March 16, 2013

What are Renewable Energy Tax Credits and How Can They Be Used? Boston

The first thing to note about renewable energy tax credits is that there are two separate tax credits related to renewable energy.  First, there is a credit known as investment tax credit (ITC).  This credit is earned by investing in renewable energy infrastructure. The second type of credit is a production tax credit or PTC.  This credit is a unit measure of renewable energy produced and is granted for each kilowatt hour of renewable energy produced.  To illustrate the basic application of ITC’s and BTC’s, imagine you are investing in solar energy.  The money spent on installing the solar panels (investing in the renewable energy infrastructure) would generate the ITC and the renewable energy that would be generated by the solar panels (the actual production of the renewable energy measured by kilowatt hour) would apply to the PTC.

The ITC amounts to 30% of the investment made in renewable energy and the PTC is a tax credit granted for each kilowatt hour of renewable energy produced.  The PTC, or production tax credit, differs in amount depending on the type of renewable energy that is being generated.   It is important to note that when applying for Renewable Energy Tax Credits, the applicant may apply for ITC’s or PTC’s but not both.  However, the ITC and the PTC are federal tax credits, making it possible to earn a state tax credit in addition to the federal tax credits.  The existence of both state and federal renewable energy tax credits is important because it allows developers or owners of renewable energy projects to apply for a federal ITC along with a state equivalent of the PTC

By applying for both the federal and state tax credits, the developer/owner maximizes the tax credits issued, which eventually translates into money back into the project.  The monetization of the ITC is generally going to be helpful in generating funds that will be used as capital expenses in building the project itself.  The state PTC's will be used to supplement the cash flow of the project once it is operational.  The governmental theory behind the implementation of these tax credits is to create a mechanism that works as a means to assist the renewable energy industry in its early developmental phase until it can compete on an equal footing with the established fossil fuel and natural gas industries.

As state tax credits differ from state to state and require knowledge of the local statutes, regulations, and marketplace, you would be best served to work with providers that have knowledge of a particular state's intricacies.  Accordingly, as we only offer services related to the ITC and select state credits, my comments here will be limited to the ITC.

The ITC is granted to the entity that incurs the investment in renewable energy, so when looking to "monetize" a renewable energy tax credit, one would need to attract an investor into the tax credit entity so that the investor can earn the right to use the tax credits as a flow through from the tax credit entity.  In a general sense, these transactions are structured in a similar manner to the structures used in the federal historic tax credit (just make this a link to the most recent historic tax credit blog).

Essentially, the investor would invest a sum equal to less than the full dollar value of the tax credit into the tax credit entity in exchange for a substantial majority equity interest in the entity.  The amount of this investment is going to be subject to negotiation and agreement between the parties.  Pricing will differ widely from deal to deal based on the deal itself as well as whether or not the project's depreciation allowance is attractive to an investor.  The investor, or more accurately, the investment partner, as an owner of the entity would be entitled to a share of the profits that the project generates, or be liable for the losses, and would have all other attributes of an owner, such as the obligation to fund deficits.  The terms of the investment may contain additional financial considerations, such as a management fee sought by the owner/developer, or an asset management fee or preferred return to the investor, as well as a procedure (and a dollar amount) for the investor to be bought out of the deal.  As the investor partner is usually looking for an investment return and the use of the tax credits, they generally have limited knowledge of the renewable energy industry,  they usually cede management and control to the owner/developer.  Accordingly, these monetizations involve the completion of a detailed set of documents that call for representations, and even guarantees by the owner/developer in order to satisfy the investor.  This relationship will continue for a period of at least 5 years, as that is the length of time that the renewable energy project needs to be "in service" to avoid a recapture of the tax credit. 

For more information on applying for or monetizing Renewable Energy Tax Credits, contact The Cherrytree Group.