On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “Act”). The Act includes several provisions that will help shape the direction of US energy policy in the coming years by seeking to reduce the country’s greenhouse gas emissions and placing renewed emphasis on US energy efficiency, independence and security. The Act includes over US$38 billion in spending, as well as tax incentives for various renewable energy initiatives estimated to cost US$20 billion over ten years. Among these spending provisions are billions of dollars in appropriations for existing programs, largely administered by the Department of Energy (the “DOE”), as well as several new and modified programs. Additionally, the Act includes several important changes to the Internal Revenue Code (the “Code”) concerning tax credits and other tax-based subsidies for the energy sector.
New Spending in the Stimulus Bill
DOE Energy Efficiency and Renewable Energy Funds
The Act grants US$16.8 billion to the DOE to be allocated to energy efficiency and renewable energy funds. Specifically, US$3.2 billion are directed to Energy Efficiency and Conservation Block Grants under the Energy Independence and Security Act of 2007, under which the Department of Energy grants funds to eligible state, local and tribal governments to develop and implement energy efficiency strategies and plans. The Act allocates US$2.0 billion of the funds to grants for the manufacture of advanced batteries and components that are produced in the United States, US$3.1 billion to the State Energy Program under the Energy Policy and Conservation Act and US$5.0 billion to the Weatherization Assistance Program under the Energy Conservation and Production Act. The Act authorizes the DOE to use these funds for state grants under Title III of the Energy Policy and Conservation Act, provided certain assurances are made that the grants will be used to fund energy efficiency and renewable energy programs.
Electricity Delivery and Energy Reliability
The Act allocates US$4.5 billion to the DOE for expenses related to electricity delivery and energy reliability. US$100 million of these funds are directed toward worker training activities and US$80 million are to be used by the Office of Electricity Delivery and Energy Reliability (“OEDER”) to conduct a resource assessment and analysis of future demand and transmission requirements after consultation with the Federal Energy Regulatory Commission. The Act specifically mandates that the OEDER provide technical assistance for the formation of certain interconnection-based transmission plans including, as needed, support to regions and states for the development of coordinated electricity policies.
Fossil Energy Research and Development
The Act allocates US$3.4 billion to the DOE to be used for fossil energy research and development. The final legislation does not include specific parameters or additional conditions (in contrast to earlier versions of the bill), suggesting that the DOE has discretion to allocate the funds within the existing parameters of the prescribed area. Eligible programs are listed in the Joint Explanatory Statement of the Committee of Conference. Sequestration research and development programs have already been created under DOE’s fossil energy research and development programs. For example, DOE has established Regional Carbon Sequestration Partnerships that bring together government agencies, academic institutions and private energy companies. These partnerships have already conducted numerous small-scale geological storage tests and are expected to implement seven large-scale projects around the country. Most recently, in January 2009, the Southeast Regional Carbon Sequestration Partnership began injecting carbon dioxide into coal seams in the Central Appalachian Basin in Virginia. Continued funding will help further the research and development necessary to bring this technology to commercialization.
Loan Guarantee Program for Qualifying Renewable Energy Projects
The Act allocates US$6.0 billion in new funds to support the DOE loan guarantee program. The program was established under Title XVII of the Energy Policy Act of 2005 (the “Loan Guarantee Program”), and is designed to encourage the early commercial use of new or significantly improved technologies in qualifying energy projects. Such qualifying projects include renewable energy systems, hydrogen fuel cell technology, advanced nuclear energy facilities and carbon capture and storage projects, among others. Under the Loan Guarantee Program and subject to certain rules and conditions, the Secretary of Energy is authorized to guarantee up to 100 percent of an eligible project’s debt, although, to date, no guarantees have been issued.
