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McPherson
McNeill, P.C.

Renewable Energy Initiatives

Posted on Monday, August 12, 2013 by David A. McPherson , James M. Spanarkel

 I.        Solar Energy

A.        Federal Incentives

Although fewer in number than in the previous two years, there are still a substantial number of solar energy incentives available to prospective owners/purchasers of solar energy systems, both on the federal and state levels.

While the federal programs primarily credited with jumpstarting the nation’s recent solar energy boom, specifically the Section 1603 Treasury Program (allowing owners of solar and other renewable energy systems to receive a cash grant of up to 30% of the cost of the project in lieu of federal tax credits), and the Section 1705 Loan Guarantee Program (authorizing the Dept. of Energy to issue loan guarantees for certain renewable projects), are no longer available to new solar entrants, a variety of federal solar energy incentives are still in full effect.

The Federal Government first offers the owners of solar energy systems the opportunity to take advantage of a Modified Accelerated Cost-Recovery System (MACRS), as well a First Year Bonus, with respect to depreciating their solar equipment. Such solar energy equipment is considered to be 5 year property for depreciation purposes under 26 USC § 48(a)(3)(A). Additionally, such property is eligible to be depreciated at a rate of 50% for the first year it is placed in service. This program was recently extended by the American Taxpayer Relief Act of 2012 and now is applicable to solar energy equipment placed in service on or before December 31, 2013.

Solar energy system owners may also take advantage of several other federal tax incentives. For examples, energy conservation subsidies provided to customers by public utilities are now considered non-taxable for owners of houses, apartments, condos, etc. Similarly, Energy Efficient Mortgages and the Residential Renewable Energy Tax Credit are available to taxpayers to either finance energy efficient home purchases/improvements and such programs include installation of solar energy and solar water heating systems. Additionally, the American Tax Payer Relief Act of 2013 has extended the Federal Business Energy Investment Tax Credit (ITC) program to allow this credit to be available to for solar energy systems on which construction begins on or before December 31, 2013 and which are placed into service on or before December 31, 2016. This credit is equal to 30% of the expenditures in the construction of the system with no maximum, but the system must be operational before the taxpayer may begin to use this credit.

Finally, the federal government has also extended funding to create programs like the Advanced Research Projects Agency-Energy (ARPA-E) and the U.S. Department of Energy’s Energy Efficiency and Renewable Energy (EERE) program. ARPA-E is a government agency that advances high potential energy technologies deemed too early along in their development for private sector investment and provides funding for such projects, on an application basis, for 1-3 years (typically between $250k and $10M per project). EERE is a similar branch of the U.S. Department of Energy which, through its SunShot Initiative, funds research, development and deployment of solar energy technologies, with the goal of making solar energy as affordable as fossil fuels by the year 2020. This program also accepts applications by prospective solar energy customers for funding for various opportunities as created by the initiative. This program is currently in disfavor because the Federal government recently funded a solar provider who couldn’t compete and the provider went bankrupt.

B.        State Incentives

Further solar energy incentives are available on the state level as well. However, the reality is that unless a solar project is being sponsored by the utility itself, solar projects are viable only when linked to the needs of a specific user of electricity.

In New Jersey, solar energy system owners whose systems are interconnected into the power grid are eligible to generate Solar Renewable Energy Credits (SRECs) for a period of 15 years. These SRECs are essentially energy credits that solar energy owners are able to sell on the open market, typically to electrical utilities or generators which are required under the state’s Renewables Portfolio Standard (RPS) to procure 22.5% of the electricity they sell in New Jersey from qualifying renewable sources by 2021. These suppliers and providers can meet these requirements by submitting SREC, which they in-turn purchase from interconnected solar energy generating customers. Failure of a supplier to meet its RPS requirements for an energy year  results in the supplier having to remit a Solar Alternative Compliance Payment (SACP) for the amount of SRECs required but  not submitted. The amount of the SACP is set by the New Jersey Board of Public Utilities (BPU) and deliberately sets such payments so as to make them higher than the cost of meeting the RPS requirement by purchasing SRECs or generating solar energy. The New Jersey Solar Rescue Bill signed by Governor Christie in 2012 has established a 15 year schedule for the SACP which in effect acts as a ceiling on SREC prices. The SACP for Energy Year 2013-14 is $339/MWh.

