Energy investors gain with cliff deal

Bart Taylor //January 10, 2013//

Energy investors gain with cliff deal

Bart Taylor //January 10, 2013//

If you were like me, you were surprised to learn that the fiscal-cliff deal, the most contentious of legislative battles, included in the end a package of energy tax provisions that on their own have been at the center of legislative discord for years. But there they were, a package of a dozen or so energy tax provisions, including an extension of the divisive wind energy production tax credit.

Surprise for me was simply business-as-usual for seasoned observers, including Joshua Greene, Deputy Chair, Energy and Environment Practice for Washington D.C.-based law firm Patton Boggs.

“In the end this is classic Washington,” Greene said. “Everybody knew, intuitively, that there was going to be some type of deal, but to get this to chambers, there were going to have to be sweeteners added, and those sweeteners included the energy tax extenders.

“The key was the PTC – there were others there obviously – but the wind PTC enjoyed bi-partisan support in the Senate. And the overarching package was pretty much settled by the Senate finance committee last summer, at the end of August.”

I asked Greene if the legislation would have made it out of the House of Representatives first, to then be considered by the Senate.

“No. It would have had to be amended in the Senate then sent back to the House, and what leadership understood and the White House understood was that the fiscal cliff deal had to be limited in the number of times members voted,” he said.

As to the collective impact of the energy tax package on investor sentiment, Green cautioned about their potentially limited impact. I asked whether the fiscal-cliff deal might act as a catalyst for investment.

“The extension of most of the credits is only a year, and the applicable credit amounts are such that I don’t think there’s going to be that much movement in the markets,” he said. “Obviously, there’s going to be some developers who look to get their projects done in this short window to avail themselves of the credits.

“But most investors will be looking for movement on broader tax reform debate and legislative movement in the first term of this Congress as the real driver,” Greene said. “At the end of the day, tax equity investing in the energy space, while its a sizable amount, is dwarfed in comparison to other capital investing, and what others are looking at is more certainty on cap gains, dividends, depreciation, R&D, and others.”

Here’s the package:

Credit for certain non-business energy property (25C). The bill extends through 2013 the credit under Section 25C of the Code for energy-efficient improvements to existing homes, reinstating the credit as it existed before passage of the American Recovery and Reinvestment Act.  Standards for property eligible under 25C are updated to reflect improvements in energy efficiency. The provision also updates the energy efficiency requirements from the 2003 International Energy Conservation Code to the 2006 International Energy Conservation Code. This provision is estimated to cost $2.446 billion over 10 years. 
 
Alternative fuel vehicle refueling property (non-hydrogen refueling property).  The bill extends through 2013 the 30% investment tax credit for alternative vehicle refueling property. This provision is estimated to cost $44 million over 10 years.
 
Plug-in electric motorcycles and highway vehicles.  The provision reforms and extends through 2013, the individual income tax credit for highway-capable plug-in motorcycles and 3-wheeled vehicles. This proposal replaces a 10 percent tax credit that expired at the end of 2011 for plug-in electric motorcycles, three-wheeled vehicles and low-speed vehicles. Thus it repeals the ability for golf carts and other low-speed vehicles to qualify for the credit. This provision is estimated to cost $7 million over 10 years.
 
Cellulosic biofuels producer tax credit.  Under current law, facilities producing cellulosic biofuel can claim a $1.01 per gallon production tax credit on fuel produced before the end of 2012.  This provision was created in the 2008 Farm Bill.  The provision would extend this production tax credit for one additional year, for cellulosic biofuel produced through 2013.  The proposal also expands the definition of qualified cellulosic biofuel production to include algae-based fuel. This provision is estimated to cost $59 million over 10 years.
 
Incentives for biodiesel and renewable diesel.  The bill extends through 2013 the $1.00 per gallon tax credit for biodiesel, as well as the small agri-biodiesel producer credit of 10 cents per gallon.  The bill also extends through 2013 the $1.00 per gallon tax credit for diesel fuel created from biomass. This provision is estimated to cost $2.181 billion over 10 years.
 
Indian country coal production tax credit.  Under the 2005 Energy Policy Act, coal produced on land owned by an Indian tribe qualifies for a production tax credit equivalent to $2 per ton through 2012.  This provision would extend the tax credit through 2013. This provision is estimated to cost $1 million over 10 years.
 
Extension and modification of incentives for renewable electricity property wind production tax credit and modification of other renewable energy credits.  Under current law, taxpayers can claim a 2.2 cent per kilowatt hour tax credit for wind electricity produced for a 10-year period from a wind facility placed-in-service by the end of 2012 (the wind production tax credit).  The bill extends through 2013 the production tax credit for wind.  The provision also modifies section 45 to allow renewable energy facilities that begin construction before the end of 2013 to claim the 10-year credit, and amends section 45 to clarify that commonly recycled paper is excluded from qualifying from the production tax credit. This provision is estimated to have a net of cost $12.109 billion over 10 years.
 
Investment tax credit in lieu of production tax credit.  Under current law, facilities that produce electricity from solar facilities are eligible to take a thirty percent (30%) investment tax credit in the year that the facility is placed-in-service.  Facilities that produce electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible for a production tax credit for electricity produced over a ten-year period.  The investment tax credit is better for small and offshore wind facilities.  The bill would allow facilities qualifying for the production tax credit to elect to take the investment tax credit in lieu of the production tax credit for facilities that begin construction by the end of 2013. This provision is estimated to cost $135 million over 10 years.
 
Credit for construction of new energy efficient homes.  The bill extends through 2013 the credit for the construction of energy-efficient new homes that achieve a 30% or 50% reduction in heating and cooling energy consumption relative to a comparable dwelling constructed per the standards of the 2003 International Energy Conservation Code (including supplements). This provision is estimated to cost $154 million over 10 years.
 
Credit for energy efficient appliances.  The bill extends through 2013 the tax credit for US-based manufacturers of energy-efficient clothes washers, dishwashers and refrigerators.  This provision is estimated to cost $650 million over 10 years.
 
Cellulosic biofuels bonus depreciation.  Under current law, facilities producing cellulosic biofuel can expense 50 percent of their eligible capital costs in the first year for facilities placed-in-service by the end of 2012.  This provision was created in the 2008 Farm Bill.  The provision would extend this bonus depreciation for one additional year for facilities placed-in-service before the end of 2013.  The proposal also expands the definition of qualified cellulosic biofuel production to include algae-based fuel. This provision is estimated to cost less than $500,000 over 10 years.
 
Special rule for sales or dispositions to implement Federal Energy Regulatory Commission or State electric restructuring policy.  The bill extends for two years, for sales prior to January 1, 2014, the present law deferral of gain on sales of transmission property by vertically integrated electric utilities to FERC-approved independent transmission companies.  Rather than recognizing the full amount of gain in the year of sale, this provision would allow gain on such sales to be recognized ratably over an eight-year period. This provision has a negligible cost over 10 years.
 
Incentives for alternative fuel and alternative fuel mixtures (other than liquefied hydrogen).  The bill extends through 2013 the $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit.  This credit can be claimed as a nonrefundable excise tax credit or a refundable income tax credit.  Due to claims of abuse in the alternative mixture tax credit, the Committee adopted an amendment denying taxpayers from claiming the refundable portion of the alternative fuel mixture tax credit. This provision is estimated to cost $360 million over 10 years.  

Thanks to the National Venture Capital Association for this summary.