United States: Will the Recovery Act Section 1603 cash grant be extended beyond 2010?
By Fred Greguras (Palo Alto).
* Late last year, Senator Feinstein introduced S. 2899, the Renewable Energy Incentive Act of 2009, that among other things, would extend the 1603 cash grant in lieu of investment tax credit through 2012. The legislation would also make public power utilities eligible for such grants and proposes a new tax credit for solar manufacturing facilities.
* A House bill (H.R. 4599) would extend cash payments until 2013 but payments would be made as tax refunds based on filing tax returns rather than cash grants that are to be paid within 60 days of placing a project into service. The timing of a tax refund payment clearly is later and is unpredictable which means greater risk for potential investors.
* In early March, Senator Schumer introduced S. 3069, the American Renewable Energy Jobs Act, which would apply the Buy American provision (Recovery Act Section 1605) and a job preservation and creation analysis on the cash grant program to all renewable energy projects, no matter whether public or private. This was in response to the highly publicized A-Power/Shenyang Power wind project in Texas that will use turbines manufactured in China. The authorizing language of Section 1603 would be changed from "shall" to "may" to provide Treasury with more discretion on whether to pay such grants.
Currently, the Buy American provision applies only to projects on public works or public buildings but the Schumer legislation would apply the requirement even if the project is on a private building or land.
The exception is when materials used in the project are from countries with which the U.S. has an applicable international agreement would still apply(such as the World Trade Organization (WTO) Government Procurement Agreement). The international agreement exception is not available, however, for projects sized at a little under $8M.
China is a member of the WTO but not of the Government Procurement Agreement (which has been an issue for Chinese solar companies under the current Section 1605) but the Schumer legislation intends to cover private projects not governmental. The legislation also would require an analysis of jobs that would be created in the "production, installation and operation" of the project to be submitted as part of the application for the cash grant.
This analysis would be where Treasury could apply discretion on whether to make the payment. The legislation leaves it to Treasury as to the relative weights of each type of job creation. For example, most renewable energy projects in the U.S. would create jobs for installation and operation but not many would create jobs in production.
Currently, the cash grant payment is required to be made by Treasury if all required information is in the application which has provided predictability for project finance. The added discretion for Treasury decisions would likely be worse for project finance than the Buy American provision for private projects. The Schumer legislation would decrease the predictability of a project receiving the cash grant. Since China is a member of the WTO and the legislation addresses private projects, except for smaller projects, the discretion change is the only way such funding could be denied.
None of these bills is likely to be enacted as a stand-alone bill, but rather as part of larger energy, tax, climate or possibly jobs legislation. While extending the Recovery Act 48C manufacturing tax credit and incentives like the Arizona state manufacturing tax credit will have a positive impact on manufacturing in the U.S. but the Schumer legislation could have a negative impact on renewable energy project finance and manufacturing in the U.S. Spending bills are becoming more difficult to get approved in Congress. The best case scenario for the cash grant appears to be an extension late in the year but perhaps the best course of action is to get projects under construction by 12/31 and not assume the cash grant will be extended in any form.
