Identifying Biofuel Funding and Incentives
September 18, 2009
BY Porter Martin, Hamang Patel and Melissa Turczyn
The U.S. DOE Loan Guarantee program provides loan guarantees for renewable energy, including biofuels, projects to accelerate their development. Currently this program has two parts, Section 1703 and Section 1705, and both are financed via the ARRA.
Section 1703 applies to U.S. projects that employ innovative technologies constituting new or significantly improved technologies. The loan guarantees are intended to facilitate accelerated commercialization of these energy projects. Under this solicitation, technology may not be currently used or installed in three or more commercial projects (for periods of at least five years) in the U.S. in the same general application as in the proposed project. Section 1705 doesn't require that technology be innovative, but both 1703 and 1705 require greenhouse gas (GHG) reductions.
More specific requirements include: 1.) the face value of the guarantee can be no more than 80 percent of the total project costs, although the guarantee can cover 100 percent of the total debt; 2.) the borrower and other principals must have made or will make a significant cash equity investment in the project; and 3.) there must be a reasonable prospect of repayment by the borrower of the guaranteed portion of the obligation and other project debt. Section 1705 also requires that the projects be located in the U.S. and commence construction no later than Sept. 30, 2011. Proposed projects under Section 1705 are not required to meet the innovative technology standards of Section 1703, but they must aid the economic conditions of the nation by assisting with the creation and preservation of jobs, infrastructure investment and facilitation of energy efficiency.
The following are the categories of eligible Section 1705 projects: 1.) renewable energy systems that generate electricity or thermal energy and facilities that manufacture related components; 2.) electric power transmission systems projects; and 3.) leading edge biofuels projects. Leading edge biofuels projects are those that use technologies performing at the pilot or demonstration scale, and that the DOE Secretary has determined are a technology that is likely to become commercial; and that will produce transportation fuel that substantially reduces life-cycle GHG emissions compared to other transportation fuels. Under the ARRA, $6 billion is authorized to pay the credit subsidy costs of loan guarantees issued under Section 1705. Of this amount, DOE will make available up to $500 million to pay the credit subsidy costs of loan guarantees for leading edge biofuels projects.
Applications for the loan guarantees are broken into two parts. Part I for current submission is due no later than 11:59 p.m. Eastern Standard Time on Sept. 14. Part II for current submission is due no later than 11:59 p.m. on Nov. 13. Ongoing application submission dates for both parts roll forward with the last due dates of Aug. 24, 2010 and Dec. 31, 2010. Applicants may be required to provide oral presentations with each written submission.
There are three application fees that must be paid to cover the internal DOE costs. The application fee will vary by the size of the loan guarantee, and will either be $75,000, $100,000 or $125,000. A facility fee will also vary by the size of the loan guarantee, and will be 1 percent of the guaranteed amount, $375,000 plus 75 percent of the guaranteed amount or $1,625,000 plus 50 percent of the guaranteed amount. Finally, a maintenance fee is expected to be between $50,000 and $100,000 per year while the loan guarantee is outstanding.
New Market Tax Credits
Congress created the new market tax credit program to encourage financing for certain businesses in low-income census districts. The ARRA expanded the program to increase the total amount of credits available to $5 billion.
This program offers the possibility of loans to construct or refinance biofuels projects on very favorable terms because the lender receives the new market tax credit equaling 39 percent of the amount loaned from the bank via an intermediary referred to as a community development entity (CDE). Typically, CDEs are affiliates of state governments, nonprofits or banks.
This program requires the loans to be interest-only (typically at a fixed rate) and with a seven-year term. Because the loan entitles the bank to the 39 percent tax credit, the bank can usually offer interest rates several percentage points below market rates and forgive a sizable portion of loan principal at the seven-year maturity.
The loan that generates the tax credit to the bank must be made to a "qualifying business" in a low-income census district. All types of biofuel or renewable energy projects are "qualifying businesses." A business is treated as in a low-income census district if approximately half of the total income, services provided by employees and tangible property of a project are in the low income census district (among other factors). Once a street address for a project is identified, a tax advisor can quickly determine if it's in a low-income census district. Not every bank participates in this tax program, and biofuels projects will usually need to work with a CDE before a bank gets involved.
