Federal subsidies give companies investment energy

Most renewable energy projects are not economically viable at
this time. If they were, no extraordinary public support would be
required
– the marketplace would make renewable energy investments
attractive.
Editor’s note: This is the first part in a continuing series about the financial incentives for large commercial solar projects in California. The information is condensed. It is not intended to be a complete analysis or a critique any specific project or program. Part 2 in this series will deal with the incentives available through the California Solar Initiative (CSI).

Most renewable energy projects are not economically viable at this time. If they were, no extraordinary public support would be required – the marketplace would make renewable energy investments attractive.

Key factors in renewable energy economic equations are the high capital costs – the upfront investment. In most instances, this money must be borrowed and repaid with interest, adding significantly to the energy costs.

To offset this disadvantage, the federal, state and many local governments have implemented various forms of financial support, including grants, incentives, investment tax credits (ITCs) and other tax breaks to encourage the development of renewable energy.

One question that always surfaces about Solargen Energy’s proposal to build a 420-megawatt solar energy plant on more than 4,700 acres in the Panoche Valley is: How much public financial support will the $1.2 billion project get?

It’s important to note that there can be significant overlaps in program qualifications and benefits. As an example, Solargen’s proposal could qualify for benefits as a renewable energy project, a solar project, a photovoltaic – PV – project or as an electrical generation project. PV involves the direct conversion of radiant energy to electricity.

The current big prize in energy grants is the U.S. Department of Treasury Renewable Energy Grants funded by Section 1603 of The American Recovery and Reinvestment Act (ARRA). Grants are not loans – you do not have to pay the money back and this grant is tax-free federally.

Under Section 1603, solar projects can qualify for a 30-percent grant of the value of property that is part of a qualified facility within some limits. The financial trigger is a 5-percent initial investment. The program expiration is December 31, 2010. “Construction” must begin by this date, and the program credit terminates Jan 1, 2017. The terms property, investment and construction as defined in the act can be misleading, so read on.

Additionally, on April 12, 2010, Gov. Arnold Schwarzenegger signed SB 401. It provides state income exclusions for federal energy grants. The grants are excluded from California gross income and alternative minimum taxable income of individuals and business. The income exclusion is applicable for any taxable year and is, thus, retroactive. Hence, the grants may also be free of California taxes.

As with all such programs, the devil is in the details. For instance, the 5 percent financial trigger called “investment” does not necessarily have to be spent up front – sometimes the obligation can be “incurred” by contract to be paid later.

Similarly, the term “property” is not just referring to land. It also can apply to equipment and assemblies, including those built offsite. Complex rules also apply to the term “construction.” Some items built off site, such as the solar panels, may be considered to be under construction for grant purposes. Therefore, projects may be eligible for a large amount of grant funding even though very little money has been spent or physical on-site work accomplished.

The program is intentionally designed so that a small investment can quickly leverage a large federal grant. Government payments may be available electronically within 60 days of approval.

These partial extracts from a treasury program document reflects some of the complexities: Construction begins when physical work of a significant nature begins. Both on-site and off-site work may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. For example, in the case of a facility for the production of electricity from a wind turbine, on-site physical work of a significant nature begins with the start of the excavation for the foundation, the setting of anchor bolts into the ground, or the pouring of the concrete pads of the foundation. If the facility’s wind turbines and tower units are to be assembled on site from components manufactured off site and delivered to the site, physical work of a significant nature begins when the manufacture of the components begins at the off-site location.

If Solargen starts with an initial 20-megawatt phase – about 5-percent of the project – at $120 million in “property” costs, the installed price would equal $6 per watt. By incurring commitments or spending on qualified costs totaling $6 million, the initial phase alone would be in line to receive an ARRA federal grant of $36 million.

Should this or other programs be extended in the future and 80 percent of the entire $1.2 billion project eventually qualified for the 30-percent federal grant, the total federal grant value would be $288 million federal and state income tax free. The grant does not constitute taxable income to recipients, but 50 percent of the grant will reduce the recipient’s tax basis in the qualifying property.