In this Client Bulletin, Bricker & Eckler’s Green Strategies Group outlines two new federal tax credit bond programs which should be of significant interest to the State of Ohio, Ohio local governments and advanced energy companies: Qualified Energy Conservation Bonds (QECBs) and New Clean Renewable Energy Bonds.
I. Qualified Energy Conservation Bonds (QECBs)
QECBs are tax credit bonds. As a tax credit bond, holders of QECBs receive payments in the form of tax credits from the federal government. The tax credits permit an issuer of a QECB to potentially borrow for “qualified conservation purposes” at rates of interest which may be significantly lower than rates of interest on taxable debt or even tax-exempt bonds.
“Qualified conservation purposes” include the following:
- Capital expenditures incurred for purposes of:
- Reducing energy consumption in publicly-owned buildings by at least 20 percent
- Implementing green community programs
- Rural development involving producing electricity from renewable energy resources
- Facilities eligible for the production tax credit, including wind facilities, biomass facilities, geothermal facilities, and landfill gas facilities, trash facilities, qualified hydropower facilities (a more detailed description of these facilities is included in Part III)
- Expenditures with respect to research facilities, and research grants, to support research in:
- Developing cellulosic ethanol or other non-fossil fuels
- Developing carbon dioxide capture and sequestration technologies resulting from fossil fuels
- Increasing efficiency of existing technologies for producing non-fossil fuels
- automobile battery technologies and other technologies to reduce fossil fuel consumption in transportation
- Technologies to reduce energy use in buildings
- Mass commuting facilities and related facilities that reduce the consumption of energy, including expenditures to reduce pollution from mass commuter vehicles
- Demonstration projects designed to promote the commercialization of
- Green building technology
- Converting agricultural waste for use in fuel production or otherwise
- Advanced battery manufacturing technologies
- Technologies to reduce peak use of electricity
- Carbon capture and sequestration technologies and using this for electricity production
- Public education campaigns to promote energy efficiency
Issuers may wish to consider issuing QECBs in tandem with tax-exempt general obligation or revenue bonds to pay for capital expenditures incurred for qualified conservation purposes in connection with, for example, new municipal or county buildings.
In addition, thirty percent of an allocation of QECBs can be issued as private activity bonds benefiting nongovernmental persons to pay capital costs incurred for qualified conservation purposes.
QECBs are issued pursuant to an allocation of a national QECB volume cap of $800 million. This national volume cap is allocated to the states based upon population and is then further allocated to “large local governments,” within a state (meaning cities and counties within a state with populations of 100,000 or more) in proportion to the population of the large local government to the population of the state. Of importance, there is no application for a large local government to receive its allocation of the national QECB volume cap. A large local government automatically receives volume cap pursuant to statute.
New Clean Renewable Energy Bonds (NCREBs) are similar to the “old” Clean Renewable Energy Bonds (“CREBs”), but unlike CREBs which now have a termination date of December 31, 2009, NCREBs have no termination date. Similar to QECBs, NCREBs are subject to a national volume cap of $800 million and likewise provide attractive issuer interest cost savings in comparison to interest costs associated with issuing traditional tax-exempt bonds. These savings would be typically passed along to benefit the projects financed with proceeds of NCREBs. The main features of NCREBs are:
- Of the $800 million volume cap, not more than 33 1/3 percent may go toward qualified projects of public power providers (defined as a state utility with a service obligation), not more than 33 1/3 percent may go toward qualified projects of governmental bodies, and not more 33 1/3 may go toward qualified projects of cooperative electric companies.
- For governmental bodies and cooperative electric companies, the Secretary of the Treasury is granted discretion to determine the most appropriate method of allocating NCREB volume cap. The allocation method may soon be announced by the Treasury in an I.R.S. Notice if the announcement procedure for NCREBs follows the procedure used by the Treasury in connection with CREBS. For public power providers, the Secretary will first determine the qualified projects appropriate to receive an allocation of NCREB volume cap. Then, the Secretary will allocate the NCREBs volume cap to the selected projects in such a way that the award bears, to the maximum extent possible, the same ratio to the cost of the project as the amount of the national volume cap assigned to public power providers bears to the overall costs of all public power provider projects receiving an allocation of NCREBs volume cap.
III. NCREBs and QECBs Capital Projects.1
NCREBs and QECBs are available to be used by the State of Ohio and local governments to assist with financing costs of the following types of qualified facilities used to generate electricity:
- Wind: using wind to generate electricity, e.g. wind turbine, tower and supporting pad.
- Closed-loop biomass: crops grown sustainably for the purpose of optimizing their value for bioenergy and bioproduct uses, e.g. annuals: corn and wheat; perennials: trees, shrubs, switchgrass.
- Open-loop biomass: biomass that can be used to produce energy and bioproducts even though not grown specifically for this purpose, e.g. agricultural livestock waste and residues from forest and crop harvesting.
- Geothermal: uses energy from the earth to produce electricity, e.g. heat accessed from below by drilling water or steam wells.
- Landfill gas: uses landfill gas— gas derived from the biodegradation of municipal solid waste —to produce electricity.
- Trash facility: a facility (other than landfill gas) which uses municipal solid waste to produce electricity, e.g. to produce steam to drive a turbine to generate electricity.
- Qualified hydropower: a facility producing qualified hydroelectric production, e.g. a dam.