All residential, commercial and industrial customers of electrical utilities in New Jersey are also now to engage in net metering as well. Systems that generate electricity using solar and other renewable energies are eligible for this program. Interconnected customer-generators have several options for receiving compensation from the utilities under the net metering program. For example, the customer-generator may receive month-to-month credit for net excess generation at the full retail rate and is compensated for any remaining excess generation at the end of an annual period; a customer may be compensated for all net excess generation on a real-time basis according to market rates; or a customer may enter into a bilateral agreement with their electric supplier or service provider for sales or purchases of net excess generation. Solar energy customers eligible for net metering retain ownership of all SRECs associated with the electricity they generate.

Finally, New Jersey also offers several tax incentives for solar energy customers as well. For example, for customers seeking to develop solar energy systems on land assessed as farmland under the New Jersey Farmland Assessment Act, January 2010 legislation now allows the development of such systems on assessed farmland without loss of this tax treatment, provided certain requirements are met. New Jersey also provides a Property Tax Exemption for Renewable Energy Systems under NJSA §54:5-3.113a et seq., exempting renewable energy systems used to meet onsite electricity, heating, cooling, or general energy needs from local property taxes. New Jersey also offers a full exemption from state sales tax for all solar energy equipment.

Therefore, while the number of solar energy incentives is not as abundant as it was in the immediately preceding years, there are still a substantial number of state and federal incentives available to solar energy customers. Even though expansion in the solar energy market has slowed to some degree from the pace established in 2011 and 2012, especially in New Jersey, recently enacted legislation, coupled with the current incentives available to solar customers, appear to have begun re-stabilizing this constantly developing industry, creating numerous opportunities for potential investors.

II.         Wind Energy Incentives

Generally speaking, the incentives discussed above also apply to wind energy generation systems.

III.        Fuel Cell Incentives

A.        State Incentives

Under the New Jersey Clean Energy Program (“NJCEP”), there are incentives for several types of small combined heat and power (“CHP”) and fuel cell systems that have a generating capacity of 1 MW or less, and are located behind the meter of an existing electric or natural gas customer that pays the Societal Benefits Charge (“SBC”). This includes customers of the state’s investor-owned electric and natural gas utilities, but does not include customers of municipal utilities.

Projects that meet the minimum program requirements are evaluated for funding based on a variety of criteria, such as system efficiency, environmental performance, and other metrics (i.e., the program is not a first-come, first served rebate program). The incentive available to an individual project is determined by the project type and size. The program’s 2012 budget was $20 million. Projects that are pursued in conjunction with energy efficiency improvements made under NJ’s Pay for Performance Program (“P4P”) are eligible for a bonus incentive. Systems owned by a third-party are eligible for incentives but the term of the lease or energy purchase agreement must be at least 15 years and meet several other technical requirements. Incentives are distributed to participants in steps, as follow: 20% upon equipment purchase, 60% upon equipment inspection and verification of installation, and 20% one year after inspection and verification that the project is achieving the proposed/minimum efficiency threshold.

For fuel cells with waste heat utilization (not fueled by Class I renewable fuel), the following incentives exist:

  • NJCEP incentive (up to $1M): $2.00/watt
  • NJCEP Pay for Performance Bonus (up to additional $250,000): $0.25/watt
  • Utility match (1:1) $/watt match up to additional $1M: $2.00/watt
  • Maximum percent of project cost: 60%

For fuel cells without waste heat utilization (not fueled by Class I renewable fuel):

  • NJCEP incentive (up to $1M): $1.50/watt
  • NJDEP Pay for Performance Bonus (up to additional $250,000): $0.25/watt
  • Utility Match (1:)1) $/watt match up to an additional $1M: $1.50/watt

Fuel Cell eligibility requirements for the State Fuel Cell incentive program are as follows:

