U.S. Treasury Grant for Solar Energy May Be Extended

by: Chris Cather

Will the 30% US Treasury Grant for solar and other renewable energy set to expire at the end of the year be extended?

The chances are about 50/50, said Keith Martin, transactional attorney at Chadbourne & Parke and Washington insider speaking at the Novogradac Financing Renewable Energy Conference held in Washington, D.C. November 10 and 11.

The focus was on doing deals with developers, investors, and tax attorneys abundant, and module manufacturers like First Solar ((NASDAQ:FSLR), SunPower (SPWRA) and JA Solar (NASDAQ:JASO) less visible.

While the Investment Tax Credit for solar and other renewable energy technologies doesn’t expire until 2016, the US Treasury Grant Program, enacted in February 2009 under ARRA to address frozen capital markets, sunsets on December 31, 2010.

Commercial solar developers at the conference were hungry for the answers to two questions: Will the grant be extended and, if not, how am I eligible if my project in not Placed In Service by the end of the year?

Mike Novogradac, Managing Partner of San Francisco-based, Novogradac & Company, the conference sponsor, has been reading the smoke signals. If it happens at all, he weighed in, it will be during the lame duck session of Congress between now and the January swearing-in, most likely as part of a larger omnibus tax bill or linked to unemployment insurance. If it’s not extended, the feeling was there is little chance of it passing in the new Congress in January.

Assuming the grant is not extended, commercial solar developers can meet the eligibility requirement to receive the grant in two ways. For energy properties not Placed In Service (PIS) in 2010, developers must begin construction by 12/31/10 by meeting one of two tests: 1) sufficient physical work or; 2) 5% cost safe harbor.

US Treasury guidance defines sufficient physical work as “work of a significant physical nature” that “demonstrates a continuous program of construction.” The intent of the definition is to avoid projects that begin construction to become eligible for the grant and then put the project on hold. More interesting is what does not qualify as “physical work”: planning, designing, securing financing, and obtaining permits among others.

More straightforward and a bit more broad is Treasury guidance on the second test - meeting the 5% Cost Safe Harbor Test by ensuring that 5% of total project costs have been paid or incurred on or before 12/31/2010. Eligible costs that may be included in the 5% are direct construction costs as well as planning, engineering and design costs. Costs are considered “incurred” when a binding contract is in place with a third party (i.e. between the system owner and the Installer/General Contractor), payment has been made for the equipment, and delivery is expected within 3 ½ months of payment. One other word of warning to developers: anticipate escalating project costs and bake in a cushion above the 5% costs, somewhere in the 8-10% range.

Let’s look at a quick example on a $1m solar PV roof mount PPA with Developer A and Developer B. Both developers are applying for the Treasury grant and neither project is expected to be Placed In Service prior to December 31, 2010. If they meet the eligibility requirement, both projects would receive a $300,000 grant. Developer A expects roughly half his project costs, or $500,000, to be “incurred” in payment for solar modules and racking and has signed a binding contract with his General Contractor, who is expected to build the solar system. The General Contractor orders equipment on December 1. Because the host has specified American-made SolarWorld (OTCPK:SRWRF) panels, availability is limited and delivery is not expected until January 15, 2011. Does Developer A meet the 5% Cost Safe Harbor Test and eligibility for the grant? Yes.

Developer B decides to use the “Physical Work” test to be eligible for the grant and pays his designers $55,000 for the engineering plan. Total project costs later increase to $1.2m. Is Developer B eligible for the grant? No.

In a post-grant financing environment in 2011, developers may have a harder go of it getting deals to “pencil out”, relying on fewer funding sources with a return to tax equity and the 30% ITC. In 2010 about 40% of renewable energy deals in the US were financed with the grant.

Still, Steve Tracy, Conference Coordinator and Novogradac partner, takes a sunnier view and says, “developers know how to follow the money” pointing to the emergence of non-tax funding sources including sponsor equity and deferred fees, private equity, and robust state subsidies.

Chris Cather attended the Novogradac Financing Renewable Energy Conference on behalf of Seeking Alpha. His day job is spent working to structure commercial deals for Kenergy Solar, an Annapolis, MD-based solar energy developer which recently completed one of the first synagogue solar PPAs in Maryland.

Disclosure: Author owns share in the Claymore/MAC Global Solar Energy Index ETF (NYSEARCA:TAN), which has holdings in FSLR, SPWRA and JASO