant. Neither the lessor nor the lessee may be ineligible persons.
In a sale-leaseback transaction, the lessee may claim the grant if: (1) the lessee originally placed the property in service; (2) the property is sold and leased back by the lessee, or is leased to the lessee, within three months after the date the property was originally placed in service; and (3) the lessor and lessee do not make an election to preclude application of the sale-leaseback rules.
- Specified Energy Property: An investment must be made in “specified energy property.” Specified energy property includes any of the following types of renewable energy facilities:
- Closed-Loop Biomass
- Open-Loop Biomass
- Municipal Solid Waste
- Marine and Hydrokinetic
- Fuel Cell
- Small Wind
- Combined Heat and Power System
- Location of Property: The renewable energy facility must be used predominately within the United States. The requirement is satisfied if it is used within the United States for at least 50% of the year.
- Placed-In-Service Requirement: Either (1) the renewable energy facility must be “originally” placed in service during 2009 or 2010 or (2) the construction of the renewable energy facility must begin during 2009 or 2010 and be completed prior to the applicable credit termination date listed here.3
A facility is placed in service when it is “ready and available for its specific use.” IRS guidance regarding when renewable energy projects are placed in service for purposes of the tax credits should be instructive in determining when a project is placed in service for purposes of the Treasury grant.
Construction will be considered to have begun “when physical work of a significant nature begins.” Physical work does not include preliminary activities such as planning and design, securing financing, exploring or researching, clearing a site, test drilling to determine soil conditions, or excavation to change the contour of the land. With respect to construction under a contract, construction begins only after a binding written contract is entered into and physical work of a significant nature begins under the contract (excluding the cost of preliminary activities). The Treasury guidance provides a safe harbor that the “physical work of a significant nature” test will be satisfied when the applicant incurs (in the case of an accrual basis applicant) or pays (in the case of a cash basis applicant) more than 5% of the total cost of the property.
- Original Use Requirement: The “original use” of the renewable energy facility must begin with the applicant, and the applicant must have “originally placed the property in service.” The “80/20 rule” applies in this context. Therefore, a facility will be considered a new facility, and an applicant may be treated as having the original use and as having originally placed the facility in service, as long as the cost of used parts contained in the facility is not more than 20% of the total cost of the facility.
Treasury Grant Payments
- Treasury Grant Amount: The amount of the grant is equal to 30% of the eligible basis of qualified property included in the renewable energy facility (10% for geothermal projects described under IRC § 48, microturbine and combined heat and power system facilities).4
Qualified property includes only tangible property that both is used as an integral part of the activity performed by the renewable energy facility and is located at the site of the facility. It does not include a building (other than certain special purpose buildings).5 The eligible basis of that qualified property is generally determined in accordance with the general rules for determining the basis of the property for federal income tax purposes -- i.e., generally, the cost of the property, including all costs that must be capitalized into the cost of the property. With respect to a lessee that claims the grant pursuant to an election by the owner-lessor, the eligible basis is based on an independently assessed fair market value of the facility on the date that it is transferred to the lessee.
The eligible basis of a facility is reduced proportionately if the facility is used for both a qualifying and a non-qualifying activity -- i.e., if the facility utilizes both open-loop biomass and fossil fuels to produce electricity.
There is no cap on the total amount of grants that may be paid out under the Treasury grant program. Grants received under this program are not generally subject to federal income tax.6
- Timing of Grant Payment: Treasury must by law pay the grant within 60 days of the later of the date of the application or the date that the facility is placed in service. The applicant may assign the payment to a third party (for example, a lender). If Treasury determines that the grant is not available for the project, Treasury will notify the grant applicant. No appeals procedure has been developed to challenge a denial of a grant application.
- Potential Recapture of Grant: If an owner who receives the grant sells or otherwise disposes of the renewable energy facility to an ineligible person within the 5-year period after the facility is placed in service, all or a portion of the grant must be repaid to Treasury (20% of the grant must be repaid for each year of the 5-year period remaining on the date of the disposition). Thus, an applicant may sell a facility to an eligible person and retain the full amount of the grant as long as the seller and purchaser agree to be jointly liable to Treasury if any recapture is required.
Similarly, if property ceases to be specified energy property within the 5-year period that the facility is placed in service, all or a portion of the grant must be repaid to Treasury. This would occur if the energy production is permanently, not temporarily, ceased.
Treasury Grant Application Process
- Acceptance of Applications: Applications can be submitted only after construction begins for a facility. With respect to facilities that will be placed in service in 2009 or 2010, we expect that the applications will generally be made after the facility is placed in service. With respect to facilities that will begin construction during 2009 or 2010, but will be placed in service after 2010, applications must be made after construction begins and before October 1, 2011 (Treasury will require that additional information be provided within 90 days after the property is placed in service). A single application may be made for multiple units of property that are treated as a single, larger unit of property (e.g., all the wind mills on a single wind farm).
Treasury is not currently accepting applications. A separate announcement will be made by Treasury providing the date on which it will begin accepting applications. Applications will be accepted online. We expect that Treasury will begin accepting applications in early August.
- Application Requirements:
- An applicant must complete an online application.
- An applicant must provide a Data Universal Numbering System (DUNS) number from Dun & Bradstreet. A DUNS number can be obtained by calling 866-705-5711.
- An applicant must register with the Central Contractor Registration (CCR). Treasury grant payments are made through the CCR; therefore, no payment can be made to an applicant unless an applicant has registered. Registration may be made at www.ccr.gov/startregistration.aspx.
- The application must include: (1) the final engineering design documents stamped by a licensed professional engineer; (2) a commissioning report provided by the project engineer, the equipment vendor or an independent third party that certifies that the equipment has been installed, tested and is ready and capable of being used for its intended purpose; (3) the interconnection agreement (for facilities placed in service that are interconnected with a utility) and any subsequent document to demonstrate that the interconnection agreement has been placed in effect; and (4) a detailed breakdown of all costs included in the claimed basis of the property (supporting documents need to be provided only if requested; if the property has a basis in excess of $500,000, applicants must submit an independent accountant’s certification attesting to the accuracy of all costs claimed as part of the basis).
- With respect to applications for facilities under construction but not yet placed in service, the application must provide documentation demonstrating that construction on the facility has begun. If the facility is being constructed under a contract, a copy of the binding contract must be provided.
- With respect to applications by lessees of renewable energy facilities the lessee must provide the lessor’s irrevocable election to allow the lessee to claim the grant.
- The application may also be required to include certain other documentation depending on the type of renewable energy project.
Post-Grant Reporting Requirements
For each of the 5 years following the placed-in-service date of a renewable energy facility for which a Treasury grant was received, the applicant is required to provide a report that includes: (1) information regarding the number of jobs retained; (2) annual production of energy; and (3) installed nameplate capacity. In addition, the applicant must provide a certification that no event has occurred that would require a partial or complete recapture of the grant amount. The applicant is also required to maintain project, financial and accounting records sufficient to demonstrate that the grant amounts were properly obtained; Treasury has the right to physical access to the facility and to pertinent books and other records in order to conduct audits, examinations and evaluations related to the grant payment.