Financial Incentives for Business Investments in Renewable Energy
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Introduction
A properly designed renewable energy system can reduce utility expenses on commercial buildings and at manufacturing and industrial facilities. In general, the capital equipment is relatively expensive, so financial incentives are often important to encourage the purchase of equipment that converts available renewable energy resources to useful energy.
There are various government and private financial incentives available for businesses to invest in or purchase renewable energy systems, or to produce energy from a renewable energy resource. The information below is only a general guide. Many of the government programs described below are affected by year-to-year budget cycles and appropriations. You should consult state and Federal tax codes and/or a certified public accountant or tax attorney to determine exact eligibility and provisions for the government financial incentives described below.
Incentives for Renewable Energy Equipment Procurement
The following is a discussion of grants, loans, and tax incentives that may be available for purchasing renewable energy conversion equipment.
Electric Utility Programs
A few electric utilities in the United States offer financial incentives for the purchase of equipment that converts a renewable energy resource to useful energy. These incentives range from leasing programs (solar systems are leased to the utility's customers), rebates, low to no interest loans, and grant programs. Contact the local utility for information on programs they may offer. Note that any energy conservation subsidy from a utility that is installed on any building other than a "dwelling unit" is subject to federal income tax.
State Government Incentives and Programs
There are many states offering one or more financial incentives for investment in commercial and industrial applications of renewable energy technologies. These incentives include income tax credits, property tax exemptions, state sales tax exemptions, loan programs, special grant programs, industry recruitment incentives, accelerated depreciation allowances, as well as project development grants. Approximately 15 states have so-called "clean energy funds" that are the result of revenues from "system benefits charges" assessed on electric utilities. These funds may be available for renewable energy projects.
The Interstate Renewable Energy Council and North Carolina Solar Center developed and administer the Database of State Incentives for Renewable Energy (DSIRE), which lists all incentives for renewable energy by state and type, and contains the source of applicable state statutes and forms when available.
Federal Business Investment Tax Credit for Qualifying Energy Property
Up to 10% of the investment or purchase and installation amount of qualifying energy property can be claimed by a business when filing annual tax returns. Qualifying energy property includes equipment that:
- Uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide process heat
- Produces, distributes, or uses energy derived from a geothermal deposit. For electricity produced from geothermal power, equipment qualifies only up to, but not including, the electrical transmission stage.
There are exclusions for public utility property and reductions on the amount of credit claimed if the qualifying property is/was financed by subsidized energy financing or by tax-exempt private activity bonds.
Relevant Internal Revenue Service (IRS) forms for filing for the credit are: Form 3800: General Business Credit and Form 3468: Investment Credit. For details on this credit, obtain the Instructions for Form 3468: Investment Credit, from the IRS (see referral below), and see Internal Revenue Code (IRC) Title 26, Section 48 (a).
Federal Modified Accelerated Cost Recovery System
Title 26, Section 168 of the Internal Revenue Code contains a Modified Accelerated Cost Recovery System (MACRS) by which businesses can recover investments in solar, wind, and geothermal property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. For solar, wind, and geothermal property placed in service after 1986, the current MACRS property class is five years. The property (equipment) allowable by MACRS must meet the same standards for eligibility required by the Federal Investment Credit (see above), with the inclusion of wind energy systems.
The Job Creation and Tax Relief Reconciliation Act of 2003, signed into law by President Bush in May 2003, allows for a first-year bonus depreciation under MACRS for solar equipment purchased and placed into service between May 6, 2003 and January 1, 2005. The first year bonus depreciation is now 50%, an increase from the current 30% bonus depreciation, which reduces the remaining depreciable basis of the equipment.
For more information on and to claim MARCS see IRS Form 946: How to Depreciate Property and Form 4562: Depreciation and Amortization and Instructions for Form 4562, and Internal Revenue Code Title 26, Section 168 (e)(3)(B)(vi).
Federal Tax Exemption for Nontaxable Energy Grants or Subsidized Energy Financing
Energy grants and subsidized energy financing received by a business from federal, state, or local government entities may be exempt from federal taxation. Such grants and financing must be for the principal purpose of conserving or producing energy. The administrator of the grant or financing must report disbursements of such funds to individual businesses using IRS Form 6497. The business/recipient of the grant or financing should ensure that the administrator of the grant or financing files Form 6497 with the IRS. It is the administrator's responsibility to notify the recipient of the grant or financing that the grant or financing is nontaxable. Generally, reporting on Form 6497 is required only for nontaxable energy grants and subsidized energy financing made for Section 38 property, as defined in Section 48 and the regulations under Section 48, of the Internal Revenue Code.
