FINANCIAL INCENTIVES FOR CLEAN DG

Tom Bourgeois

Director of ResearchPace Univ. Energy Project

Policy Instruments

Public Financing

Tax Code

Loan Programs

Other Financial Incentives

Investment Tax Credits (ITC)

Accelerated Depreciation / Expensing

Production Tax Credits (PTC)

TAX POLICY INSTRUMENTS

H.R. 6 – House Energy Bill and the Counterpart Senate

Bill (S 14) Provided a 10% ITC for Qualified CHP System Property

To Qualify a CHP System must meet a 60% efficiency threshold

At least 20% of useful energy used for thermal energy and at least 20% of useful energy for electrical/mechanical

INVESTMENT TAX CREDITS

Provisions Sunset after 3 Years (for systems placed in service prior to 1/1/2007)

CHP System Size must be <= 15 MW’s

The Energy Bills in the 108th Congress removed provisions that would have lengthened the depreciation period for industrial systems

INVESTMENT TAX CREDITS

Depreciation Periods Vary Based upon Ownership

The Same Equipment May Face Depreciation Periods ranging from 15 to 39 Years

Industrial sites 15 or 20 years

Smaller Commercial/Residential 27.5 years (rental property) or 39 years (owner-occupied)

ACCELERATED DECPRECIATION

A Facility is paid for kW and kWH produced, not simply for investment at the site

The PTC may have superior efficiency properties, the more the equipment runs, the more incentive is paid

The PTC may be preferred for areas where the DG is mitigating local or regional system congestion

PRODUCTION TAX CREDITS (PTC)

Wind and Biomass tax credits exist at the federal level, MN has considered a state PTC

The PTC has higher risk to the recipient than the ITC, as payment is tied to production

For any given amount, the CHP system owner would prefer ITC to PTC

PRODUCTION TAX CREDITS (PTC)

CT could pass an ITC incremental to the Federal Provision, if enacted

CT could enact an ITC regardless of federal activity

CT may examine its tax treatment regarding depreciation of CHP system property

Many states conform their depreciation schedules with the Federal (“coupled), and for good reason

STATE ALTERNATIVES

ATTRIBUTES FOR CONSIDERATION IN SETTING CHP TAX POLICY

What Level of System Efficiency Should Be Rewarded with Special Incentives What Level of Environmental Performance Should Be Rewarded Should Increasing Levels of Performance Receive Progressively Greater Incentives How Long Should the Incentive Last (Sunset Provisions) Should the Sunset be determined in Years, installed MW's, or Some Other Metric Is GEOGRAPHIC Targeting a Key Objective -- Is the Tax Code the Right Tool

ATTRIBUTES FOR CONSIDERATION IN SETTING CHP TAX POLICY

Should the Tax Credit be refundable (if liability < credit) Can the Tax Credit be applied against past/future tax years (carry-back, carry-forward) What are the Revenue Implications Should incentives be targeted to geographic areas (tracts, blocks, zip codes) If a change in depreciation schedule is considered, does it require decoupling from federal Does a PTC provide a more efficient economic incentive, relative to State objectives

Debt Financing Instruments

Tax Exempt Financing

Tax Exempt Lease Programs

Loan Guarantee Programs

Other Rate Reduction Measures

Tax Exempt Financing

Certain State Authorities Can Issue Tax Exempt Bonds for Capital Equipment and Structures

The Beneficiary is typically an Institutional / Non-Profit Entity (Hospital, Nursing Home, College /University, etc.,)

Certain Regional Authorities (e.g. IDA’s) May be Authorized to Issue Tax Exempt Instruments. In NYS Civic Facility Revenue Bonds are an alternative to State Sources

A Master Lease may be preferred method for small issues

Debt Policy Instruments

CT may have Authority to do Loan Guarantees for Capital Equipment Investments

The State may capitalize a revolving loan fund specifically for investments in strategically sited Clean DG / CHP

In NYS, DASNY has financed CHP Capital Equipment Investments through the TELP Program and “Power of 2” Jointly Administered with NYSERDA

Other Financial Instruments

Economic Development Zones

Brownfield Cleanup and Redevelopment

Market Based Emissions Programs (ERCs & Allowances)

Brownfields Cleanup

An ITC ranging from 10% to as much as 22% for capital equipment & structures (including CHP systems)

Credits are increased by 8% for location in “ENV-Zones”

Credits are further increased by 2% for cleanup to the highest level (“Track 1”)

Credits are fully refundable – if taxpayer liability < tax credit

the Tax Dept will write a check for the difference

Market Based Environmental Incentives

Utilization of programs that will pay Clean DG and CHP for demonstrable environmental benefits

Emission Reduction Credits (ERCs) are worth $9,000 to $12,000 per ton in recent years in NY Metro Area (Severe Non-Attainment Area)

Emission Allowances can be distributed to EE/RE resources under EPA Guidance. Could credit Clean DG for as much as 1.5 lbs/MWH of displaced electricity

Emission Allowances and ERC’s

All states may create an EE/RE Set-Aside for the Allowance Program; ~ 5 states have, CT has not (NY, MA have)

Illustrative Example: large Multi-Building, Mult-family complex in NYC,

Emission Allowances can be distributed to EE/RE resources under EPA Guidance. Could credit Clean DG for as much as 1.5 lbs/MWH of displaced electricity

ERC NOx ALLOWANCES CONTRIBUTION TO PROJECT ECONOMICS

Assume 7.5 Tons of ERCs Certified and sold

at $11,000 / Ton

Assume 2,500 MWH’s Generated at the Site

Assume Formula for Awarding Allowances for Displaced Electric NOX credits this site with 3,750 lbs (1.875 Tons) of NOx

Allowances at $2,750/ton * 1.875 tons = $5, 156 per year for 5 Years

NPV of Emissions Credits is

ERC at $82,500 + NPV of $5156 per year for 5 years =

$82,500 + $19,547 = = $102,047

Utility / Regulatory Incentives

Location-Based Incentives for new investments (e.g. $/kW payment in auction for resources within constraint)

Special clean DG / CHP gas rates

Standby Tariff waiver for clean, high-efficiency DG

Summary: Consider the Objectives

Clean DG for T&D System Relief?

Clean DG for Environmental Benefits?

Clean DG for Economic Development / Reliability?

SUMMARY: Consider the Objectives

Tax Policy (Credits, ITC, Loan Programs) are typically not geographically targeted – though they can be

EDZ’s and NYS Brownfield Cleanup Tax Credits are examples of programs that are targeted to census tracts.

If improving reliability is paramount – the PTC might be favored, if Environmental Improvements, then pay for progressively better emissions profiles

SUMMARY: Consider the Objectives

Use Existing institutions where feasible – e.g., a hospital/ health-care/ university financing agency, or, an existing economic development agency

Align with pre-existing programs when possible – e.g. cross market energy, economic, and environmental incentives and technical assistance .

Be aware of interactions with other jurisdictions and regulatory authorities