The United States consumes more than 20% of the energy produced
in the world. It also is responsible for 25% of the global GHG
emissions though accounting for only 4.5% of the world population.
Approximately 83% of the United States' energy consumption
comes from fossil fuels, 9% from nuclear electric power, and 8%
from renewable sources.1 We import 57% of the petroleum
we consume.2 In an era of global warming, continued
environmental degradation, peaking petroleum production, war,
terrorism, and political instability, it is no wonder that the
United States seeks (yet again) to reduce its dependency on
petroleum and embrace clean and renewable energy sources. Government tinkering with energy markets is not new –
it dates back to at least the end of World War I. For most of that
time, government policies have focused on increasing domestic oil
and gas reserves and production. Beginning in the 1970's,
however, environmental issues, oil embargoes, and budget deficits
influenced policy to shift in favor of energy efficiency and
alternative fuel sources. Since then, this shift has accelerated as
a result of national security and climate change issues, and with
growing emphasis on technologies that are both renewable and
clean. When intervening in markets, governments have a variety of tools
at their disposal, including tax policy, mandates, and direct
subsidy (e.g. grants, loans, guarantees, etc.). Tax policy can
include either taxing activities that are to be discouraged, or
subsidizing substitute activities, or both. For a variety of
reasons, U.S. tax policy has tended to focus on tax subsidies or
incentives. The purpose of this article is to discuss and summarize
some of the more important currently available (as of October 2010)
federal and Michigan incentives for renewable/clean energy and
energy efficiency with a focus on tax subsidies. A. Renewable Clean Energy Incentives. Section 45 of the Internal Revenue Code ("IRC")
provides an income tax credit for the production of electricity
from qualified wind power, solar energy, small irrigation power,
geothermal energy, open loop and closed-loop biomass production,
municipal solid waste, hydropower production and marine and
hydrokinetic renewable energy facilities that is sold by the
producing party to an unrelated party. For 2010, the credit is in
the amount of 2.2 cents per kilowatt hour. The credit is also
reduced for grants, tax exempt bonds, subsidized energy financing
and other credits received by the producer. For qualified facilities placed in service between 2009 through
2013 (but 2012 for wind facilities), a producer may make an
irrevocable election to obtain a 30% investment credit under IRC
§48 rather than claim the PTC. Certain types of production are
excluded from this election. In addition, Section 1603 of the ARRA
permits a producer to opt for a government grant equal to 30% of
investment costs in lieu of claiming either the PTC or the ITC in
2009 and 2010. The provision was added by the American Recovery and
Investment Act because of the lack of appetite by tax equity
investors resulting from the meltdown of credit markets. The standard accelerated depreciation provisions of IRC
§168 remain in effect with most renewable energy properties
classified as 5-year property. An additional bonus depreciation of
50% of eligible costs included in the Economic Stimulus Act of 2008
expired at the end of 2009 and has not been extended as of this
writing. This incentive payment program complements the PTC. Qualifying
systems owned by state and local governments, tribal governments,
municipal utilities and cooperatives can receive annual payments of
1.5¢ per kilowatt hour in 1993 dollars, indexed for inflation.
The incentive in 2010 is 2.1¢ per kilowatt hour. Individual taxpayers are eligible for a personal tax credit
equal to 30% of the cost of qualified solar-electric, solar hot
water, small wind energy and geothermal heat pump property. ARRA
extended the applicability of this credit until December 31, 2016,
and eliminated the previous cap of $2,000. Federal Grants Three major grant programs are available to Native American
tribes and rural communities. The DOE's Tribal Energy Grant
Program provides financial and technical assistance to tribes for
the development of renewable energy projects and energy efficiency
programs. The USDA's Rural Energy for America Program
("REAP") provides grants and loan guarantees of up to 25%
of project cost for the development of renewable energy systems by
agricultural producers and small rural businesses. Grants are also
available to state and local governments, tribal governments, rural
electric co-ops, etc. The USDAs High Energy Cost Grant Program
provides grants to individuals, businesses, and state, local and
tribal governments to improve energy systems in rural communities
that have high energy costs (275% of national average). Innumerable technical and research grants are also available
through DOE and other government agencies, amounting to potentially
billions in subsidies. The reader is directed to www.grants.gov
for further information. Federal Loans and Guarantees Several loan and guarantee programs are available for renewable
energy projects. REAP guarantees have been noted above. The
DOE's Title XVII loan guarantee programs (as amended by ARRA)
are the most widely publicized (and criticized – only 14
guarantees have been issued in 5 years). The program focuses on
large-scale projects in renewable energy and advanced vehicle
manufacturing, but requires entities to possess a B+ or better
credit rating thereby making them difficult for new market entrants
to obtain. Other programs include Clean Renewable Energy Bond
("CREB") Program and Qualified Energy Conservation Bond
("QECB") Program. The CREB Program is administered
through the IRS under open solicitations and is available for
renewable energy projects in the public sector. Holders of CREBs
receive tax credits (treated as taxable income) in lieu of
interest. For CREBs issued after March 18, 2010, issuers may elect
to receive a refundable tax credit (a direct payment) in lieu of
the non-refundable tax credit provided to the bondholder. The QECB
program is administered by the states under allocations from the
U.S. Treasury. The Program is administered in Michigan by the
DELEG. It is available to state, local and tribal governments and
is similar to the CREB Program except for the allocation process.