Federal Support for Renewable Energy Project Development
The federal government has various programs and mechanisms that may provide funds or financing to support renewable energy projects. In general, these funds are available under specific programs of specific agencies and are dependent on annual appropriations from the U.S. Congress. The U.S. Department of Energy (DOE) has funding programs focused on developing new technologies, and from time-to-time may have funds available for project feasibility studies and even technology demonstrations. Most focus on specific technologies or applications, and are often cost-shared. When funds are available, the DOE, or an agency or organization representing the DOE, issues a competitive solicitation or Request for Proposals (RFP), with specific conditions for submitting proposals.
Notification of the availability of RFP's are posted at the Federal Business Opportunities Web site, which is designated in the Federal Acquisition Regulation (FAR) as the single point of universal electronic public access on the Internet to U.S. government wide procurement opportunities that exceed $25,000.
The DOE's e-Center is the primary DOE web site for information on doing business with the DOE, including viewing current business opportunities, registering to receive notification of new business opportunities, and obtaining information and guidance on the acquisition and financial assistance award process.
Funds from these programs awarded by the DOE, or other government agencies on DOE's behalf, may be exempt from taxation (see section above.)
Another potential source of project funding is the U.S. Environmental Protection Agency's (EPA) Supplemental Environmental Projects (SEP) program. SEP is a policy vehicle designed by the to give companies who have violated environmental laws an alternative to fines for noncompliance. Instead of paying the full amount of its fines, the violator can volunteer to fund environmentally friendly projects. These settlements are a viable source of funding for renewable energy projects.
Incentives for Production of Electricity and Fuels Produced from Renewable Resources
The National Energy Policy Act of 1992 (or "EPAct;" Public Law 102-486-Oct. 24, 1992) contained several provisions to encourage the production of electricity from renewable energy resources: the Renewable Electricity Production Credit (REPC) and the Federal Renewable Energy Production Incentive (REPI).
Renewable Electricity Production Credit
Private entities subject to taxation (corporations, small businesses, and individuals) that generate electricity from wind and "closed-loop" biomass facilities and sell this electricity to an unrelated party, are eligible to receive a Renewable Electricity Production Credit (REPC) for electricity sold to unrelated parties. A "closed-loop" facility is a biomass power facility that utilizes biomass grown exclusively for energy production. It is not available for a taxpayer cutting standing timber to produce electricity. Nor is it available for projects using residues from agricultural or forestry operations, where the residues are the result of some non-energy related activity. In 1999 the REPC was made available to poultry waste facilities, which generate and sell electricity, that were placed in service after 1999.
The REPC was initially set at 1.5 cents per (kiloWatt-hour) kWh, and is adjusted annually for inflation. The REPC for calendar year 2003 is 1.8 cents per kWh. (See Federal Register: April 17, 2003; Volume 68, Number 74, page 10973-19074)
The REPC applies to electricity produced from qualified sources during a ten-year period after the facility is placed into service. The REPC is proportionally phased out over a 3?/kWh range if the national average electricity price from these sources exceeds a threshold price of 8?/kWh.
When originally established, the REPC was available to wind power generators brought on line between January 1, 1994 and June 30, 1999, and closed-loop biomass power plants brought on-line on between January 1, 1993 and June 30, 1999. In November 1999, the REPC was extended for 30 months (to December 31, 2001). On March 9, 2002, President Bush signed into law an economic stimulus bill (H.R. 3090), which includes a two-year extension of the REPC for new wind, closed-loop biomass, and poultry waste facilities. The new law extends the REPC retroactively from the end of 2001 to December 31, 2003. As of December 17, 2003, the REPC had not been extended.
For information on and to claim the REPC, see IRS Form 8835: Renewable Electricity Production Credit. Form 3800: General Business Credit must also be filed.
