The US Treasury

The US Treasury

June 15, 2013 | By Keith Martin in Washington, DC

The US Treasury is expecting to pay another $12.5 billion in grants on renewable energy projects before the section 1603 program ends.

It expects another 100,000 applications, almost exclusively for solar projects with the vast majority of them for smaller systems mounted on rooftops. The only projects that still qualify for grants are projects that were considered under construction by December 2011. Many solar developers are sitting on solar panels and other equipment stockpiled in 2011. Projects that use this equipment can still qualify given the right facts.

Total payments through May 10 under the program were $18.5 billion.

The largest single grant to date was a $542 million grant paid in May 2011 to E.On Climate & Renewables in connection with a 781.5-megawatt wind farm the company built in Roscoe, Texas. The grants are 30% of the eligible cost or fair market value of the project, depending on how the project was financed.

Grants approved for payment through September 30 this year are subject to an 8.7% haircut due to budget sequestration.

The haircut percentage is expected to drop to 7.3% for grants approved on or after October 1, according to the latest estimate by the Office of Management and Budget. OMB said it will issue an update in August. The actual haircut will depend on budget decisions made between now and the start of the US government’s next fiscal year on October 1. Unless Congress turns it off, sequestration will remain in effect for another eight years after this year.

There has been continuing erosion in the “tax bases” that Treasury will accept for calculating grants. Treasury has been paring back the bases it will accept in some cases to the actual amount the developer can demonstrate a project cost to build. Many projects are financed in the tax equity market in a manner that lets tax benefits be calculated on the fair market value rather than cost. Treasury’s view is that the market value should not exceed the replacement cost, or the amount someone would have to spend today to build the same project. With solar panel prices falling, this has meant projects built today using equipment purchased in 2011 may have a lower replacement cost than the actual cost to build. Treasury has accepted the actual cost in some cases, notwithstanding the lower replacement cost, but after knocking out developer fees or other markups achieved in tax equity transactions. In other cases, it has been willing to entertain a small markup above actual cost. In other cases, it has used the income method to arrive at basis, but using the tax equity investor’s internal rate of return as the discount rate, unless the developer can produce a better market assessment of the riskiness of the customer revenue stream being discounted under the income method.

The Treasury is strictly enforcing a deadline to respond to any questions that its reviewers ask after looking at grant applications. Responses are due within 21 days. Grant applicants who need more time should be sure to ask for an extension before the deadline. At least one applicant who failed to respond in time has been told he is out of luck: the application has been treated as withdrawn and cannot be refiled.

There are currently five lawsuits pending against Treasury about the section 1603 program. A sixth suit was withdrawn by the solar company that filed it “with prejudice,” after the government filed a counterclaim against the company charging it with fraud. The company claimed grants on bases as high as $45 a watt on solar systems mounted on flat-bed trucks.

In April, a biodiesel producer lost a round in one of the other pending suits. Clean Fuel, LLC filed suit against Treasury in February 2012 after being denied grants on new Cummins generators that it added to two existing biodiesel plants in Florida. The plants make biodiesel from waste soy, palm nuts and some waste animal fats. Clean Fuel bought them in early 2009 from the original owner and added the generators a year later to make electricity for use in the plants. Treasury appears to have denied grants on grounds that the company was asking for grants on used property. The government should have pointed out that the company would not have qualified for production tax credits on the electricity because there is no sale of the electricity to third parties. However, the Treasury does not appear to have raised this as a bar to a grant.

Clean Fuel sued not only for the grants it was denied but also for the net income it said it lost in 2011 as a result of not receiving grants. The company said its 2011 net income was down $8.977 million in the case of one of the two plants.

The government moved to dismiss the claim for lost profits — called “consequential damages.”

The judge in the case agreed with the government. He said the claims court does not have the power to award consequential damages in a section 1603 case.

The Treasury has extended the deadline to apply for grants after projects are put in service. The deadline had been 90 days. It is now 180 days.