MORE ENERGY TAX INCENTIVES may be on the way.

The Senate will try to finish work in April on the Bush energy plan.  The plan is controversial, but if it makes it through the Senate, it will be with a number of new energy tax incentives that the Senate Finance Committee approved in February.

Five main tax benefits are being watched keenly by the project finance community.

One is a tax credit for 10% of the cost of new cogeneration facilities.  To qualify, at least 20% of the useful energy produced at the project would have to be in the form of steam or other thermal output.  The project would also have to have an energy conversion ratio of at least 70%, meaning that no more than 30% of the energy content of the fuel can be lost during conversion to electricity. (The required conversion ratio for small projects of 50 megawatts or less in size would be only 60%.)

The Senate bill is also expected to create three new tax credits for using clean coal technologies to generate electricity.  One is an investment tax credit for 10% of the cost of new clean coal power plants.  Only 4,000 megawatts worth of projects in total would qualify.  Taxpayers would have to have their projects certified in advance by the Internal Revenue Service.  Certified projects would also receive an additional tax credit tied to the amount of electricity sold each year.  The amount would vary between 0.1¢ to 1.4¢ a kilowatt hour, depending on the heat rate and when the project is placed in service.  The credit could be claimed on the first 10 years of output from the project.  Finally, a credit of 0.34¢ a kilowatt hour could be claimed for 10 years on output from existing power plants that are retrofitted to use clean coal technologies.  Companies with retrofit projects would also have to have them certified first by the IRS.  The IRS would be authorized to certify only 4,000 megawatts in retrofit projects.

The Senate is expected to expand an existing section 45 tax credit of 1.7¢ a kilowatt hour for generating electricity from certain fuels.  The credit is claimed today mainly by owners of windpower projects. Three new fuels would be added to the eligibility list.  They are geothermal energy, cow and hog manure, and biomass (but not garbage, landfill gas or recyclable paper).

The Senate would also allow taxpayers more time to place new projects in service to qualify for section 29 tax credits.  These are credits for producing gas from coal seams, tight sands, Devonian shale, geopressured brine and biomass or for producing synthetic fuel from coal.  Future such projects would qualify for a tax credit of 51.7¢ an mmBtu on output.  The bill would tighten the definition of synthetic fuel for future syncoal projects.  Output from such projects would qualify for tax credits only if it sells for a price that is at least 50% more than the cost of the raw coal used to produce it and only if sulfur dioxide and nitrogen oxide emissions are reduced by at least 20% compared to such emissions from burning the raw coal.

Finally, the Senate is expected to allow businesses that buy fuel cell power plants a tax credit for 30% of the cost.  The credit would be limited to $1,000 for each kilowatt hour of capacity.

The Bush energy plan passed the House last July with many, but not all, of the same tax provisions.  If the bill also passes the Senate, then the two houses will have to reconcile differences between the two versions.  Most observers expect the process to take until October to play out.