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North America: Policy - Alarm bells ring over new US funding rules

US: Proposed legislation aimed at keeping the cash flowing to US wind power projects has industry players concerned about how changes to the way the money is paid will impact on their financing strategies.

Projects that start construction this year and come online by the end of 2012 are eligible for a cash grant covering 30% of their costs. A new bill, introduced in February by Earl Blumenauer, a US Congressman from Oregon for the centre-left Democratic Party, would extend the construction-start deadline to the end of 2012, something the industry has been pushing for. But it would also convert the cash grant to a refundable tax credit.

The reason for the change is that there is little support in the House Committee on Appropriations, which has jurisdiction over the grants, to add to spending at a time when the Obama administration's latest budget proposal projects a $1.56 trillion deficit in 2010. The new legislation puts authority in the hands of the Committee on Ways and Means, which is in charge of taxation programmes.

"The mood has turned very dark in Washington," Keith Martin, a partner at law firm Chadbourne & Parke, told delegates at Infocast's recent Wind Power Finance and Investment conference in San Diego, California. "It's hard to get additional spending and they want to find a way to extend it without that."

Martin explained: "The way the new system works is that the government would pretend that the owner of a new wind farm overpaid his income taxes by 30%, which would then allow the owner to apply for a refund from the Internal Revenue Service."

The benefit would be the same as the cash grant, but the change adds a number of complications. Currently, developers apply for the grant once their project is completed and receive a cheque from the government within 60 days. The quick turnaround has made bankers comfortable enough to lend against the promise of the grant to give developers the money they need to build the project. Under a tax-refund programme, the wait is longer.

"If I'm a lender and I'm going to get paid 60 days after the project is completed, I'm going to go ahead and make that bridge loan. The risk there is not so bad. But if I have to wait a year or so for you to get the money back from the government on your tax return, that's a different risk profile," said Ed Zaelke, another partner at Chadbourne and Parke. "Our friend in Oregon is trying (his best), but we've taken half a step back if this legislation passes."

There is also no guarantee that developers will be refunded the full 30%. "The government will not make refunds if you owe money to other government agencies or to the IRS and, in some cases, to state agencies," said Martin.

At the same time, though, experts agree that finding a way to give the industry two more years of cash payments is going to be key to keeping its momentum going. "Everybody I think would just prefer to extend the grant for two years, but that doesn't seem to be being offered right now," said John Eber, managing director for energy investments at JP Morgan Capital Corporation. "It looks good to me in the sense that the industry can get two more years of a similar type of programme."

Tax credit choice

Without that extra two years, projects that start construction in 2011 or 2012 have the choice of either taking an investment tax credit (ITC), which allows them to deduct 30% of the capital cost of the wind farm in the year the project came into service, or a $0.022/kWh production tax credit (PTC), which is paid out on the actual energy produced over the first ten years of a project's life. The problem is that most project developers lack the tax appetite to use either incentive, forcing them to go out and find equity investors who can. The bottom fell out of that market as the global financial crisis took hold in autumn 2008 and, although so-called tax equity investors are starting to return to the market, they are limited in what they can do.

"I think the industry would be in tough shape if they don't extend this," said Eber. "There is just not enough tax equity to handle all the PTCs and ITCs that could be coming next year."

Blumenauer's bill has the support of the chair of the Ways and Means Committee, said Martin, although whether it will get to a vote in the full House of Representatives is not certain. The path to the Senate is also unclear, he added. "The Senate Tax Committee staff are saying they just don't have a view yet on whether the cash grant programme should be extended," he said. "They want to see some of the results before taking a position."

One thing the industry should not expect is a resolution before October, said Zaelke. "Congress likes the stimulative effect of us not knowing what our future is going to be, so we're all going to work very hard this year to get projects in the ground and create jobs," he said. "If they told us too soon, we'd relax and do those projects in 2011 and 2012."

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