Although the new funds are to be channeled through the existing Loan Guarantee Program, the Act has imposed certain conditions on the types of project eligible for the guarantees. These conditions are in addition to the existing rules of the Loan Guarantee Program. For example, to qualify for a portion of the new US$6.0 billion an eligible project must use a renewable energy technology (including incremental hydroelectric) that produces electric or thermal energy or related manufacturing, focus on electricity transmission, or be a leading edge biofuel project, and must be able to start construction by the end of September 2011.
For additional information regarding the loan guarantee program, see our Client Alert, dated February 16, 2009, titled “Stimulus Law Provides ‘Rapid Deployment’ Expansion of DOE Innovative Technology Loan Guarantee Program.”1
Additional DOE Allocations
The Act grants funds for various other DOE activities, including US$483 million for non-defense environmental clean-up and US$390 million for the Uranium Enrichment Decontamination and Decommissioning Fund. In addition, US$1.6 billion is allocated generally for the DOE’s Office of Science, and an additional US$400 million is directed to be used by the Advanced Research Projects Agency—Energy.
The Act contains provisions that build upon recent Congressional efforts to realize the set of technological improvements, referred to as “smart grid,” for the US electricity transmission and distribution grid, with the goal of addressing grid reliability and security, efficiency and the grid’s ability to incorporate renewable sources of energy. These provisions include:
- The US$4.5 billion appropriation for electricity delivery and energy reliability programs discussed above expressly provides that the funds are also for implementation of the Smart Grid Investment Matching Grant Program, which was established by the Energy Independence and Security Act of 2007 (the “Energy Security Act”) in order to reimburse investors for up to 20 percent of the cost of certain qualifying smart grid investments.
- Increasing the eligible percentage of federal matching grant funds available for qualifying smart grid investments from 20 percent to 50 percent.
- Amending the Energy Security Act to provide financial support for smart grid demonstration projects, including in areas where transmission and distribution assets are controlled by investor-owned utilities.
- Increasing the borrowing authority of the Western Area Power Administration (“Western”) by US$3.25 billion, to be used only for delivering power via renewable energy systems or for new or upgraded electric power transmission lines. The Act grants another US$10 million to Western to be used for activities including conservation and renewable resource programs. The borrowing authority of the Bonneville Power Administration is also increased by US$3.25 billion to aid with the construction, acquisition and replacement of the transmission system.
For additional information regarding smart grid spending, see our memo, dated February 16, 2009, titled “A Summary of Select Energy-Related Provisions in the American Recovery and
Reinvestment Act of 2009.”2
Military-Based Energy Conservation Funding
US$100 million of the funds allocated to the Navy and Marine Corps under the Act for military construction is specifically directed for energy conservation and alternative energy projects. These funds are available for use before September 30, 2013. The Act also grants defense-wide military construction funds of US$120 million for the Energy Conservation Investment Program, which funds are available for use until September 30, 2013. In addition, under the Act, those funds allocated to the Army, Navy, Marine Corps, Air Force, the respective Reserves of each of the same, the Army National Guard and the Air National Guard for modernization and improvements to Department of Defense facilities are to include investment in the energy efficiency of these facilities. The funds that will include such investments total US$3.7 billion and are available until September 30, 2010. An additional US$400 million, also available until September 30, 2010, are allocated to the Defense Health Program to improve, repair and modernize facilities, including investment in the efficiency of military medical facilities. The Army Corps of Civil Engineers receives US$25 million under the Act to be used for investigations, US$2 billion for construction and US$2.1 billion for operations and maintenance on projects that also receive alternative appropriations for energy and water development.
The Act instructs that unspecified portions of the US$180 million allocated to the Department of the Interior, the US$115 million allocated to the US Fish and Wildlife Service and the US$589 million allocated to the National Park Service for construction, are to be used for energy efficient retrofits to existing facilities.
State and Tribal Assistance Grants
The Act allocates US$6.4 billion for state and tribal assistance grants, and specifies that, to the extent sufficient projects are available, 20 percent of the US$4 billion allocated to the Clean Water State Revolving Funds are to address green infrastructure, water or energy efficiency improvements or other environmental innovation. US$300 million of the grant funding is directed to Diesel Emission Reduction Act grants.
