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The American Recovery and Reinvestment Act of 2009 ("the 2009 Act") was signed by the president on February 17, 2009 and it offers up the federal government's latest incentives to stimulate the Renewable Energy Market. The 2009 Act provides extensions on the dates that energy property has to be placed in service in order for it to qualify for tax benefits and other liberalizations designed to increase the investment in renewable energy.

The investment in clean technologies is not occurring at the pace many had hoped for. This can be traced to the fact that credit markets are still tight and oil prices have remained relatively low. More importantly though is that it is hard to find what is known as tax equity to invest in clean-tech projects. Tax equity or a tax investor has an appetite to invest in a project that will provide the investor with tax benefits to offset their own tax liability. Obviously, one must have a tax liability to have an appetite for the benefits. In today’s uncertain economic environment many would-be tax investors have either lost their need for the tax benefit or are skittish about making such large investments. In order to make the incentive more attractive to a wider audience the 2009 Act has turned the Energy Investment Tax Credit ("ITC") and the Production Tax Credit ("PTC") from income tax credits into a grant.

The grant works the same way as the ITC (i.e. it is equal to 30% of the qualifying cost of the property) but it will be paid in dollars 60 days after the later of the date the project is completed or the application for the grant is filed. Accordingly, the investor’s tax position becomes less relevant to the decision making process. Because the tax benefits are key to the economic feasibility of these deals, investors will still need to be concerned with the accelerated depreciation that will be generated. For instance, a solar installation can be depreciated over 5 years which will almost certainly cause a tax loss to be recognized in the earlier years of the project. A tax investor must be able to use the loss currently or the expected return on the investment will suffer. This should be a concern to a taxpayer who does not have sufficient income to absorb the loss or one that is subject to the Passive Activity Loss rules.

The grant is available for projects that are placed in service in 2009 and 2010. Certain projects placed in service after 2010 will qualify if construction begins before 2011. The Secretary of the Treasury must receive the grant application by October 1, 2011 for the grant to be made. The grant is not available to governmental agencies, 501(c)(3) entities, issuers of clean renewable energy bond issuers, or a partnership (or LLC) that has one of the above as a partner. After the grant expires the ITC will still apply to projects placed in service up to December 31, 2016 (December 31, 2012 for wind facilities).

Another change that may enhance the tax benefits is an election that a taxpayer may make to take the ITC instead of the PTC for qualified projects. The PTC is an income tax credit based upon the amount of electricity sold from qualified facilities. The credit is generally claimed over a 10 year period for electricity produced from renewable resources. These include trash, biomass, wind, wave, geothermal, and hyrdropower facilities. This election will be attractive to the owners of such facilities if they do not expect to be profitable over the 10 year credit period. Additionally, many of these projects are capital intensive and short on output making the PTC economically more attractive. Also, see above for the grant in lieu of credit provision. The 2009 Act has also extended the placed in service date for the PTC qualifying facilities mentioned above until to 2013 (for wind farms to 2012).

The Credit for Investment in Advanced Energy Projects enacted as part of the 2009 Act adds a new tax credit designed to keep manufacturing jobs in the U.S. The credit is equal to 30% of the taxpayer’s investment in any qualified advanced energy project. These projects include the establishment, expansion, or the re-quip of a manufacturing facility for the production of:

• property designed to be used to produce energy from the sun, wind, geothermal deposits, or other renewable resources
• fuel cells, microturbines, or an energy storage system for use with electric or hybrid motor vehicles
• electric grids to support the transmission of intermittent sources of renewable energy, including storage of that energy
• property designed to capture and sequester carbon dioxide emissions
• property designed to refine or blend renewable fuels, other than fossil fuels, to produce energy conservation technologies (including energy-conserving lighting technologies and smart grid technologies)
• new qualified plug-in electric drive motor, qualified plug-in electric vehicles or components which are designed specifically for use with those vehicles, including electric motors, generators, and power control units, or
• other advanced energy property designed to reduce greenhouse gas emissions as may be determined by IRS.

The projects must be certified by the U.S. Treasury in conjunction with the Department of Energy by a process yet to be announced. The total amount of credits awarded cannot exceed $2.3 billion. Once the project is certified the taxpayer will have 3 years to place the project in service. The renewable energy incentives being offered by both the federal and state governments have broad-based support because of its apparent benefits on the environment and our dependence on foreign oil. The tax benefits have increased the past two years under different administrations. Hopefully, the economy will start to cooperate and provide the credit liquidity and tax appetite to kick this industry into high gear. Until then let’s hope oil doesn’t go to $150 a barrel.