Tax Credits and Grants
Biofuel producers looking to burn waste biomass (e.g., glycerin) for electricity are eligible for a new grant created by the ARRA. Under this program, the treasury department will issue a grant to help fund part of the cost of constructing a facility to generate electricity from biomass.
The grant is generally equal to 30 percent of the tax basis (i.e., the cost) of the tangible property used in the facility, except for the land and building. The grant is paid in one lump-sum payment shortly after the facility starts generating electricity. Thus, a biofuels producer would typically need to obtain financing of the entire cost of the facility and use the grant to pay down a portion of the financing when the facility becomes operational.
To be eligible for the grant, the facility must become operational by the end of 2010. Alternatively, if construction started before the end of 2010, the facility need not be operational until December 31, 2013. In lieu of this grant, a biofuels producer can choose to claim a comparable federal income tax credit.
Federal Grant Programs
There are numerous grant programs available for biofuels producers. Specifically, grants are available for applied research, development, demonstration and deployment projects for renewable energy, with funds specifically allocated for the production of energy and biofuels. Funds are also available for state energy programs. States are awarded funds by the federal government on a pro rata basis determined by their share of total electric consumption. These funds are only available to states that intend to adopt strict building energy codes and incentivize utilities to adopt energy efficiency measures.
Additional funds are available through 2012 for biorefiners that replace fossil fuel boilers with new systems that use renewable biomass or produce energy from renewable biomass. Yet another program provides for mandatory funding through 2012 to encourage greater production and use of advanced biofuels, including lower-carbon biodiesel and cellulosic ethanol.
Lastly, the USDA will provide financial assistance to biomass producers who sell their crops to qualified biomass conversion facilities. More specifically, the USDA will pay up to 75 percent of the cost of planting and establishing biomass crops; provide annual payments to help compensate for lost opportunity costs while crops are being established; and pay for collection, harvest, storage and transportation of biomass by matching the amounts paid by the biomass conversion facility, up to $45 per dry ton.
Attorneys Porter Martin, Hamang Patel and Melissa Turczyn are members of the Michael Best & Friedrich Renewable Energy Practice Group. Reach them at (608) 257-3501 or through www.michaelbest.com.
The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Biodiesel Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
Section 1703 applies to U.S. projects that employ innovative technologies constituting new or significantly improved technologies. The loan guarantees are intended to facilitate accelerated commercialization of these energy projects. Under this solicitation, technology may not be currently used or installed in three or more commercial projects (for periods of at least five years) in the U.S. in the same general application as in the proposed project. Section 1705 doesn't require that technology be innovative, but both 1703 and 1705 require greenhouse gas (GHG) reductions.
More specific requirements include: 1.) the face value of the guarantee can be no more than 80 percent of the total project costs, although the guarantee can cover 100 percent of the total debt; 2.) the borrower and other principals must have made or will make a significant cash equity investment in the project; and 3.) there must be a reasonable prospect of repayment by the borrower of the guaranteed portion of the obligation and other project debt. Section 1705 also requires that the projects be located in the U.S. and commence construction no later than Sept. 30, 2011. Proposed projects under Section 1705 are not required to meet the innovative technology standards of Section 1703, but they must aid the economic conditions of the nation by assisting with the creation and preservation of jobs, infrastructure investment and facilitation of energy efficiency.
The following are the categories of eligible Section 1705 projects: 1.) renewable energy systems that generate electricity or thermal energy and facilities that manufacture related components; 2.) electric power transmission systems projects; and 3.) leading edge biofuels projects. Leading edge biofuels projects are those that use technologies performing at the pilot or demonstration scale, and that the DOE Secretary has determined are a technology that is likely to become commercial; and that will produce transportation fuel that substantially reduces life-cycle GHG emissions compared to other transportation fuels. Under the ARRA, $6 billion is authorized to pay the credit subsidy costs of loan guarantees issued under Section 1705. Of this amount, DOE will make available up to $500 million to pay the credit subsidy costs of loan guarantees for leading edge biofuels projects.
Applications for the loan guarantees are broken into two parts. Part I for current submission is due no later than 11:59 p.m. Eastern Standard Time on Sept. 14. Part II for current submission is due no later than 11:59 p.m. on Nov. 13. Ongoing application submission dates for both parts roll forward with the last due dates of Aug. 24, 2010 and Dec. 31, 2010. Applicants may be required to provide oral presentations with each written submission.