Approximately $40M of Michigan's current QECB allocation
remains unawarded at this time. B. Energy Efficiency Programs. In addition to providing incentives for producing renewable
energy, the federal government has some programs to encourage both
individuals and businesses to increase their energy efficiency,
which would then hopefully reduce the need for as much energy
production. Energy Efficient Commercial Buildings Tax
Deduction Section 136 of the IRC provides a tax deduction ranging from
$0.30 to $1.80 per square foot for building envelope, lighting,
HVAC or hot water systems that reduce energy costs to meet certain
national standards. Residential Energy Efficiency Tax Credit There is currently a federal tax credit equal to 30% of the
amount expended for purchasing new, efficient technologies such as
water heaters, furnaces, boilers, heat pumps, central air
conditioners, insulation, windows, doors, roofs and fans. The
maximum amount of this tax credit for all technologies placed in
service in 2009 or 2010 is limited to $1,500. This provision
expires December 31, 2010. There is a bill in Congress currently to
extend this program; however, as of October 1, 2010, it has not yet
passed. III. State of Michigan Incentives Utility Rebates and Subsidies Both the DTE Energy and Consumers Power have enacted pilot
programs and experimental programs which also provide incentives
for acquisition and installation of solar energy systems and other
renewable energy-type systems. Michigan Business Tax Credits The Michigan Business Tax ("MBT") offers a variety of
different credits for alternative energy. For example, businesses
which are certified by the NextEnergy Authority as a qualified
"alternative energy technology" can claim a credit
against Michigan Business Tax based upon the percentage of payroll
for employees working on alternative energy related research,
development or manufacturing within the NextEnergy zone. There is
also a non-refundable Michigan Business Tax Credit where businesses
engaged in qualified alternative energy research development or
manufacturing (but not located in the NextEnergy zone) can offset
portions of Michigan Business Tax liability. There are other
credits for advance battery manufacturing and photovoltaic
manufacturing and developments. These two credits as proposed are
refundable credits but which also require pre-approval from MEGA
and require a level of job creation. Renewable Energy Renaissance Zones In 2006, Michigan enacted legislation to allow MEGA and the
Michigan Strategic Fund in conjunction with state and local
municipalities to create Renewable Energy Renaissance Zones
("RERZs") for the production of renewable energy such as
solar, wind, biomass, landfill gas, renewable fuels, and most
recently, this legislation was amended to permit the manufacturing
of electric batteries. A Renaissance Zone allows the producer to be
exempt from state and local taxes, such as real estate tax,
personal property tax and Michigan Business Tax for 15 years. This
is a significant benefit to encourage development of renewable
energy sources. Recently, electric battery and cell manufacturers,
such as Johnson Controls/SAFT, and Compact Power, Inc./LG Chem,
have obtained Renewable Energy Renaissance Zone status for the
construction of large-scale plants in Holland, Michigan. Property Tax Exemptions Michigan has legislation which exempts certain alternative
energy personal property from taxation. The types of property that
can be exempted from personal property taxes include but is not
limited to, PV systems, wind turbines, fuel cells and other
property used to solely for the purposes of research, development
and manufacturing of alternative energy technologies. Michigan is
monitoring the various types of technologies and does appear to
make changes for inclusiveness in order to promote alternative
energy. Renewable Portfolio Standards In October, 2008, Michigan became the 28th state to
create a Renewable Portfolio Standard
("RPS").3 The RPS established the mandate that
by 2015, 10% of the state's energy come from renewable sources.
