Taking the first steps to renewable energy can be daunting, looking at different financial strategies is a great start.
Power from the People (Chelsea Green Publishing, 2012) explores how homeowners, co-ops, nonprofit institutions, governments, and businesses are putting power in the hands of local communities through distributed energy programs and energy-efficiency measures. Over 90 percent of US power generation comes from large, centralized, highly polluting, nonrenewable sources of energy. It is delivered through long, brittle transmission lines, and then is squandered through inefficiency and waste. But it doesn't have to be that way. Communities can indeed produce their own local, renewable energy.
One of the biggest issues for most projects is how to finance them. Renewable energy technology tends to be fairly expensive and usually requires a lot of upfront equity and debt financing as well as seed capital to cover early development costs. This can be a daunting challenge for most communities or local organizations, depending upon who is actually organizing the project. Nevertheless, there are a number of financial tools available. You will probably want to take advantage of as many as possible. For additional ideas on local financial strategies, see the first book in the Community Resilience Guides series, Local Dollars, Local Sense by Michael Shuman.
One of the first places to look for financing for small, locally owned projects is a local bank. Local bankers have an obvious interest in their community and in establishing or maintaining financial relationships with local residents. They may not be familiar with the latest renewable energy technologies, but if the benefits to the local community are carefully explained, some bankers may be persuadable. If there is no local bank in your community, a regional bank is the next possible source. There are also a number of commercial finance companies that specialize in renewable or green energy projects.
It is also possible that a local business or cooperative might be willing to be an equity investor or participant in a local renewable energy project, depending on their appetite for federal or state tax credits. Some states also offer low-interest loan programs for renewable energy projects. Admittedly, obtaining a loan of any kind has been a challenge for most small businesses since 2008. But if your project is well conceived and structured, and if you are able to take advantage of some of the incentives or tax credits that are often available, you should be able to arrange financing.
Another potential tool is a local Property Assessed Clean Energy program. These programs enable local governments to finance renewable energy and energy-efficiency projects on residential, commercial, and industrial properties, eliminating the main barrier to these projects: the large upfront cost. The local government does this by creating an improvement district and issuing a bond secured by real property in the district; the bond proceeds are then available for funding renewable energy or energy-efficiency projects. The property owners who take advantage of this funding then repay the debt service on the bond in fixed payments as part of their property tax bills. If the property is sold, the debt stays with the property and is assumed by the new owner, who will also benefit from the improvement. Participation is completely voluntary, and only those who choose to participate in the program pay the costs of the additional assessment.
PACE programs have begun to spread across the nation, although they were suspended in July 2010 due to regulatory issues with the Federal Housing Finance Agency and mortgage giants Fannie Mae and Freddie Mac. Some states, however, have since enacted recent PACE legislation enabling the commercial portions of the program to continue unaffected, and there is now an active bipartisan national effort to allow the programs to continue. While PACE programs may not be useful for collaborative community-scale projects, they can be extremely helpful for private residential and commercial projects in the community.
Another possible tool is the federal Renewable Electricity Production Tax Credit. The PTC reduces the federal income taxes of qualified taxpaying owners of renewable energy projects based on the electrical output (measured in kilowatt-hours). Qualified resources include landfill gas, wind, biomass, hydroelectric, geothermal electric, municipal solid waste, anaerobic digestion, tidal power, wave energy, and ocean thermal. The PTC is generally available for the first ten years of operation and provides 2.2 cents per kWh for wind, geothermal, and closed-loop biomass, and 1.1 cents per kWh for open-loop biomass and other eligible technologies. The credit has experienced numerous congressional cycles of expiration, renewal, and revision, making it difficult for the renewable energy sector in general (and businesses representing the specific technologies in particular) to make long-term financial plans.
The PTC is mainly meant for corporations with a large tax credit appetite, and is difficult for smaller groups such as farmers, schools, municipal utilities, and cooperatives to use due to technicalities in federal tax regulations. Nevertheless, many community energy projects (especially wind power projects in the Midwest) have found creative ways to make use of the tax credit. Two of the most famous examples are known as the Minnesota Flip and the Wisconsin Flip, both originally developed for community wind projects in those states. The idea is that local investors form a limited liability company (LLC) to do all of the preliminary work of organizing the project, and then market the project to a tax-motivated equity investor who can take advantage of the PTC and accelerated depreciation for an initial ten-year period. Typically, the equity investor owns around 90 percent (or more) of the project for the first ten years. Then, when the PTC has expired, the ownership “flips” to the local LLC. This strategy can sometimes be adapted to other types of renewable energy projects. Of course, none of these convoluted strategies would be necessary if the United States had a coherent national energy policy, including a national feed-in tariff. For additional information on PTCs, see the DSIRE database.