Federal Renewable Energy Production Incentive (REPI)
Also under EPAct (Section 1212), non-taxpaying entities can apply for an incentive payment from the U.S. Department of Energy, for electricity produced and sold by new qualifying renewable energy generation facilities. Eligible electric production facilities are those owned by State and local government entities (such as municipal utilities) and not-for-profit electric cooperatives that started operations between October 1, 1993 and September 30, 2003. As of December 17, 2003, the REPI had not been extended. Qualifying facilities are eligible for annual incentive payments of 1.5 cents per kilowatt-hour (1993 dollars and indexed for inflation) for the first ten year period of their operation, subject to the availability of annual appropriations in each Federal fiscal year of operation. Criteria for qualifying facilities and application procedures are contained in the rule making for this program. Qualifying facilities must use solar, wind, geothermal (with certain restrictions as contained in the rule making), or biomass (except for municipal solid waste combustion) generation technologies. For more information, visit the REPI Web site.
Alternative Fuel [Alcohol (Ethanol or Methanol) and Biodiesel] Production and Use Credits
The federal government provides production payments and tax credits for the production and sale of fuel ethanol or methanol, biodiesel, and mixtures of ethanol or methanol and gasoline. For information on production incentives/payments for the production of ethanol and biodiesel, contact the U.S. Department of Agriculture, Commodity Operations Bioenergy Program.
For information on ethanol production and use tax credits, see IRS Form 6478: Credit for Alcohol Used as Fuel.
Other Incentives for Installing Renewable Energy Equipment
In most cases the economics of a renewable energy system are the most favorable when the availability of a renewable resource corresponds with the energy requirements of a facility. For example, a solar air heating system may heat ventilation air sufficiently during the day when a facility is most in use. Another is if a manufacturing facility generates wood or other combustible residues that can be burned for space or water heating.
Some electric utilities charge their commercial and industrial customers a higher price for electricity consumed during peak periods, the highest of which typically occur on summer afternoons. Many utilities also assess a demand charge on their commercial and industrial customers, which is a charge based on the power generation capacity the utility has to have available to meet the customer's peak demand. Reducing the amount of electricity purchased during these periods with a renewable energy system could be economically advantageous. For example, a solar photovoltaic (PV) system may be designed to maximize its output on summer afternoons when the building's peak electricity load typically occurs, and thus reduce peak energy consumption costs and the peak demand capacity requirement and resulting charge. This increases the value of the PV system output substantially.
There are some situations where the availability of the renewable resource does not match a facility's energy requirements, and the system may produce more energy than a facility can use at any one time. To help address this, electric utilities in many states are required to offer so-called "net" metering and billing programs. These programs allow owners of qualifying renewable energy power systems to connect their systems to an electric utility. Qualifying systems are defined in the specific statute that authorizes net metering in each state. There is no uniform definition of a qualifying system for all states. However, in all programs the basic idea is to allow electric utility's customers to offset their electricity consumption with a qualifying generator. The utility's customer is only billed for the net amount of electricity that the customer consumes over a billing cycle (typically one month, but some utilities have a longer billing option). Thus the system owner effectively obtains the same value for the output from the renewable energy system as he/she pays for electricity from the utility, up to the point where excess power is produced. Any excess power produced may be bought by the utility at a rate determined by the state utility regulatory agency. In some states, the utility is not required to purchase excess generation in net metering situations. Net metering may have financial benefits for a business where electricity prices are very high and/or when the system can offset peak demand as discussed above, and the life-cycle cost of power generation from a renewable energy system is lower than the utility's prices.
As of December 2003, there were 32 states with state net metering statutes: Arkansas, California, Connecticut, Delaware, Georgia, Hawaii, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming. Individual utilities in Arizona, Colorado, Florida, Idaho, Illinois, and Kentucky offer net metering. Net metering is under consideration in several other states and the District of Columbia. Each state has restrictions on the types of technologies or fuels, the type of customer, and the capacity of the generating source that net metering applies to. The U.S. Congress is also considering a national net metering provision.
Other Incentives for Utilities and Independent Power Producers
Besides the direct incentives described above, there are a number of incentives that enable or encourage renewable energy power project development.
Utility Purchases of Renewable Energy
The Public Utilities Regulatory Policy Act (PURPA) of 1978 (Section 210) requires regulated utilities to interconnect with and purchase electricity produced by a "qualifying facility" (QF). A QF includes power producers who use renewable sources of energy such as biomass, geothermal, hydroelectricity, solar (thermal and photovoltaic), and wind, or are cogenerators who produce both heat and electricity using any type of fuel. PURPA requires utilities to purchase electricity from these power producers at a rate approved by a state utility regulatory agency [commonly called a Public Utility Commission (PUC) or Public Service Commission (PSC)], under federal guidelines. PURPA also requires utilities to sell electricity to these producers. Such producers are required to meet the utility's requirements for power quality, connection to their system, and safety. The prices that utilities will pay for such electricity and the method of accounting for it (metering) are largely state and utility-specific. This price may or may not make a renewable power project profitable.
