It seems that green is the official color of the 21st century. Hardly a day goes by without hearing or seeing some sort of reference to renewable resources, alternative energy, or going green. In fact, the U.S. energy industry accounts for $1.2 trillion annually and is one of the most competitive industry sectors.
At both a state and federal level, incentives are helping renewable energy to gain further prominence and economic parity as the industry matures. The role of incentives will surely factor into the energy development debate for years to come in the United States. Let’s explore some of the current incentive programs that are of widespread benefit to U.S. businesses.
Section 1603 Grant
For companies that install new renewable energy developments, the American Recovery and Reinvestment Act (“ARRA”) created a program whereby developers would receive a cash grant from the U.S. Treasury Department 60 days after their project was placed into service for approximately 30 percent of cost incurred to build the renewable project. This program expired for projects that were not started by Dec. 31, 2011, but an extension has been proposed in President Obama’s most recent budget. To date, this grant program has helped fund over $35 billion worth of investments in the U.S. and has played a crucial role in substantially all of the renewable energy developments since early 2009.
Investment Tax Credit (ITC)
The ITC functions similarly to the cash grant program except the developer receives the incentive in the form of a 30 percent nonrefundable tax credit rather than a cash grant. For companies with taxable income, this will continue to be the primary incentive driving investment if the cash grant program is not renewed, though this credit will be expiring Dec. 31, 2012 for large wind projects. For developers lacking taxable income from other sources, the investment tax credit attracts outside participants with large amounts of taxable income to participate in renewable energy developments. Commonly, developers lacking taxable income will structure their projects to IRS guidelines whereby tax motivated investors effectively purchase the tax credit created when these projects are placed into service. While adding some complexity to renewable energy developments, this allows developers to obtain much needed upfront capital for their projects and helps reduce institutional tax liability.
Production Tax Credit (PTC)
For certain renewable technologies (most commonly wind), the production tax credit provides a non-refundable tax credit for 10 years based on the amount of electricity created, rather than on the costs originally incurred, as in the ITC and cash grant. For example, a wind development installed in 2011 would receive a tax credit of 2.2 cents per kWh generated through 2020.
State Incentive Programs
Twenty-nine states, including Michigan, have passed renewable portfolio standards that mandate the utility companies have a certain amount of renewable energy generation by a given timeframe. In Michigan, Public Act 295 requires that 10 percent of the energy created by Michigan utilities be sourced from renewable resources by 2015. The laws that are being passed at the state level across the United States have been the primary driver of renewable energy development and many utility companies subject to these guidelines have their own incentive programs for local businesses to further encourage renewable energy development.
For businesses that are looking to make energy-efficiency improvements to their facility, rather than add actual additional energy generation capacity, The Energy Policy Act of 2005 includes a tax deduction of up to $1.80 per square foot for investments in “energy-efficient commercial building property.” These investments must significantly reduce energy costs by updating the heating and cooling, building envelope, and interior lighting components in new or existing commercial buildings (which includes apartment buildings that are four floors or more). In the case of improvements made on property owned by a governmental unit, the deduction can be allocated to the person primarily responsible for designing the improvement.
Taking Advantage of Renewable Energy Incentives
Understanding your business’ future energy needs, the associated costs, and the available incentives will continue to be of great importance as the demand for energy continues to rise. Consideration of renewables should be part of that equation.