Power Plants That Use Solid Waste

Power Plants That Use Solid Waste

November 30, 2011

Power plants that use solid waste as fuel can be financed in the tax-exempt bond market.

The IRS made it easier in August for fuel to qualify as “solid waste.”

Tax-exempt financing is normally reserved for schools, roads, hospitals and other public facilities. However, it can also be used to finance 13 other types of projects that are privately owned. One of the 13 categories is a “solid waste disposal facility.” Tax-exempt financing has been used in the past under this provision to finance expensive pollution control equipment at the back end of large coal-fired power plants. It has also been used to finance equipment through the boiler at the front end of power plants that burn culm or gob, two forms of waste coal. Culm is dirt that was brought up many years ago from underground mining of anthracite coal and left in a pile above ground. The dirt contains coal residues that can be removed through modern processes. Gob is similar material from underground mining of bituminous coal.

In the past, material qualified as solid waste only if it was unused, unwanted or discarded material that had no value in the place where it is located. Thus, if there was a local market in culm or gob, the fuel did not qualify as solid waste. Power plant owners would pay to have the culm or gob transported or processed, but not for the underlying material.

The IRS has dropped the need to show material has no value. Material now qualifies as solid waste if it has been used previously or is considered residue from an agriculture, commercial or industrial process. However, material qualifies as a residue only if its market value is less than the value of the products or service from which the material is left over. Animal manure is considered “used” material.

Virgin material is never a solid waste. Hazardous and radioactive wastes do not qualify.

The equipment at a power plant that uses solid waste as fuel qualifies for tax-exempt financing only up to the point where the first marketable product is produced. In most power plants using waste, that first product is steam. Therefore, tax-exempt bonds can only to be used to finance equipment through the boiler. The power train does not qualify.

At least 65% of the fuel used in the power plant each year the tax-exempt bonds are expected to be outstanding must be solid waste. If the actual percentage dips below 65% in a year, then the bonds would have to be partially refunded. However, if the dip is caused by events outside the control of the plant operator, then he can wait to see whether he is above 65% in each of the next two years and add the excess in each of those years to the percentage in the bad year to get above the threshold. The annual testing does not start until the power plant is not only in service, but also is operating at close to its nameplate capacity.

The new rules apply to tax-exempt bonds issued on or after October 18, 2011.

Keith Martin