Yet another federal corporate tax credit that supports renewable energy projects is the Business Energy Investment Tax Credit. The ITC reduces federal income taxes for qualified tax-paying owners of renewable energy projects, and is earned when the equipment is placed in service. The eligible technologies include solar hot water, solar space heating, solar photovoltaics, wind, biomass, geothermal electric, fuel cells, geothermal heat pumps, combined heat and power (CHP) co-generation, and others. The amount of the tax credit generally ranges from 10 percent for geothermal, micro-turbines, and CHP, to 30 percent for solar, fuel cells, and small wind. There are no limits on the maximum incentive on small wind turbines placed in service after December 31, 2008, and no limits on all other eligible technologies regardless of their installation dates. The eligible system size varies, depending on the technology.
In addition, all ITC-eligible technologies, as well as large wind projects, can take advantage of Modified Accelerated Capital-Recovery System (MACRS) accelerated depreciation allowed by the IRS. A five-year depreciation schedule is generally allowed, although certain biomass projects can use a seven-year depreciation schedule. In addition, bonus depreciation that allows taxpayers to deduct 50 percent of the value of eligible systems in the first year currently extends through 2012.
Established in 2000, New Markets Tax Credits were intended to spur new or increased investments located in low-income communities. They have been used to help finance solar projects as well as—in at least one community—a wind project, built in 2010 in Washington State (Coastal Energy Project LLC). NMTCs provide an investment tax credit of 39 percent over seven years for a Qualified Equity Investment (QEI) in a Community Development Entity (CDE). The CDE, in turn, channels “substantially all” of the QEI into a loan or equity investment for a qualifying low-income business. One particularly attractive feature of this strategy is that it appears to be possible to make use of an NMTC in addition to a PTC or ITC. While this is not a tool for everyone, it’s worth investigating.
CREBs are a federal loan program for municipalities (including school districts), municipal utilities, and rural electric cooperatives to finance renewable energy projects. The same list of qualifying technologies used for PTCs generally applies to CREBs. CREBs are issued with a 0 percent interest rate; the borrower only pays back the principal of the bond while the bondholder receives a federal tax credit. The federal Energy Policy Act of 2005 established CREBs to finance public-sector renewable energy projects. Since then, the guidelines have been amended several times. Participation in the program is limited by the volume of bonds allocated by Congress (and announced by the IRS), and those allocations have varied.
This is a federal performance-based incentive for projects owned by local municipal governments (including school districts), state governments, municipal utilities, rural electric cooperatives, and native corporations. Eligible technologies are similar to those for PTCs, plus solar thermal electric and photovoltaics. The payment amounts to 2.2 cents per kWh (subject to availability of annual appropriations). The production payment only applies to electricity sold to another entity, and actual incentives have generally been lower in recent years due to lack of full funding. REPI was designed to complement the federal PTC, which is available to businesses that pay federal corporate taxes.
Section 6108 of the 2008 Farm Bill expands the U.S. Department of Agriculture’s authority to loan to renewable energy generation projects, even if those projects are not serving traditional rural markets. This clause potentially makes low-cost debt financing from USDA’s Rural Utility Service available to a wide range of renewable energy projects, even those not associated with rural electric cooperatives. A RUS loan was used for part of the financing of the Fox Islands Wind Project in Maine in 2009. This was the first time a RUS loan was made to a wind project on a project finance basis.
In addition to the federal programs just listed, a dizzying array of state, utility, and local incentives, rebates, and policies can be tapped to assist many community renewable energy and efficiency projects. Visit the DSIRE website (www.dsireusa.org) and click on your state to see what is available. It’s important to understand that the presence or absence of local or state incentives or other policies can dictate which of the previous financial and ownership strategies are viable in your location. Check with financial and legal experts in your region.
This excerpt is adapted from Greg Pahl’s book Power from the People: How to Organize, Finance, and Launch Local Energy Projects (Chelsea Green, 2012) and is printed with permission from the publisher.
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