The Federal Energy Regulatory Commission (FERC) is the U.S. government agency that has authority over interpretation and implementation of PURPA. To obtain QF status, the system owner, operator, or their legal designees or representatives of a QF should file either a notice of self-certification, or an Application for Commission Certification of Qualifying Status with FERC. The choice of whether to certify the facility through a notice of self-certification (for which there is no fee) or to apply for Commission certification (for which a fee of over $12,000 is charged) is up to the applicant. Contact info for FERC is provided below.
There are city, county, state, and other federal government regulations that apply to the construction and operation of a renewable energy system. Obtaining FERC QF status does not allow the small power producer to avoid meeting the conditions of these laws and regulations.
The Energy Policy Act of 1992 created a new category of electricity producer: the "exempt wholesale generator" (EWG), which do not have to meet PURPA QF standards. While utilities are not required to purchase power from EWG's, they do have to allow access to their transmission lines for wholesale power transmission at just and reasonable rates, as defined by FERC.
Renewable Portfolio Standards
In some states, PURPA provisions have been replaced or augmented with a renewable portfolio standard (RPS), which is a requirement that some, or all, electric utilities produce aspecificc percentage of the electricity they produce or sell from renewable resources. The state governments in Arizona, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Minnesota, Nevada, New Jersey, New Mexico, Pennsylvania, Texas, and Wisconsin have established some type of RPS, and several other states are considering one. A few states require specific utilities to meet a specified generation capacity from renewables. (See state-by-state summaries by selecting "Rules, Regulations & Policies" on the Database of State Incentives for Renewable Energy Web site. Many members of the U.S. Congress are calling for a national RPS.
Utility Green Power Programs
Some electric utilities have established so-called "green power" programs. In some states, green power producers are marketing their product directly to consumers. The term "green power" generally applies to electricity generation using renewable resources. Most existing green power programs offer consumers the opportunity to purchase some or all of their electricity as green power at a higher price than electricity produced from other sources. Some programs allow customers to effectively make a contribution to new project development. The revenues obtained from the price differential or contributions are supposed to offset the potentially higher cost of generation from renewable energy projects and/or to help pay for the development of new renewable energy projects. Nearly all such existing programs are offering wind generated electricity and electricity generated at landfill-gas recovery facilities, though a few have programs that include solar and small hydropower generation. While these programs do not themselves provide a direct financial incentive for investors in renewable energy power plants, they do provide a market for the power generated, and increase the potential for obtaining financing for developing a renewable energy project.
Title IV of the Clean Air Act Amendments (CAA) of 1990 established an acid rain cap and trade program, which allows power companies to buy and sell allowances for emitting sulfur dioxide (SO2). Title IV set aside a small percentage of the SO2 allowances for renewable energy in the Conservation and Renewable Energy Reserve (CREC) program. Subsequently some utilities and states and the EPA have established trading programs for nitrous oxide (NOx) emissions. A few states and regional emission (SO2 and NOx) trading programs specifically address renewables. These programs can potentially improve the economics of a renewable energy project, if/when a specific project can take an allowance for the electricity it produces. There is some interest in the U.S. Congress to amend the CAA to either reduce the existing SO2 cap or to establish new emission cap-and-trade programs for NOx and/or for carbon dioxide emissions or both.
A recent innovation is the concept of so-called "green tags," "renewable energy credits" or "renewable energy certificates." Such renewable energy credits (REC) reflect the value of the environmentally beneficial attributes of green power. The REC is a separately marketable commodity from the electricity itself. The price of the REC may be the cost premium for generating power from a renewable resource or it may be the value of the air pollution reduction credits that a renewable energy project may obtain. For example, if it costs a wind farm to produce electricity at 6 cents per kWh, and the average cost for power generation in a region is 4 cents, the REC price may be 2 cents per kWh. Another example is, if a wind power project obtains sulfur dioxide and/or nitrogen oxide pollution reduction credits, the REC price could reflect the value of these credits. However the REC price is determined, the basic idea is to allow consumers to purchase REC's without necessarily purchasing the green power itself, which would not be sold at a premium. While still in its infancy, the concept has the potential as a mechanism for generating revenues for renewable energy project development.
