The Database of State Incentives for Renewables and Efficiency (DSIRE) is a comprehensive database of incentives for wind and other forms of renewable energy. It is a great resource for up-to-date policy information.
The New Markets Tax Credit Program (NMTC) provides a credit against Federal income taxes in exchange for making qualified equity investments in designated Community Development Entities (CDEs). All of these investments must in turn be used by the CDE to provide loans or equity investments for designated projects in lower-income communities. The credits are provided to the CDE and passed through to investors based on their proportionate investment in the CDE. The credits are equal to 39 percent of the funds invested and are claimed over a seven-year credit allowance period. In each of the first three years, the investor receives a credit equal to five percent of the total amount paid for the stock or capital interest at the time of purchase. For the final four years, the value of the credit is six percent annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period.
CDE’s apply for an allocation during the annual allocation period (July-September). The CDE does not have to identify specific projects or have a committed source of capital to fund those projects. To date, the Fund has made 170 awards totaling $8 billion in allocation authority.
A designated community must meet certain low-income characteristics. Eligible communities include low-income rural counties with high out-migration. An organization wishing to receive awards under the NMTC Program must be certified as a CDE by the Fund.
Once a CDE is awarded a NMTC allocation, it solicits projects consistent with its targeted investments. At the same time, it attracts private capital to invest in the CDE. The CDE then makes equity investments in or lends to the designated projects. Lending terms are usually better than what may be offered by commercial lenders. The outside investors receive tax credits and, depending on the structure of the transaction, either interest payments from or an equity stake in the projects.
To qualify as a CDE, an organization must:
- be a domestic corporation or partnership at the time of the certification application;
- demonstrate a primary a mission of serving or providing investment capital for low-income communities or low-income persons; and
- maintain accountability to residents of low-income communities through representation on a governing board of or advisory board to the entity.
In 2006, three Midwestern and one Gulf Coast CDEs were awarded NMTC allocations to provide debt and equity for rural businesses involved in value-added agricultural activities including renewable energy. These were:
Midwest Minnesota Community Development Corporation, Detroit Lakes, MN
$80 million allocation
Projects in Minnesota
Dakotas America, LLC, Sioux Falls, SD
$50 million allocation
Projects in North and South Dakota
American Community Renewable Energy Fund, LLC, New Orleans, LA
$42 million allocation
Projects in the Gulf Coast
Potential developers of community wind or other renewable energy projects in the targeted geographic investment areas of the four CDE entities listed above can contact them to discuss financing considerations.
Combining NMTCs with the PTC
According to tax counsel at the law firm Nixon Peabody LLP, a renewable energy project that is eligible for Section 45 tax credits can utilize both NMTCs and the production tax credits from the project. Unlike other grant or subsidized loan programs, there would be no reduction in the available production tax credits from the project. If the CDE is providing debt to the project, then the investors in the CDE can claim the NMTCs while equity investors in the project can claim the PTCs. If the CDE is providing equity support to the project (less typical these days because the Treasury strongly favors CDEs that aren’t “related” to the businesses they invest in), then the investors in the CDE can claim both the NMTCs and their proportionate share of the PTCs. Note that for a typical wind project ($1,500/kW, 35% capacity factor), the New Markets Tax Credit has roughly the same value as the PTC.
For More Information
The Clean Renewable Energy Bond (CREB) program is a new financial incentive created in the Energy Policy Act of 2005. It is available to municipal utilities and electric cooperatives and is intended to promote renewable energy development.
The Federal Production Tax Credit (PTC) has been the dominant mode of financing for renewable energy projects since it was made available in the early 1990s. The PTC, however, was designed to benefit the large investor-owned utilities and to track their capital into the renewable energy marketplace. Electric cooperatives and government entities like public power systems and municipal utilities have never been eligible for the PTC. In order to get into the marketplace, they successfully lobbied Congress in 2005 for the creation of CREBs, which is a tax credit bond available only to them. The program was modeled after the Qualified Zone Academy Bond (QZAB) program enacted in 1998 to provide tax incentives for the rehabilitation of public school buildings.
CREBs are tax credit bonds with an interest-free finance rate. The entire interest on the bond is paid by the U.S. Treasury in the form of a tax credit. $800 million have been allocated by the Secretary of the Treasury to the program for the time period between January 1, 2006 and December 31, 2007. $300 million of that has been designated for rural electric cooperatives. The borrower has five years to spend 95% of the proceeds. The tax credit rate is posted daily by the U.S. Treasury. The discount rate is designed to provide for the maximum term equal to produce 50% of the face amount of the bond (approximately 11 years).
