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Arra launches Obama's green revolution

What provisions does the American Recovery and Reinvestment Act make for the US energy sector?

A TWO-pronged approach to stimulate economic activity in the US energy industry was signed into law by President Barack Obama on 17 February. The first prong of the American Recovery and Reinvestment Act of 2009 (Arra) is the use of grants and loan guarantees, administered by the Department of Energy (DOE), to support investment. The second is the use of the tax code to provide economic motivation to the private sector to make near-term investments in renewable energy.

The appropriations for DOE-administered energy programmes reflect two objectives of the new administration: stimulating the US economy by spending federal funds to build new infrastructure; and increasing the supply of renewable energy. The emphasis is on quick action, both for federal spending and in providing incentives for private-sector investment. Federal energy investment is based primarily on modifications and additions to existing programmes, with the advantage that the DOE will be able to spend the appropriated monies with a minimal degree of new rulemaking.

Electricity delivery and energy reliability

Arra appropriations include $4.5bn of grants to support investment in qualified, smart-grid demonstration projects. The grants will be administered in line with an existing regulatory programme, although the maximum level of costs supported by the grants rises from 20% to 50%. The newly appropriated funds are designated for qualified projects – those that support delivery and reliability measures, and modernise the electricity grid, including demand-responsive equipment. The DOE can also accept applications related to rehabilitation of energy infrastructure and improvements to security, and for energy-storage research, development and deployment.

The unifying feature of the qualifying projects is that they will try to increase the efficiency of energy delivery or usage. The act requires the DOE to use $80m, in consultation with Federal Energy Regulatory Commission (Ferc), to analyse electricity demand and future transmission requirements, and create a long-term plan for investment in smart-grid technology to yield the greatest increase in energy efficiency. As a matter of policy, smart-grid projects (transmission and advanced metering) are to be promoted in urban, suburban and rural areas.

The legislation also adds new procedural requirements. The DOE must, within 60 days of enactment of Arra, take action to implement new rules – this time limit has probably been included because of lengthy delays to DOE awards of funds under previous legislation. The DOE must also establish specific procedures for obtaining grants and the new rules require funded demonstration projects to utilise open protocols and standards (including internet-based protocols and standards) where available and appropriate.

Innovative technology loan-guarantee programme

Arra appropriates $6bn for loan guarantees for a narrowly defined set of investments. While modelled on an existing programme to provide loan guarantees for innovative technology, investments that qualify for the loan guarantees are specifically defined. The level of loan guarantee is set at a maximum of 80% of the project cost, as estimated at the time that the loan guarantee is made. Loan guarantees are intended to promote rapid deployment of renewable energy and electricity transmission, and will be provided only to projects that start construction before October 2011. Funds will be available to three types of projects:

  • Renewable energy systems that generate electricity or thermal energy, including incremental hydro-electric projects, and facilities that manufacture related components. The inclusion of such projects is a significant departure from the previous programme and may reflect the need to insure there are eligible applicants that can commence construction within the deadline;
  • Electricity-transmission systems, including upgrading and projects to install new conductor on existing lines. Loans must be based on the viability of the project without guarantees, the availability of other federal/state incentives, the importance of the project in meeting reliability requirements and the effect on state/regional environmental (including climate change) and energy goals; and
  • Leading-edge biofuels projects, at pilot or demonstration stage, which are likely to become commercial technologies and will produce transport fuels that substantially reduce life-cycle greenhouse-gas emissions compared with their alternatives. These more stringent requirements probably reflect a policy judgment that biofuels investments are made on condition of environmental and energy-independence benefits.

Borrowing authority for federal power agencies

Arra authorises both the Bonneville Power Administration (BPA) and the Western Area Power Administration (Wapa) to each increase borrowing by $3.25bn. The BPA may use its additional borrowing for construction, acquisition and replacement of transmission facilities, or for non-transmission purposes. (BPA operates in a discrete geographic territory in which it controls a significant portion of generation and transmission capacity and is unlikely to seek joint participation in projects it pursues under its increased borrowing authority.)

Wapa's additional borrowing authority is for construction of transmission infrastructure to deliver renewable energy to each of the widely dispersed areas it serves. Wapa does not own generating capacity. It operates in 15 western US states and has built transmission facilities and provides transmission services. Wapa may use the $3.25bn of funds to pay for its share of projects jointly developed with other entities – it has previously entered joint-development projects with investor-owned bodies.

National electricity-transmission study

The energy secretary uses the DOE's biennial National Electric Transmission Study of power-grid congestion as a foundation to designate National Interest Electric Transmission Corridors (NIETCs). The primary responsibility for transmission siting in the US is exercised by states. The designation of NIETCs is the predicate for backstop siting jurisdiction, a policy under which Ferc has recently been given authority to issue certificates previously denied by states.