In addition, the state governments in Arizona, California, Connecticut, Hawaii, Illinois, Iowa, Maine, Massachusetts, Nevada, New Jersey, Texas, and Wisconsin have established "renewable portfolio standards" (RPS), which require some or all utilities to include a percentage of renewably generated electricity in the electricity they produce or sell. Several other states are considering an RPS. A few states require specific utilities to meet a specified generation capacity from renewables. (See state-by-state summaries by selecting "Rules, Regulations & Policies" on the Database of State Incentives for Renewable Energy Web site.
Several state and local governments and federal agencies and a growing number of private companies and institutions (such as colleges and universities) have also committed to purchasing green power. These programs help to establish opportunities for renewable energy power projects.
The Tennessee Valley Authority (TVA) and participating power distributors have created a production incentive program to reward TVA customers (in Alabama, Georgia, Kentucky, Mississippi, and Tennessee) for generating electricity using renewable energy resources. Under the Green Power Switch (CPS) Generation Partners Program, TVA and participating distributors will pay $0.15 per kWh for all electricity generated by solar and wind energy systems, with a maximum system size of 50 kW. The program, available to residential and small commercial customers, is intended to create green power for TVA's GPS program. In addition, residential system owners may also qualify for an additional $500 award to help offset start-up costs. For details, contact the Tennessee Valley Authority.
Renewable Energy Certificates (Green Tags)
A recent innovation is the concept of so-called "green tags," "renewable energy credits" or "renewable energy certificates." Such renewable energy credits (REC) reflect the value of the environmentally beneficial attributes of green power and can be bought and sold. The REC is a separately marketable commodity from the electricity itself. The price of the REC may be the cost premium for generating power from a renewable resource or it may be the value of the air pollution reduction credits that a renewable energy project may obtain. For example, if it costs a wind farm to produce electricity at 6 cents per kWh, and the average cost for power generation in a region is 4 cents, the REC price may be 2 cents per kWh. Another example is, if a wind power project obtains sulfur dioxide and/or nitrogen oxide pollution reduction credits, the REC price could reflect the value of these credits. However the REC price is determined, the basic idea is to allow consumers to purchase REC without necessarily purchasing the green power itself, which would not be sold at a premium. While still in its infancy, the concept has the potential as a mechanism for generating revenues for renewable energy project development. Several organizations and companies are now selling and purchasing REC associated with renewable energy projects and systems. The Center for Resource Solutions (see below) has established a certification program for REC products.
Air Pollutant and Greenhouse Gas Emissions Trading
Title IV of the Clean Air Act Amendments (CAA) of 1990 established an acid rain cap and trade program, which allows power companies to buy and sell allowances for emitting sulfur dioxide (SO2). Title IV set aside a small percentage of the SO2 allowances for renewable energy in the Conservation and Renewable Energy Reserve (CREC) program. Subsequently some utilities and states and the EPA have established trading programs for nitrous oxide (NOx) emissions. A few states and regional emission (SO2 and NOx) trading programs specifically address renewables. These programs can potentially improve the economics of a renewable energy project, if/when a specific project can take an allowance for the electricity it produces. The US EPA has proposed a new emission cap-and-trade programs for Nox and for mercury emissions from coal-fired power plants. Both these programs could result in new investment in renewable energy projects or the use of co-firing biomass with coal.
A similar market for trading carbon dioxide (CO2) and other greenhouse gas emissions is considered by many organizations as an approach to reducing the amount of greenhouse gases released to the atmosphere. An effective trading program could spur investment in renewable energy projects that offset or avoid greenhouse gas emissions. In September 2003, a private company, the Chicago Climate Exchange (CCX?), began a pilot, voluntary greenhouse gas emissions trading program. This self-regulatory, rules-based exchange has been designed and is governed by its members who have made a voluntary, legally binding commitment to reduce their emissions of greenhouse gases by four percent below the average of their 1998-2001 baseline by 2006. For details, visit the Chicago Climate Exchange Web site.
Sources of More Information
Organizations
- American Solar Energy Society (ASES)
- American Wind Energy Association (AWEA)
- Green-e Renewable Electricity Certification Program
- Energy Information Administration (EIA) / National Energy Information Center
- Green Power Network
- Internal Revenue Service (IRS)
- Solar Energy Industries Association (SEIA)
