On August 29, 2014, Judge Bruggink heard oral argument and ruled on plaintiffs’ motion to compel the production of documents and information requested from the Department of the Treasury (“Treasury”) regarding plaintiffs’ challenge to Treasury’s calculation of Section 1603 cash grant awards for solar projects. Plaintiffs, special-purpose entities that invested in cash-grant-eligible solar projects sponsored by SolarCity, filed a complaint in the Court of Federal Claims on February 22, 2013, challenging adjustments made by Treasury that resulted in reduced cash grant awards.
Background and early developments in the case are covered in blog posts of May 21, June 2, July 9, August 14 and September 20, the most recent of which concerns Judge Bruggink’s denial of the Department of Justice’s (DOJ) motion to dismiss the complaint. Since that time, discovery disputes have slowed the progress of the litigation, leading plaintiffs to file the motion to compel at issue in the hearing held last Friday.
On Friday, Christopher Kelley of the Treasury Office of Tax Legislative Counsel announced that the IRS would be issuing additional guidance to determine whether projects started construction in 2013 as is necessary to be eligible for production tax credits. Kelley’s comments were made in at an American Bar Association Section of Taxation meeting in Washington, DC.1
The guidance is in response to requests from the wind industry for further clarification as to two issues. First, what level of physical work was required for projects, which did not opt to satisfy the 5% safe harbor, to be deemed to have started construction in 2013 as is necessary for production tax credit eligibility? Second, what level of legal stake must a developer have had in a project in 2013 to have purchased equipment pursuant to a master supply agreement with a manufacturer that is subsequently transferred to the project in order to enable the project to satisfy the 5% safe harbor?
The Office of the Comptroller of the Currency (OCC) at the end of October published a fact sheet to clarify the eligibility of wind tax equity investments as public welfare investments for national banks and federal savings associations (federal thrifts). Qualifying as such permits the investment to be held in the bank, rather than a bank holding company. Further, it qualifies the investment for favorable capital weighting under Basel III and qualifies the investment for exceptions to the Volker and Dodd-Frank and real estate limitation rules.
America’s Power Plan describes itself as a “toolkit” for policymakers. The information that constitutes the toolkit is available here. Its energy finance paper was just published. The paper is available here. Below are key quotations about tax equity and tax policy.
[T]oday’s electricity markets do not adequately compensate investors for the value provided by two critical services in a high renewables future – avoided pollution and system-wide grid flexibility services.
At present, compensation for pollution reduction benefits is primarily addressed by federal tax incentives (including production and investment tax credits) and indirectly through state renewable portfolio standards. The tax incentives also compensate investors for bearing risks associated with the scale-up and deployment of a new technology. They have played a critical role in enabling the scale-up of renewable technologies across the country. Along with global technology improvements and economies of scale, they have helped to drive steep cost reductions over the last few years, making wind and solar increasingly competitive. Many investors expect that with sustained policy to drive continued deployment and cost reductions, wind and solar generation will be cost competitive with traditional fossil fuel resources without federal support by the end of this decade.
[I]ncreasing [economics] rewards [for renewable energy] through temporary tax incentives creates additional risk associated with uncertainty regarding the future of the policy, and leads to financing barriers associated with the relatively small market of investors who can use them.
[F]inancing for renewable generation relies on tax equity – investors who have enough tax liability to make use of federal tax incentives. However, in part due to the lack of political certainty associated with temporary renewable tax incentives, only 20 tax equity investors actively finance renewable projects in the U.S. today. The transactions are generally bilateral agreements that do not have as much transparency on prices or conditions as larger public debt or equity markets. Further, IRS rules require five years of continuous ownership to “vest” the investment tax credit, which restricts the liquidity of these investments.
The additional costs of bringing tax equity into a project consume some value of the tax incentives available to a project. The government can get a better “bang for its buck” by instead offering taxable cash or refundable incentives, as described by the Climate Policy Initiative and the Bipartisan Policy Center.
To provide investors with more certainty …, these tax credits should be extended for a significant length of time, rather than being allowed to expire every few years.
Though important to the success of renewable energy development, private equity is both expensive and relatively rare. Independent power producers would benefit from having better access to public markets as well. One way to do this would be by allowing renewables companies to organize as MLPs or REITs, both of which are currently off-limits to clean energy. These instruments are publicly traded and have a tax benefit, since MLPs don’t pay corporate taxes and REIT dividends are tax-deductible.
AWEA recently held its annual Wall Street conference. Below are selected sound bites from panelists speaking on September 10th about finance, the state of market for wind in the United States, and the health of the tax equity market. An effort was made to be as loyal as possible to what the panelists said, but this was prepared without the benefit of a transcript or a recording. Further, edits were made in the interest of clarity. The sound bites are organized by topic, rather than appearing in the order in which they were said.
Tax Equity Volume in 2013
“Eleven deals totaling $1.75 billion have been awarded.
“Four deals totaling $.4 billion are closing to being awarded.
“Seven more deals will be in the market before year end.
“This year there will be more deals than in either of the prior two years. There could be $4 billion of tax closed in 2013.”
John Eber, Managing Director Energy Investments, J.P. Morgan
Today, Judge Bruggnick of the Court of Federal Claims denied the Department of Justice’s (DOJ) motion to dismiss the complaint filed by two special purpose entities affiliated with SolarCity regarding the Treasury’s calculation of the 1603 cash grant awards for solar projects. The judge’s order is available here. Unfortunately, the order is quite short and does not contain any legal discussion but rather references reasons stated during oral argument.
Although, surviving a motion to dismiss is a far cry from winning the case, the judge’s determination is a positive indication for this case and for similarly situated Cash Grant applicants that are considering bringing actions to contest how Treasury has administered the 1603 Cash Grant program. The outcome of this litigation has implication both for 1603 Cash Grant applicants and for the tone of future IRS audits of investment tax credit transactions because Treasury was supposed to be following the investment tax credit rules for calculating the amount of the Cash Grant award. Thus, principles decided in this litigation in theory will also apply to investment tax credit transactions.
Today, at the American Wind Energy Association’s Finance & Investment Seminar in Manhattan Attorney-Advisor Christopher Kelley of the U.S. Treasury, speaking on his own behalf, said that the Treasury and IRS are considering further guidance to clarify the requirement that wind projects start construction in 2013 and then pursue continual work towards completion in order to be eligible for production tax credits. His comments were qualified and made it clear that there is a possibility that no further guidance would be provided. It was acknowledged that if such guidance was published in mid-November that it would be too late to spur much in the way of equipment orders.
Another Treasury official on June 17 had written Congress that Treasury “believe[d] that Notice 2013-29 provides the desired degree of certain in the marketplace and allows renewable energy project to move forward.” A blog post discussing this Treasury letter is available here, and client alerts discussing Notice 2013-29 are available here and here. Treasury appears to be having second thoughts as to whether “desired degree of certainty” was in fact provided by Notice 2013-29.