Who Can Issue CREBs?
- State and local governments
- District of Columbia
- CoBank, ACB
- Mutual or cooperative electric companies
- U.S. territories and possessions
- Native American tribal governments
- National Rural Utilities Cooperative Finance Corporation
- A not-for-profit electric utility that has received a loan or loan guarantee under the Rural Electrification Act
Who Can Borrow CREB Proceeds?
- A mutual or cooperative electric company
- A governmental body
Allocation of CREBs
Applications for CREBs were due April 26, 2006. The Secretary of the Treasury will allocate CREBs starting with the smallest project and proceeding through the larger projects until the entire $800 million has been allocated.
For More Information
- The Environmental Law and Policy Center (ELPC) has a detailed summary of the CREB program
- The conference proceedings from Windustry’s March 2006 Community Wind Energy Conference have more information on CREBs.
The Renewable Energy Production Incentive (REPI) provides financial incentive payments for electricity produced and sold by new qualifying renewable energy (including wind) generation facilities. Eligible electric production facilities are those owned by state and local government entities (such as municipal utilities) and not-for-profit electric cooperatives. Qualifying facilities are eligible for annual incentive payments of 1.5 cents per kilowatt-hour for the first ten-year period of their operation. This incentive is not considered bankable since it must be appropriated each year by Congress. This incentive expired September 30, 2003 but was reauthorized for 2006-2026 by the Energy Policy Act of 2005.
The Wind Energy Production Tax Credit (PTC), is a per kilowatt-hour tax credit for wind-generated electricity. Available during the first 10 years of operation, it provides 1.5 cents per kWh credit adjusted annually for inflation. The adjusted credit amount for 2005 is 1.9 cents per kWh. Enacted as part of the Energy Policy Act of 1992, the credit has gone through several cycles of expiration and renewal. The inconsistent nature of this tax credit has been a significant challenge for the wind industry, creating uncertainty for long term planning and preventing steady market development. In July 2005, the PTC was "seamlessly" renewed for the first time when an extension through December 31, 2007 was included in the federal Energy Bill. The PTC was extended again in December 2006, and will now expire December 31, 2008.
Read more about the PTC on the American Wind Energy Association web site.
The tax credit also is primarily useful for corporations and is difficult (but, not impossible) for other entities (farmers and individuals, schools, municipal utilities, etc.) to use effectively.
Many community wind projects find ways to use the production tax credit, but it can be a challenge. The federal Renewable Energy Production Incentive supported many municipal and school projects, but is not available for new projects. There have been a number of proposals to make the PTC more accessible for community projects and other alternatives.
Why is the PTC difficult for farmers and other average individuals to use?
Adapted from the Government Accountability Office's September 2004 report, Wind Power's Contribution to Electric Power Generation and Impact on Farms and Rural Communities:
According to Department of Treasury officials, for a farmer who does not materially participate in a wind power project to make use of the production tax credit, the farmer must have tax liability attributable to passive income (e.g., rental income or income from businesses in which the farmer participates only as an investor) against which to claim the production tax credit.* Passive income does not include income from the farmer's active farming business, wage income, or interest and dividend income. Unless a farmer materially participates in the production of wind power, the production tax credit cannot offset tax liability attributable to income from these sources. Since many farmers do not have passive income and do not materially participate in wind power production, this passive versus nonpassive income distinction limits the number of farmers that are able to take advantage of the renewable energy production tax credit.
*Internal Revenue Service Publication 925 defines criteria for material participation in a trade or business activity. For example, an individual materially participates in a trade or business activity if the individual participates more than 500 hours during the tax year.
This guidebook was created by Charles Kubert for the Environmental Law and Policy Center in 2004. It talks about business models, sources of equity, grant and loan programs, incentives, and power purchase agreements for community wind projects. You'll find it online on the ELPC website.
A minimum renewable energy requirement for a region's electricity mix. Under an RES, electricity suppliers are required to provide some percentage of its supply from renewable energy sources. RPS proposals frequently ease that requirement by including a tradable credit system under which electricity suppliers can meet the requirement by buying and selling renewable energy credits (RECs).
The “green” or renewable attribute of electricity that is generated utilizing a renewable energy resource. A wind turbine that produces 1 MWh of electricity has produced 1 REC which, in some electricity markets, can be sold separately from the electrical power.