Training in Energy-based Employment
The Act allocates to the Department of Labor US$500 million to be used for research and job training to prepare workers for so-called “green collar” careers in energy efficiency and renewable energy. These funds are available through June 30, 2010. In addition, the Secretary of Labor may allocate up to 15 percent of the appropriation to build centers for the Office of Job Corps for the operational needs of such centers including training in energy efficiency, renewable energy and environmental careers.
The Act allocates US$300 million for the acquisition of government vehicles with better fuel economy, including hybrid vehicles, electric vehicles, and commercially available plug-in hybrid vehicles, which funds are available for use until September 30, 2011. In order to use these funds, the Administrator of General Services must submit a plan for their expenditure and the strategy used to substantially increase energy efficiency. In addition, the Act grants US$100 million to the Federal Transit Administration to be distributed as discretionary grants to public transit agencies for capital investments to assist in the reduction of energy consumption and greenhouse gas emissions by public transportation systems. Grants are to be based on factors including total projected energy savings, as well as the percentage of projected savings of the total energy use of the agency.
Housing and Urban Development
Of the US$4 billion allocated to the Department of Housing and Urban Development (“DHUD”) under the Act, US$1 billion of these are to be made available by competition for “priority investments,” which include investments that leverage private sector funding or financing for renovations and energy conservation retrofit investments. An additional US$250 million is allocated to the DHUD to provide grants or loans for energy retrofit and green investments to property owners that receive project-based housing assistance. The Secretary of the DHUD is also authorized to use additional funds allocated as part of the project-based assistance grants, which total US$2.25 billion, to provide incentives to grantees to use the funding for investments in energy efficiency and green building technology. The Act directs the Secretary to use distributions from the US$510 million allocation to the Native American Housing Block Grants for, among other things, rehabilitation, including energy efficiency and conservation.
Federal Buildings Fund
The Act allocates US$5.5 billion to the Federal Buildings Fund, of which at least US$4.5 billion must be available to convert General Services Administration buildings to “high performance green buildings.”
Renewable Energy Incentives
The Act provides a number of tax incentives for developers and investors in renewable energy projects. In particular, the Act establishes a tax credit for Qualifying Advanced Energy Projects, extends the placed-in-service sunset date for eligibility for production tax credits (“PTCs”), allows taxpayers to elect an investment tax credit (“ITC”) in lieu of claiming PTCs or to claim a grant from the Treasury Department in lieu of the ITC or PTC and extends the period to claim bonus depreciation. Qualifying Advanced Energy Project Credit The Act establishes a tax credit equal to 30 percent of the qualifying investment with respect to any qualified advanced energy project (the “Qualifying Advanced Energy Project Credit”). A qualifying advanced energy project includes a project which re-equips, expands or establishes a manufacturing facility for the production of:
- Property designed o be used to produce energy from renewable resources
- Electric grids to support the transmission of intermittent renewable energy, including storage of such energy
- Property designed to capture and sequester carbon dioxide emissions
- Property designed to refine or blend renewable fuels or to produce energy conservation technologies
- Other advanced energy property designed to reduce greenhouse gas emissions
There is a total of US$2.3 billion in credits available under this program through a competitive bidding process. A taxpayer that claims the Qualifying Advanced Energy Project Credit may not also claim the Energy Credit, Qualifying Advanced Coal Project Credit or the Qualifying Gasification Project Credit with respect to the same investment.
