Our solar component manufacturing partners won a significant piece of the Section 48c manufacturing tax credits awarded for renewable energy equipment manufacturing facilities. 183 awards were made from an applications pool of over 500, with tax credit applications totaling over $8B. The solar industry ended up with over $1B in awards. The awards were made to facilities across 43 states. They are designed to help rebuild domestic manufacturing and bring private capital off the sidelines.
The big winners:
- CIGS technology was a big winner—at a capex of $0.50/W, this adds 1.2GW of production capacity
- CdTe technology—at a capex of $2.00/W, this adds 30MW of capacity.
- 55,000 metric tons of polysilicon and 5,000MT of uMg Si added—enough for 8GW of xSi modules annually.
So now is when it gets interesting--
Time for the heavy lifting of project development to start. I see two big risks—
- On-time, on-budget completion of clean-tech manufacturing facilities--with hard completion deadlines or you lose the 30% tax credit, and
- Getting good value from third party tax investors for the credit.
Our integrated solar project delivery [Bridging] tool may be the best way to deal with the first risk. It accomplishes the following:
- defends the price,
- protects against “fastrack” or GMax-type change orders,
- maintains clear responsibility for post-construction problems, and
- gets to an enforceable contract sooner.
The 30% tax credit is all or nothing—if you miss either your certification or completion deadlines, you lose the credit. Selecting the right delivery tool is a big deal.
The second risk is mitigated by using a market-friendly tax equity structure. Of course, the best answer is to put the tax equity on your balance sheet and match it with your federal tax liabilities, but not everyone has the cash flow to do that. If you need to monetize the tax equity piece [like most solar developers do], you typically have three options:
- equity flip partnership
- operating lease, or
- inverted lease with an tax credit pass-through.
What follows is my take on what needs to be done—please remember I am a solar developer, not a tax accountant, so please confirm your own understanding on the tax equity side.
Monetizing tax equity—No cash grant option in this program—so credit monetization structures, such as partnership flips, sale leasebacks, or inverted leases will have to be utilized if the credit cannot be used directly. If the facility takes over two years to build, the credits can be used during construction. Not describing a partnership or leasing structure in the credit application, but admitting an investor later using a partnership or lease structure does not appear to change the project in a “significant” way, provided the investor signs the same credit agreement executed by the original taxpayer.
$2.3B is the total award, and some companies will be able to use the credit to offset their own tax bill. A significant share of third party tax equity will be needed however—and to solicit this from a market that is just opening up again after being shut down during the financial crisis—I question how much of this equity gets placed. Will the IRS want to see a tax investor prior to certifying your project as eligible for the credit? Do you start construction and buy equipment without your tax investor lined up?
Tax Basis [263A cost]--Eligible investment credits cover future expenditures and cover investments made after 17FEB09. This credit does not apply to a building or its structural components—the basis can only involve the equipment portion of the facility, meaning building leases make more sense than owned real estate—but lease costs are not includable in basis. Good news for Silicon Valley, where the commercial property vacancy rate is north of 20%. Qualifying property must be “necessary for the production of specified advanced energy property” and qualify as tangible personal property. Base building upgrades—power, technical infrastructure, HVAC, industrial gases, lighting, logistic systems and disposal facilities—need to be clearly tied to equipment support, and probably won’t be includable as basis unless specifically needed for the project.
IRS Terms for the credit will be dictated by 15MAR2010. This credit agreement needs to be executed and returned to the IRS so that they can execute it by 16APR2010. Any successor taxpayer will have to file a new credit agreement, or face forfeiture or recapture of the credit.
The taxpayer will have one year from the date of the award letter to provide evidence that all requirements for the allocation have been met—construction contracts, all permits, long lead-time components ordered, the balance of project financing, and off-take agreements. The IRS may disallow the credit if facility plans are changed significantly.
Integrated Project Development—To mitigate or eliminate risks of forfeiting the credit, the facility description needs to translated from the business plan into working drawings and construction contracts in a manner that demonstrates consistency with the original facility description.
The applicant will have one year from the date of the IRS acceptance letter, or 8JAN2011 to pull all permits and complete all other long lead-time work required to demonstrate a placed in service date no later than three years after this certification date.
Pull all permits within 12 months of Treasury acceptance letter >> 8JAN2011.
Treasury will certify that project is eligible for tax credits.
Place project in service within three years of certification date.
The taxpayer will have three years from the certification date to place the property into service, Including receipt and satisfactory signoff of all federal, state, and local permits—including occupancy permits, if applicable. If you don’t complete within that three year window—the certification is no longer valid.
DOE or Treasury can audit the project—so care in project development and management practices, along with the accountant certs and opinions need to be in the development files.
Construction risks when you have already locked in the value of your credit and when you face deadlines in placing the equipment in service are significant, and rest squarely on the taxpayer’s shoulders. That is why I like our integrated, two step project delivery tool for this application—we lock in certification at the same time we have price and schedule certainty. And with the most enforceable construction contract in the industry, to boot.
Recapture—the credit vests at at 20% per year, so the recapture risk exists for five years after the date of service due to the taxpayer selling the project or more than one-third of their stake in the facility.
Don’t hesitate to email or call with any questions, or to discuss a potential project. Successful project execution will need both tax equity structuring and integrated project delivery expertise to meet these deadlines. We can do both, or be part of a team that gets it done.
Tom Friedman is right--our clean energy future and energy independence depend on deploying these credits and getting these new clean technologies right. Now.