This article was co-authored by Jeffrey Moss at Dawda, Mann, Mulcahy & Sadler, PLC

I. Introduction

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.

II. Federal Incentives

A. Renewable Clean Energy Incentives.

Production Tax Credit ("PTC")

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.

Investment Tax Credit ("ITC"); Grants in Lieu

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.

Modified Accelerated Cost Recovery System ("MACRS")

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.

Renewable Energy Production Incentive

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.

Residential Renewable Energy Tax Credit

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.