Under the Act, the Secretary of the Treasury, in consultation with the Secretary of Energy, is required within 180 days of enactment to establish a qualifying advanced energy project program to consider and award certification of the credits. In determining whether to certify a particular project, the Secretary of the Treasury is required to consider only those projects that have a reasonable expectation of commercial viability. In addition, the Secretary of the Treasury is required to take into consideration projects that provide for: (a) the greatest domestic job creation during the credit period; (b) the greatest net impact in avoiding or reducing air pollutants or anthropogenic emissions of greenhouse gases; (c) the greatest potential for technological innovation and commercial deployment; (d) the lowest levelized cost of generated or stored energy, or of measured reduction in energy consumption or greenhouse gas emissions and (e) the shortest project time from certification to completion.
Extension of Placed-in-Service Sunset Date for PTCs
Under current law, PTCs are generally available only with respect to electricity derived from qualified energy resources at a qualified facility that is placed in service before certain specified dates. Qualified energy resources are defined as wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production and marine and hydrokinetic renewable energy. A qualified facility is, in general, a facility that produces electricity using qualified energy resources. The Act extends the placed-in-service date for wind facilities to January 1, 2013, and extends the PTC for other qualified facilities that are placed in service before January 1, 2014.
Election of Investment Credit in Lieu of the Production Credit
The Act allows taxpayers to make an irrevocable election to claim a 30 percent ITC in lieu of the PTC on certain qualifying facilities. This election should be attractive to tax investors wishing to take advantage of the tax benefit in a single year rather than over a ten-year period, especially if they are uncertain about their tax positions in future years. To be eligible for the ITC, wind facilities are required to be placed in service during the period from January 1, 2009 to December 31, 2012, and all other qualified facilities are required to be placed in service during the period from January 1, 2009 to December 31, 2013. A taxpayer who elects to take the ITC in lieu of the PTC is required to reduce the adjusted basis of the property by one-half of the amount of the ITC claimed.
Grants for Specified Energy Property
Under the Act, eligible taxpayers are permitted to claim a cash grant from the Secretary of the Treasury in an amount equal to thirty percent (or, in some cases, ten percent) of the basis of “specified energy property” that is placed in service during 2009 or 2010. The grants are in lieu of PTCs or ITCs and taxpayers that claim the grants are not eligible to claim PTCs or ITCs with respect to the same property. Specified energy property is defined, in general, as any wind, closed-loop biomass, open-loop biomass, geothermal or solar, landfill gas, trash combustion, qualified hydropower, or marine and hydrokinetic renewable energy facility that is eligible for PTCs, and any qualified fuel cell property, solar property, qualified small wind energy property, geothermal property, qualified microturbine property, combined heat and power system property and geothermal heat pump property that is eligible for the energy credit. The amount of the grant is excluded from the taxpayer’s gross income. However, the taxpayer is required to reduce the adjusted basis of the property by one-half of the amount of the grant. Taxpayers may obtain the grants by filing an application with the Secretary of the Treasury before October 1, 2011.
Repeal of Certain Limitations on Credit for Renewable Energy Property
The Act removes the US$4,000 cap on the credit available for qualified small wind energy property placed in service after December 31, 2008, and before January 1, 2017. A qualified small wind energy property means property that uses a qualifying small wind turbine to generate electricity. In addition, the Act eliminates the current law requirement that a taxpayer reduce the basis of property for purposes of claiming the energy credit if the property is financed by subsidized energy financing or by the proceeds of a private activity bond.
For additional information regarding tax incentives, see our Client Alert, dated February 16, 2009, titled “New Tax Incentives for Renewable Energy Projects.”3
Increased Allocations of New Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds
Clean Renewable Energy Bonds (“CREBs”) and Qualified Energy Conservation Bonds were created under the Energy Policy Act of 2005 and the Energy Improvement Act, respectively. Under these programs, project-specific bonds can be issued by state, local or tribal governments, or electricity cooperatives, among others, in respect of certain qualifying public-sector renewable energy projects or energy efficiency and conservation projects.