There are three application fees that must be paid to cover the internal DOE costs. The application fee will vary by the size of the loan guarantee, and will either be $75,000, $100,000 or $125,000. A facility fee will also vary by the size of the loan guarantee, and will be 1 percent of the guaranteed amount, $375,000 plus 75 percent of the guaranteed amount or $1,625,000 plus 50 percent of the guaranteed amount. Finally, a maintenance fee is expected to be between $50,000 and $100,000 per year while the loan guarantee is outstanding.
New Market Tax Credits
Congress created the new market tax credit program to encourage financing for certain businesses in low-income census districts. The ARRA expanded the program to increase the total amount of credits available to $5 billion.
This program offers the possibility of loans to construct or refinance biofuels projects on very favorable terms because the lender receives the new market tax credit equaling 39 percent of the amount loaned from the bank via an intermediary referred to as a community development entity (CDE). Typically, CDEs are affiliates of state governments, nonprofits or banks.
This program requires the loans to be interest-only (typically at a fixed rate) and with a seven-year term. Because the loan entitles the bank to the 39 percent tax credit, the bank can usually offer interest rates several percentage points below market rates and forgive a sizable portion of loan principal at the seven-year maturity.
The loan that generates the tax credit to the bank must be made to a "qualifying business" in a low-income census district. All types of biofuel or renewable energy projects are "qualifying businesses." A business is treated as in a low-income census district if approximately half of the total income, services provided by employees and tangible property of a project are in the low income census district (among other factors). Once a street address for a project is identified, a tax advisor can quickly determine if it's in a low-income census district. Not every bank participates in this tax program, and biofuels projects will usually need to work with a CDE before a bank gets involved.
Tax Credits and Grants
Biofuel producers looking to burn waste biomass (e.g., glycerin) for electricity are eligible for a new grant created by the ARRA. Under this program, the treasury department will issue a grant to help fund part of the cost of constructing a facility to generate electricity from biomass.
The grant is generally equal to 30 percent of the tax basis (i.e., the cost) of the tangible property used in the facility, except for the land and building. The grant is paid in one lump-sum payment shortly after the facility starts generating electricity. Thus, a biofuels producer would typically need to obtain financing of the entire cost of the facility and use the grant to pay down a portion of the financing when the facility becomes operational.
To be eligible for the grant, the facility must become operational by the end of 2010. Alternatively, if construction started before the end of 2010, the facility need not be operational until December 31, 2013. In lieu of this grant, a biofuels producer can choose to claim a comparable federal income tax credit.
Federal Grant Programs
There are numerous grant programs available for biofuels producers. Specifically, grants are available for applied research, development, demonstration and deployment projects for renewable energy, with funds specifically allocated for the production of energy and biofuels. Funds are also available for state energy programs. States are awarded funds by the federal government on a pro rata basis determined by their share of total electric consumption. These funds are only available to states that intend to adopt strict building energy codes and incentivize utilities to adopt energy efficiency measures.
Additional funds are available through 2012 for biorefiners that replace fossil fuel boilers with new systems that use renewable biomass or produce energy from renewable biomass. Yet another program provides for mandatory funding through 2012 to encourage greater production and use of advanced biofuels, including lower-carbon biodiesel and cellulosic ethanol.
Lastly, the USDA will provide financial assistance to biomass producers who sell their crops to qualified biomass conversion facilities. More specifically, the USDA will pay up to 75 percent of the cost of planting and establishing biomass crops; provide annual payments to help compensate for lost opportunity costs while crops are being established; and pay for collection, harvest, storage and transportation of biomass by matching the amounts paid by the biomass conversion facility, up to $45 per dry ton.
Attorneys Porter Martin, Hamang Patel and Melissa Turczyn are members of the Michael Best & Friedrich Renewable Energy Practice Group. Reach them at (608) 257-3501 or through www.michaelbest.com.
The claims and statements made in this article belong exclusively to the author(s) and do not necessarily reflect the views of Biodiesel Magazine or its advertisers. All questions pertaining to this article should be directed to the author(s).
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