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Jeff Chester
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Madeleine Tan
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Bill Fellerhoff |
By Jeff Chester, Bill Fellerhoff and Madeleine Tan, partners at Kaye Scholer.
Background. The recent U.S. financial crisis caused a significant slow-down in financings across all markets. Nonetheless, government sponsored incentives ensured that the pace of installations of wind and solar renewable energy projects in the U.S. remained robust. Much of this activity was attributable to the introduction of government-backed cash grants in the American Recovery and Reinvestment Act of 2009 (“ARRA”). Prior to ARRA, tax incentives had existed in the form of production tax credits (“PTC”) for wind projects and investment tax credits (“ITC”) for solar projects. But, their value in spurring development was lessened during the financial crisis and resulting recession due to significantly decreased taxable corporate earnings. ARRA provided developers an alternate incentive in the form of government-backed cash grants for qualifying projects, in lieu of tax credits.
The cash grants proved to be a very popular alternative for developers. According to various industry sources and publications, in 2008, PTCs supported approximately $2.5 billion in wind power installations. But, in 2009, the dollar value of wind power installations supported by PTCs had fallen below $1 billion. In contrast, in the same year, wind power installations supported by cash grants amounted to approximately $2.04 billion and increased to $3.48 billion in 2010, with PTCs supporting only $2.7 billion in wind power installations in the same year. To date, cash grants have provided financing for wind power projects totaling over 10,000MW in generation capacity.
In addition to wind power developers, the cash grant program also has benefitted solar power developers and integrators. Prior to 2009, owners of commercial solar systems were entitled to an ITC equal to 30% of the capital cost of a solar installation. But this ITC was scheduled to expire and the tax credit would have fallen to 10%. In addition, owners of residential solar systems were only entitled to a per project tax credit capped at $2,000. ARRA extended the 30% ITC for 8 years until the end of 2016 and removed the cap and made available to residential solar asset owners the full ITC equal to 30% of the capital cost. In addition, the owners of both residential and commercial projects could apply for a 30% cash grant in lieu of the ITC. The combination of tax and cash incentives has resulted in a boom in the number....