Increased Limitation on Issuance of New CREBs
For the CREB program, the Act authorizes an additional US$1.6 billion of new bonds to finance facilities that generate electricity from qualifying renewable energy sources such as hydropower, landfill gas, marine renewable and trash combustion facilities. This US$1.6 billion authorization is subdivided into thirds with equal parts going one-third to qualifying projects of state, local and tribal governments one-third to qualifying projects of public power providers; and one-third to qualifying projects of electricity cooperatives.
Increased Limitation on Issuance of Qualified Energy Conservation Bonds
For the newer Qualified Energy Conservation Bond program, the Act authorizes an additional US$3.2 billion of new bonds to finance state, municipal and tribal government programs and initiatives designed to reduce greenhouse gas emissions. The Act will also clarify that qualified energy conservation bonds may be issued to make loans and grants for capital expenditures to implement green community programs.
For additional information regarding CREBS and Qualified Energy Conservation Bonds, see our Client Alert, dated February 16, 2009, titled “A Summary of Select Energy-Related Provisions in the American Recovery and Reinvestment Act of 2009.”4
Energy Conservation Incentives
In order to provide incentives for upgrading the energy efficiency of residential buildings and automobiles and to promote the use of alternative sources of energy, the Act adjusts the credits allowed under the Code for related expenditures. These adjustments include increasing the percentage of certain qualified nonbusiness upgrade expenditures, removing caps on the credit for residential energy efficient property, and temporarily increasing the credit for expenditures on alternative fuel vehicle refueling property.
Extension and Modification of the Credit for Nonbusiness Energy Property
The Act increases the credit for nonbusiness energy property from ten percent to thirty percent of the sum of the amount paid for qualified energy efficiency improvements by the taxpayer and the amount of residential energy property expenditures paid by the taxpayer for the taxable year. The Act also simplifies the general limitation on this credit by restricting the aggregate amount of the credits for the taxable years beginning in 2009 and 2010 to US$1,500 per taxpayer.
The revisions to this credit should provide incentives for qualified energy improvements by increasing the credit on these improvements, while decreasing the residential energy property expenditures portion of the credit from the previous credit allowance, which included the full value of these expenditures. Qualified energy improvements continue to include the addition of insulation material or systems in order to reduce heat loss or gain, installation of exterior windows or doors, or certain roofs, but the efficiency requirements for their qualification have been made more rigorous. Efficiency levels required to qualify as a residential energy property expenditure have also been raised for electric heat pumps, central air conditioners, water heaters and biomass fuel (wood) stoves. The fuel efficiency standards for hot water boilers, however, have been lowered regardless of whether the boiler is fueled by natural gas, oil, or propane, as have the standards for oil furnaces.
Modification of the Credit for Residential Energy Efficient Property
The Act loosens restrictions on the residential energy efficient property credit, which includes a credit equal to 30 percent of expenditures on certain qualified solar electric, solar water heating, fuel cell, small wind energy and geothermal heat pump property. The Act removes the US$2,000 credit ceiling for expenditures on qualified solar water heating property and geothermal heat pump property, and the US$4,000 credit ceiling for expenditures on qualified small wind energy property.
Temporary Increase in the Credit for Alternative Fuel Vehicle Refueling Property
In order to expand the tax incentives for using vehicles that run on certain alternative fuels, the Act increases temporarily both the amount of the credit and the limit placed on the credit. In order to qualify as an alternative fuel vehicle, the Code requires that the vehicle only run on alternative fuel, which is defined as either compressed natural gas, liquefied petroleum gas, hydrogen or any liquid whose volume consists at least 85 percent of methanol. The Act limits the increase in the credit to property that is placed in service in the taxable years beginning after December 31, 2008 and before January 1, 2011. During this period, the credit on such expenditures that do not relate to hydrogen increases from 30 percent to 50 percent, and the maximum credit is raised from US$30,000 to US$50,000 for business property and from US$1,000 to US$2,000 for nonbusiness property. In the case of hydrogen fuel improvements that are subject to an allowance for depreciation, the limit on the credit is raised during the provided term from US$30,000 to US$200,000.