  • The Fuel Cell system must be less than or equal to 1MW of installed capacity (for larger systems see BPU Large Scale CHP/Fuel Cells program which is beyond the scope of this memo)
  • Applicant must be a contributor to the Societal Benefits Charge Fund/
  • The Fuel Cell system must be installed in New Jersey
  • Only stationary, natural gas fueled fuel cell equipment installed on the customer side of the meter is eligible.
  • Fuel Cell equipment must be sized to serve all or a portion of the electrical load at the customer site
    • For demand metered customers – no more than 100% of historical annual consumption or peak demand
    • For non-demand  metered customers – no more than 125% of historical annual consumption
    • Historical annual consumption is for the most recent 12 month period
  • Equipment must be new, commercially available and permanently installed
    • The following are not eligible:
      • Renewable source-fueled systems (must be submitted through NJ Renewable Energy Market Manager under the REIP Program)
      • Portable/emergency backup power systems
      • Used, refurbished, temporary, pilot or demonstration systems
      • Systems using diesel fuel or other types of oil or coal for continuous operation
  • Expansion of an existing facility with new equipment is permissible but only the incremental expansion is eligible for the incentive
  • Fuel systems with waste heat utilization must achieve annual system efficiency of at least 60% based on total energy input and total utilized energy output (45% for systems without)
  • Fuel Cell systems must have a 10 year all inclusive warranty covering all major components of the system to protect against breakdown or degradation in electrical output of more than 10% from the originally rated electrical output
    • The warranty shall cover the full cost of repair or replacement of defective components or systems.
    • In the event that a system warranty does not meet the10 year requirement, the customer must purchase a warranty or service contract that does (such costs may be considered as part of the cost of the project)
  • Third Party ownership is permitted under the following provisions:
    • Third-party projects are subject to the same 10 year warranty requirements
    • A binding agreement between parties ensuring the agreement remains on site and in operation for the term of this agreement is required
    • The customer/applicant can sign over the fuel cell incentive to the third party owner
    • All other program rules apply

Projects meeting the minimum qualifications will be evaluated according to system efficiency, environmental performance, economic viability, projected startup date, annual system utilization, general programmatic goals and project clarity. Also considered are local marginal pricing, island capability, smart growth and emergency management centers.

However, it must be noted that access to the State incentive program remains subject to the availability of such funds.  There has been a trend, under the Christie Administration, of diverting funds from the NJ Clean Energy Fund for other governmental needs (see attached article).

B.        Federal Incentives

The federal government also provides a fuel cell incentive in the form of the Business Energy Investment Tax Credit (“ITC”). This credit, available under 26 USC 48, was expanded significantly by the Energy Improvement and Extension act of 2008, enacted in October 2008, which extended the duration, by 8 years, of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; allowed utilities to use the credits; and allowed taxpayers to take the credit against the alternative minimum tax, subject to certain limitations. The credit was further expanded by the American Recovery and Reinvestment Act of 2009, enacted in February 2009. The credit is available for eligible energy systems placed in service on or before December 31, 2016.

For Fuel Cell systems (for business property owners), the credit is equal to 30% of expenditures, with no maximum credit. However, the credit for fuel cells is capped at $1,500 per 0.5 kilowatt ($3,000 per kilowatt) (kW) of capacity. For non-business property owners, credits are available for up to 40% of the cost up to $1,000 per kW. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity only generation efficiency of 30% or higher. Eligibility has been extended to all utilities and telecommunications firms.

The ITC entitles the taxpayer to subtract the amount of the credit (dollar-for-dollar) from total federal tax liability. The date that the fuel cell is placed in service (begins operating) determines when a taxpayer can take advantage of the revised credit. The magnitude of the credit is determined by the size and cost of the fuel cell. For a business property, multiply the cost of the unit by 30%. Next multiply the rated output in kilowatts by $3000. The credit is the lower of the two amounts. To qualify fuel cells must achieve a 30% electricity only generation, which is determined in accordance with the standards of ANSI/ASME PTC 50-2002 Fuel Cell Power Systems Performance. The tax credit is claimed using IRS form 3468. Certain entities may need to also submit IRS form 3800 (General Business Credit Document).

IRS Internal Revenue Bulletin 2008-34 provides guidance relating to this energy credit for fuel cells. A copy of this bulletin is attached. The bulletin provides relevant definitions, guidance in computing the credit, rules related to the availability of the fuel cell credit, and record keeping requirements.

For more information, please feel free to contact David A. McPherson at dam@lawwmm.com or James M. Spanarkel at js@lawwmm.com

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