In addition, the two largest utilities Detroit Edison and Consumers
Energy have additional obligations to meet interim renewable energy
capacity goals by December 31, 2013. Utilities may meet their goals
by acquiring Renewable Energy Credits ("RECs") with or
without the associated renewable energy. Types of energy that are
included are solar and solar thermal, biomass, wind, geothermal,
municipal solid waste, landfill gas, existing hydro electric, wave
and water current. Along with the RPS standards, Michigan also created a "Net
Metering Program" which divided net metering into two
different categories for residential customers. For customers who
generate 20 Kilowatts or less, a "modified" net metering
concept will occur when "Net Excess Generation during a
billing period may be carried over to the next billing period at
either the monthly average real time marginal price or the
utility's retail rate". Customers who generate more than
20 Kilowatts will be eligible for true net metering in the sense
that the power they generate and the power they use will offset
each other in real time. The utility is required to use the
customer's existing meter if the meter is capable of reverse
registration or may install an upgraded meter at no additional cost
to the net metering customer. If a utility has fewer than a million
customers, it may charge the net metering customer at-cost for an
upgraded meter. IV. Pending and Proposed Legislation. The ARRA, passed in 2009, was an expansive piece of legislation
aimed in part at promoting the production of energy from renewable
energy sources. Since February, 2009, a plethora of different bills
were introduced in the House and Senate, which would extend many of
these incentives or increase them in order to make more projects
economically viable. On September 14, 2010, HR 6121 called the
Renewable Energy Investment Incentive Act of 2010 was introduced to
the House of Representatives, which quite simply extends most of
the incentives, including the PTC, the ITC and the grant in lieu of
credits to 2019. This legislation, if passed, would provide
utilities and project developers with sufficient comfort that they
could continue to plan additional projects which could commence
even three, four and five years from now, and that would provide
the markets with sufficient time to create and plan appropriate
projects. On that same day, HR 6117 was introduced in the House of
Representatives which it passed, would create another set of new,
clean energy renewable bonds, which would provide for a source of
financing for large-scale projects. Other particular bills passed
in the House include HR 5856, Waste to Energy Technology Act of
2010, HR 5805, Thermal Renewable Energy and Efficiency Act of 2010,
and HR 5792, Manufacturer Renewable Energy Systems. Most recently,
on September 29, 2010 SB 3935 the proposed "Advanced Energy
Tax Incentives Act" was introduced in the Senate. This
proposed Act appears to be the most comprehensive of the possible
legislation expanding building and energy efficiency incentives,
promoting thermal energy and vehicle efficiency, providing
additional credits for advanced energy manufacturing, providing new
incentives for energy storage, and more. We do not know which, if any, of this legislation will pass
before year-end or will be introduced again in the future. We are
also not sure which types of renewable energy will ultimately be
the major source of energy in the United States. We do applaud and
encourage all efforts to develop alternative sources of energy
which are renewable and clean for the benefit of future
generations. V. Summary Whether this elaborate system of Federal and state tax subsidies
and incentives is the most efficient intervention in energy markets
is an open question, and is the appropriate subject of another
article.4 We do applaud the various efforts to encourage
the research, development and manufacture of renewable energy in
the United States. Others may argue that our tax policy should (and
especially in light of current deficits), also include a tax on
coal-produced electricity and increases in gasoline and diesel fuel
taxes, or a broader based carbon tax, so as to discourage on a
marginal basis consumption of fossil fuels. These policies might
also promote efficiency and conservation rather than encourage more
energy production. It is argued that these policies would be more
efficient and produce less economic distortions and contradictions.
(For example, by lowering the cost of energy consumption, tax
subsidies for renewable energy stimulate energy demand in
contradiction of the goals of energy efficiency.)5
Moreover, subsidy systems are subject to abuse and unintended
consequences. One has only to note that the primary beneficiaries
of the unconventional fuel and alcohol fuel subsidies of the
1990's and 2000's were, contrary to the policy makers'
intent, existing coal producers and suppliers and the paper pulp
industry.6 It is clear, that we will continue to see
lots of changes in both the technology for energy development
consumption and also the taxes and subsidies related to the
development of energy. Footnotes 1. U.S. Energy Information
Administration, Annual Energy Review 2009. 2. Id. 3. MCL 460.1021 et
seq 4. See Molly F. Sherlock,
Energy Tax Policy: Historical Perspectives on and Current
Status of Energy Tax Expenditures, BNA Daily Tax Report (May
7, 2010). 5. Id. 6. Id. The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
I. Introduction
II. Federal Incentives
Production Tax Credit ("PTC")
Investment Tax Credit ("ITC"); Grants in Lieu
Modified Accelerated Cost Recovery System
("MACRS")
Renewable Energy Production Incentive
Residential Renewable Energy Tax Credit
ARTICLE
21 March 2011
"Green" Tax Incentives: A Guide To Federal And Michigan Incentives For Clean Energy And Energy Efficiency
The United States consumes more than 20% of the energy produced in the world. It also is responsible for 25% of the global GHG emissions though accounting for only 4.5% of the world population.