Analysis on U.S. investment vs. production tax credits

Blue Mountain Faulkner-1, geothermal power plant, Nevada (source: Nevada Geothermal Power)

Alexander Richter 22 Tem 2010

In an analysis on the U.S. investment and production tax credits, Renewable Energy World looks at the components thereof and talks about the issue of extension of those credits and the cash grants, which will run out towards the end of this year. In an analysis by NREL the conclusion was that while production tax credits are more favorable than investment tax credits for geothermal projects, while at the same time tax credit appetite by the big banks – traditionally the ones that used those credits in the past – simply isn´t there at the moment.

The piece talks about that “both the investment tax credit (ITC) and production tax credit (PTC) for renewable energy products are key components of successful project financing, and by the looks of the political landscape, they’re not going away soon. So if you accept the premise that both government carrots to renewable finance will be around for the mid-term, it’s important for developers to analyze which credit is best for their project.

The investment tax and production tax credits came about when the Bush administration placed an emphasis on developing alternative energy sources over fossil fuels. Both programs have been used heavily by the industry. In 2008, Congress renewed the production tax credit for eight more years. The investment tax credit has been renewed yearly and there’s no sign that the government will retire either inducements.

Companies are scrambling this year to use another carrot that Congress passed with the economic recovery legislation, the up-front cash grant in lieu of the ITC for wind, biomass and geothermal projects. Observers expect the grant program to expire at year’s end.

So far, cash-strapped early stage renewable companies are opting for the investment tax credit. For now they can get the grant – 30 percent of the total cost of qualified projects – if at least 5 percent of the project has been built prior to December 31, 2010. The other cash option is to sell the ITC to the handful of institutional investors who will buy them, but the shaky financial market is putting downward pressure on prices for the credits and developers have to weigh other tax factors in their decisions, such as analyzing the future ability to depreciate assets.

“I have yet to have a client who would not rather have the cash than the credit,” said James Whitmire, partner at the Denver office of Davis Graham & Stubbs and author of a paper on partnership taxation.

“They may defer the credit or not use it at all to offset income. I had one large corporate client that was more interested in credits than grants. They were in a compliance program with the IRS where they could book the credit immediately,” Whitmire said, adding that he saw “no indication” from Congress that they will extend the grant program.
The investment tax credit is an upfront credit against the capital expense used to build out your project. The production tax credit is a credit over time based on the amount of energy produced.

Even if you are able to jump through enough hoops to gain an investment or production tax credit, it doesn’t mean your deal will be approved by the small number of banks sophisticated enough to specialize in this field. Other issues such as mineral or thermal rights, production purchase agreements and rights of way to the power grid can trip up a project finance deal. And you can expect a thorough examination of how the tax credits will play out.

“You have to run the numbers to figure out which vehicle works the best,” Polsinelli’s Rossi says. “Somewhere in these deals someone’s going to ask for a tax opinion.”

“We need to work on your tax position and do a full economic analysis on whether to use one or another. Most want cash but you need to work the numbers. Clients can end up with better results claiming a production tax credit even if you end up monetizing that credit,” Whitmire adds.

For example, for every dollar of ITC you claim, you have to reduce the depreciable basis of the property by 50 cents. On top of that, you’re facing a haircut of 15 or 20 more basis points from the buyer of your tax credit if you decide to sell. A producer of electricity may decide that the 1.5-cent per kilowatt-hour PTC would be more advantageous.”

For the full article see link below.

Source: Renewable Energy World