Clean renewable energy bond

Clean renewable energy bond

January 01, 2006 | By Keith Martin in Washington, DC

Clean renewable energy bond applications must be filed by April 26.

Clean renewable energy bonds are a type of bond that municipal utilities, electric cooperatives and Indian tribes can use to borrow money for wind farms and other power plants that use renewable fuels. The borrower does not have to pay any interest on the bonds.  Rather, the lender is allowed to claim tax credits.  Only $800 million in total in clean renewable energy bonds can be issued for all projects.  All bonds must be issued in 2006 and 2007.  The IRS will allocate the bond authority among interested projects if there is more interest in the bonds than there is capacity. Congress directed it to reserve at least $300 million of bond authority for electric cooperatives.

The IRS said in December that it plans to allocate the scarce bond authority by handing it out to the project that asks for the smallest amount of bond authority first — up to the full amount requested — and then to the next smallest, and so on, until all the bond authority has been used up.  In so doing, the government rejected a request by the California state treasurer to allocate the bond authority among US states based on population.  A list of the information that must be included in an application is in Notice 2005-98.

The American Public Power Association has been talking to the Treasury Department about how arbitrage restrictions will be applied to the bonds.  The US tax code bars state and local governments from borrowing at tax-exempt borrowing rates — or, in this case, at a zero rate — and then reinvesting the proceeds in other securities, commodities or similar investments that earn a higher return.

Keith Martin