Recovery Act Offers Support for the Alternative Energy Industry
The eyes of some entrepreneurs likely grew wider when the dollar amount tied to the American Recovery and Reinvestment Act of 2009 (âARRAâ or âthe Recovery Actâ) was announced in February – $787 billion is certainly an impressive figure.
So, too, is the sizeable amount that is designated for the development of renewable energy, clean transportation and energy efficiency: $67 billion of incentives for various, clean power projects. Though itâs been nearly a year since the Recovery Act passed, there are still plenty of reasons for business leaders and entrepreneurs to be excitedâand billions of dollars available.
By the end of October, the U.S. Department of Energy (DOE) awarded approximately $17 billion and cut checks for $1.1 billion. A vast amount of funding is still up for grabs, but securing a piece of this pie is not for the faint of heart. Like most government programs, applicants need the wherewithal to identify and apply for the program best suited to the project, which can be a confusing, arduous and downright frustrating process. Applicants need to pursue the appropriate incentive structure, as there are a number of grants, tax credits and financing (loan guarantees and direct loans) available in addition to matching state funding.
Grants have been one of the governmentâs means of providing alternative energy companies ARRA-related support. In 2009, the Recovery Act funded $16.7 billion of grants for approximately 40 of the 73 Federal Opportunity Announcements listed on the DOEâs website. Many of the grants have been dedicated to commercially viable initiatives, energy efficiency initiatives and grid upgrades, energy storage devices, as well as the deployment of new technologies.
Tax credits are also available to the ARRA-fund-seeking applicant. Traditionally, tax credits were given to tax equity partners in exchange for providing funding for alternative energy projects. However, investors have been less interested in such projects because the recent economic challenges have diminished their anticipated U.S. income tax liabilities.
In response, Congress created a grant to be used instead of traditional tax credits, which, with the exception of some geothermal and micro-turbine projects, is 30 percent of the eligible cost basis. The Recovery Act has also modified â or adopted new â credits, including production tax credits, investment tax credits (ITC) in lieu of production tax credits (PTC), and ITCs for qualified advanced energy manufacturing projects.
In addition to grants and tax credits, Congress created a new âTemporary Loan Guarantee Programâ and the DOE published two solicitations in conjunction. The first solicitation, in July, was for âInnovative Energy Efficiency and Advanced Transmission and Distribution Technologies,â and it dedicated $2.5 billion to cover the credit subsidy. Itâs important to note that the DOE defines âinnovativeâ as technology that is not âcommercially available,â meaning it is technology that has not been in general use in the United States in three or more commercial projects of the same type within the previous five years.
The following technologies are examples of projects eligible for this solicitation:
â˘ Alternative fuel vehicles*
â˘ Efficient electricity transmission distribution and storage
â˘ Energy efficient building technology*
â˘ Hydrogen and fuel cell technology*
â˘ Energy efficiency projects*
*These technologies, while covered in the July solicitation, are only eligible for a loan guarantee under Section 1703, not Section 1705.
In October, the DOE published the second solicitation, âCommercial Technology Renewable Generation Projects under the Financial Institutions Partnership Program,â and dedicated $750 million to cover its credit subsidy. To prevent a flood of applications, the DOE shortened the time period of general usage to two years for âcommercial technologyâ in this solicitation. Examples of projects eligible for this solicitation include:
â˘ Wind facility
â˘ Closed-loop biomass
â˘ Open-loop biomass
â˘ Geothermal facility
â˘ Landfill gas
The DOE is not accepting applications under the second solicitation for manufacturing, transmission or leading edge biofuel projects, but it is expected to issue another solicitation this winter for these types of projects.
There are a few key points to keep in mind when applying for Recovery Act grants, tax credits and financing. Because the âtechnology standardsâ are not uniform across all incentives, e.g. âcommercial technology versus innovative technologyâ, applicants should pay particular attention to the technology standard and ensure that the application demonstrates how the project meets or exceeds the desired standard. It should also be remembered that the Recovery Act is a âstimulusâ bill so applicants must highlight the job creation and/or retention aspects of their project and support job estimates with sound economic modeling.
Even with a solid application, the aspiring applicant should obtain state matching funds to increase its competitiveness. The DOE and Treasury are more inclined to fund projects that demand fewer federal resources. Moreover, the Administration wants to back projects that are financially viable over the long term, so the departments place increased scrutiny on the financial modeling supporting each application. Because many of the models are required to be turned over to DOE for stress testing and review, third-party validation is key before giving DOE access to the models and outputs.
As stated before â and demonstrated above â the application process can be a challenging, complicated endeavor. Thoroughness and perseverance can pay off. The Recovery Act funding is large enough for most to grab a slice.
Gregory Burkart is a managing director in the Detroit office of independent financial advisory and investment banking firm Duff & Phelps. His 13 years of experience includes specialization in the structuring and negotiating of government-sponsored economic development incentive packages.
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