Carbon Dioxide Sequestration
In addition to the funding and carbon sequestration tax incentives introduced as part of the Qualifying Advanced Energy Project Credit discussed above, the Act includes tighter restrictions on a previously established tax credit for carbon sequestration. In October 2008, Congress passed the Emergency Economic Stabilization Act (the “EESA”) to inject money into the financial sector. In addition to the provisions of the Troubled Asset Relief Program (“TARP”), the EESA also created a new tax credit equal to US$20 per metric ton of qualified carbon dioxide captured at a qualified facility and permanently disposed of in secure geological storage (with a minimum capture of 500,000 tons per year to be eligible). The EESA also provided a credit of US$10 per metric ton for the first 75 million metric tons of qualified carbon dioxide that is captured at a qualified facility and used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project (the “Tertiary Injectant Credit”). Under the Act, the Tertiary Injectant Credit is only available if the carbon dioxide used as a tertiary injectant is permanently sequestered in secure geological storage following its injection.
For detailed information regarding carbon sequestration, see our Client Alert, dated February 16, 2009, titled “New Legislation Provides Additional Support for Carbon Sequestration.”5
Plug-in Electric Drive Motor Vehicles
In order to stimulate the proliferation of electric vehicles, the Act amends and introduces certain tax credits for their purchase or the expense of converting a vehicle to electricity-based propulsion. For each of these tax incentives, the Act retains the provision that affirmatively prevents the credit from exceeding the tax liability of the taxpayer for that year.
New Qualified Plug-in Electric Drive Motor Vehicles and Certain Plug-in Electric Vehicles
There are a number of changes in the Act to the previous tax credit for new qualified plug-in electric drive motor vehicles which should provide incentives for more efficient vehicles. The Act eliminates the plug-in electric drive motor vehicle credit for low speed vehicles and for plug-in vehicles weighing 14,000 pounds or more. The Act also removes the previous weight-based limitations on the extent of the credit available and instead provides a maximum credit amount equal to US$2,500, plus an additional credit amount of up to US$5,000 based on the battery capacity of the vehicle.
The changes to the plug-in electric drive motor vehicle credit are effective for vehicles acquired after December 31, 2009. The credit phases out over four calendar quarters, beginning in the second calendar quarter following the quarter in which a manufacturer reaches the 200,000 vehicle limitation. For the purposes of this credit, motor vehicles include those with at least four wheels that are manufactured for use on public streets, roads and highways and that do not operate exclusively on a rail or rails.
The Act also reintroduces a previously expired credit for other electric vehicles, with certain amendments. The credit for certain plug-in electric vehicles is equal to ten percent of the cost of a vehicle placed in service by the taxpayer in that year, with a cap of US$2,500. This credit applies to two- and three-wheeled vehicles, as well as to “low speed vehicles” which are defined by the Federal Motor Vehicle Safety Standards as vehicles having four wheels, with a maximum speed within one mile of more than 20 miles per hour but less than 25 miles per hour, and a gross vehicle weight rating of less than 3,000 pounds. Although there is no phase-out period, this credit does not apply to any vehicles acquired after December 31, 2011.
Amendments to the Alternative Motor Vehicle Credit
As a supplement to the Alternative Motor Vehicle Credit, the Act introduces a ten percent credit for the cost of converting a motor vehicle into a qualified plug-in electric drive motor vehicle, up to US$4,000. This credit applies to property placed in service after the date of enactment of the Act and is not available for conversions made after December 31, 2011.
Transportation Fringe Benefits
The Act increases the monthly exclusion from gross income for employer-provided transit and vanpool benefits to the same level as the exclusion for employer-provided parking. Currently, taxpayers may exclude from income the amount of qualified transportation benefits up to US$175 per month. This amendment has at least the symbolic effect of removing a tax expenditure preference for employees to drive their own vehicles. This amendment is effective only for those months before January 1, 2011.