Arra requires an expanded scope for the 2009 study. The DOE must analyse potential sources of renewable energy that are constrained by a lack of adequate transmission capacity; discover why adequate capacity has not been developed, including the extent to which legal challenges at state and federal level have delayed construction; and make recommendations to install the required infrastructure. The 2009 biennial study must also detail the assumptions and projections made, including those related to energy-efficiency improvements in each load centre, the location and type of new generating capacity, and the deployment of distributed generation. The revised study could provide a basis for future pre-emptive federal legislation to regulate the siting of transmission capacity.

Energy efficiency and renewable energy

Arra appropriates $16.8bn in new funds for energy efficiency and renewable-energy programmes. The vast majority of the funds are provided to states and local government under long-established programmes. Private-sector involvement in these programmes will probably be limited to contractual services, but $2bn is provided for grants for the manufacture of advanced batteries and components.

Arra provides significant new tax incentives related to the development and deployment of renewable energy and clean energy. For renewable-energy projects, including wind projects eligible for production-tax credits (PTCs) and solar projects eligible for investment-tax credits (ITCs), Arra modifies a number of existing tax incentives and establishes a programme to make optional grants available in lieu of tax credits for certain projects. These changes respond to the concern that market conditions have made it difficult for many renewable-energy projects to find financing because of the uncertain tax positions of potential investors.

Energy tax incentives for renewables

  • Placed in service deadlines for claiming PTCs are extended for three years. The new deadline is 31 December 2012 for wind facilities and 31 December 2013 for biomass (closed-loop and open-loop), geothermal, landfill gas, waste-to-energy, certain hydropower, and marine and hydrokinetic facilities (collectively, renewable-energy facilities);
  • Optional investment credit – a taxpayer may decide to claim a 30% ITC instead of PTCs for a renewable energy facility otherwise eligible for PTCs. In limited circumstances, ITCs may be available for certain progress expenditures for property with a long construction period;
  • Arra repeals limitations that reduce the amount of allowable ITCs for energy properties that were financed with subsidised financing or private-activity bonds. The existing ITC credit cap of $4,000 a year for qualified, small wind-energy project is eliminated;
  • Grants will be made available, in lieu of PTCs or ITCs, to any person placing a property in service during 2009 or 2010. Grants will also be available for property placed in service after 2010, but before the applicable PTC or ITC placed-in-service deadlines (31 December 2016 for solar property), if construction begins during 2009 or 2010. The available grant equals 30% of the property's cost, except for qualified microturbines, combined-heat and power systems and geothermal heat-pump facilities, which qualify for a 10% grant; and
  • Arra authorises the issue of an additional $1.6bn of clean renewable-energy bonds to finance renewable-energy facilities owned by public-sector power providers, government bodies and co-operative electricity companies.

Clean-energy tax provisions

  • An additional $2.4bn of qualified energy-conservation bonds will be available, which can be issued to finance retrofits of existing privately owned buildings through loans and/or grants to individual homeowners or businesses, or through repayment mechanisms, such as periodic fees on utility bills that approximate the energy savings;
  • Arra provides a new 30% credit for investments in certain depreciable property that is used in a qualified advanced-energy manufacturing project. Eligible projects include renewables, fuel cells, microturbines, or an energy-storage system for use with electric or hybrid-electric motor vehicles, electricity grids that support transmission of intermittent resources of renewable energy, including storage, carbon capture and storage projects, renewable fuels and conservation technologies, and the manufacture of vehicles such as plug-in electric cars;
  • A provision adopted in 2008 that provides credit of $10 a tonne for carbon dioxide (CO2) captured and injected in an enhanced oil- or gas-recovery project has been amended to require that the CO2 is permanently stored in order to qualify for the credit – secure geological storage includes storage in oil and gas reservoirs;
  • Arra increases the maximum credit for alternative-fuel, refuelling property placed in service in 2009 or 2010 to $200,000 for a qualified hydrogen refuelling facility and $50,000 for other refuelling properties. For non-business facilities, the maximum credit is increased to $2,000. The credit rate for non-hydrogen refuelling property is increased, temporarily, to 50%;
  • Credit for the purchase of qualified energy-efficiency improvements to existing homes increases to 30% for property placed in service by 31 December 2010. Additionally, the $500 lifetime cap is replaced by an aggregate cap of $1,500 for property placed in service during 2009 or 2010. The provision also modifies the efficiency standards for qualifying property;
  • Caps have been eliminated on personal credits for the purchase of certain residential solar-electric and solar water-heating, geothermal heat pump, small wind-energy and fuel-cell power projects; and
  • The credit available to owners of qualified plug-in electric-drive vehicles is capped at $7,500 per vehicle; the credit for vehicles weighing 14,000 pounds or more is eliminated. Arra also creates new 10% credits for electric-drive motorcycles and low-speed and three-wheeled vehicles, up to a maximum credit of $2,500, and for conversions to plug-in vehicles, up to a maximum of $4,000.

Stephen Angle, John S Decker, Debra J Duncan, L Price Manford, and Christine L Vaughn are partners, Vinson & Elkins LLP

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