IRS Initiates Renewables Subsidy Program for Non-Profit Utilities

Implementing a new renewable energy incentive from the Energy Policy Act of 2005 (2005 EPAct), the Internal Revenue Service (IRS) has issued a notice soliciting participation in a tax credit bond program that will allow units of government, municipal utilities, rural electric cooperatives, and Tribal governments to finance, through bonds, capital expenditures for certain renewable resource facilities.   


Previously, production tax credits (PTCs) for renewable energy production have been made available only to tax-paying entities such as corporations.  In the 2005 EPAct, however, Congress created a mechanism, equivalent to the PTCs, for non-profit utilities.  The initiative would allow qualifying entities to issue "Clean Renewable Energy Bonds" (CREBs) to finance projects that would qualify for PTCs were they sponsored by private entities.  CREBs do not pay interest; instead bondholders will receive tax credits.  The 2005 EPAct designated up to $800 million for the CREB program, of which no more than $500 million may be allocated to governmental entities such as public power systems.  All CREBs must be issued during 2006 and 2007.  In early 2006, the IRS, together with the Treasury Department, plans to issue temporary rules for the CREB program.  Initially, the IRS plans to allow CREBs on a project-by-project basis to "qualified projects" that apply to the IRS by April 26, 2006, and meet all the requirements contained in the IRS notice.  


The IRS notice solicits applications for allocations of the bonds and provides initial guidance on required criteria for eligibility for the program.  Applicants for CREBs must show that the project to be financed is one of the "qualified projects" eligible for funding: a wind facility, a closed- or open-loop biomass facility, a geothermal or solar energy facility, a small irrigation power facility, a landfill gas facility, a trash-combustion facility, a refined coal production facility, or a qualified hydropower facility.  Applicants must also describe the project's financing plan and specify the dollar amount of the CREB funding requested.  CREBs will be allocated starting with the smallest dollar amount requested and increasing until the limit of $800 million is reached.  The IRS notice also provides guidance on the methodology the Treasury Department will use to allocate the funds, set the credit rate, and determine maximum term and information reporting requirements applicable to CREBs.


Public power advocates lobbied for this renewables initiative in the lead-up to the passage of the 2005 EPAct.  While they and wind energy advocates have applauded the program as a potentially dramatic improvement over the underfunded Renewable Energy Production Incentive, the $800 million allocated for the program may not prove large enough to spur much renewable energy development.  In addition, the usefulness of CREBs remains to be determined.  Some sources suggest that, as an alternative, institutional investors could own the renewable projects and sell the electricity to the non-profit utilities.  That way, the investor could claim accelerated depreciation and use the PTCs.