FINANCIAL INCENTIVES FOR CLEAN DG Tom Bourgeois Director of Research Pace Univ. Energy Project

Policy Instruments Public Financing Tax Code Loan Programs Other Financial Incentives

Investment Tax Credits (ITC) Accelerated Depreciation / Expensing Production Tax Credits (PTC) TAX POLICY INSTRUMENTS

H.R. 6 – House Energy Bill and the Counterpart Senate Bill (S 14) Provided a 10% ITC for Qualified CHP System Property To Qualify a CHP System must meet a 60% efficiency threshold At least 20% of useful energy used for thermal energy and at least 20% of useful energy for electrical/mechanical INVESTMENT TAX CREDITS

Provisions Sunset after 3 Years (for systems placed in service prior to 1/1/2007) CHP System Size must be <= 15 MW’s The Energy Bills in the 108 th Congress removed provisions that would have lengthened the depreciation period for industrial systems INVESTMENT TAX CREDITS

Depreciation Periods Vary Based upon Ownership The Same Equipment May Face Depreciation Periods ranging from 15 to 39 Years Industrial sites 15 or 20 years Smaller Commercial/Residential 27.5 years (rental property) or 39 years (owner-occupied) ACCELERATED DECPRECIATION

A Facility is paid for kW and kWH produced, not simply for investment at the site The PTC may have superior efficiency properties, the more the equipment runs, the more incentive is paid The PTC may be preferred for areas where the DG is mitigating local or regional system congestion PRODUCTION TAX CREDITS (PTC)

Wind and Biomass tax credits exist at the federal level, MN has considered a state PTC The PTC has higher risk to the recipient than the ITC, as payment is tied to production For any given amount, the CHP system owner would prefer ITC to PTC PRODUCTION TAX CREDITS (PTC)

CT could pass an ITC incremental to the Federal Provision, if enacted CT could enact an ITC regardless of federal activity CT may examine its tax treatment regarding depreciation of CHP system property Many states conform their depreciation schedules with the Federal (“coupled), and for good reason STATE ALTERNATIVES

Debt Financing Instruments Tax Exempt Financing Tax Exempt Lease Programs Loan Guarantee Programs Other Rate Reduction Measures

Tax Exempt Financing Certain State Authorities Can Issue Tax Exempt Bonds for Capital Equipment and Structures The Beneficiary is typically an Institutional / Non-Profit Entity (Hospital, Nursing Home, College /University, etc.,) Certain Regional Authorities (e.g. IDA’s) May be Authorized to Issue Tax Exempt Instruments. In NYS Civic Facility Revenue Bonds are an alternative to State Sources A Master Lease may be preferred method for small issues

Debt Policy Instruments CT may have Authority to do Loan Guarantees for Capital Equipment Investments The State may capitalize a revolving loan fund specifically for investments in strategically sited Clean DG / CHP In NYS, DASNY has financed CHP Capital Equipment Investments through the TELP Program and “Power of 2” Jointly Administered with NYSERDA

Other Financial Instruments Economic Development Zones Brownfield Cleanup and Redevelopment Market Based Emissions Programs (ERCs & Allowances)

Brownfields Cleanup An ITC ranging from 10% to as much as 22% for capital equipment & structures (including CHP systems) Credits are increased by 8% for location in “ENV-Zones” Credits are further increased by 2% for cleanup to the highest level (“Track 1”) Credits are fully refundable – if taxpayer liability < tax credit the Tax Dept will write a check for the difference

Market Based Environmental Incentives Utilization of programs that will pay Clean DG and CHP for demonstrable environmental benefits Emission Reduction Credits (ERCs) are worth $9,000 to $12,000 per ton in recent years in NY Metro Area (Severe Non- Attainment Area) Emission Allowances can be distributed to EE/RE resources under EPA Guidance. Could credit Clean DG for as much as 1.5 lbs/MWH of displaced electricity

Emission Allowances and ERC’s All states may create an EE/RE Set-Aside for the Allowance Program; ~ 5 states have, CT has not (NY, MA have) Illustrative Example: large Multi-Building, Mult-family complex in NYC, Emission Allowances can be distributed to EE/RE resources under EPA Guidance. Could credit Clean DG for as much as 1.5 lbs/MWH of displaced electricity

ERC NOx ALLOWANCES CONTRIBUTION TO PROJECT ECONOMICS Assume 7.5 Tons of ERCs Certified and sold at $11,000 / Ton Assume 2,500 MWH’s Generated at the Site Assume Formula for Awarding Allowances for Displaced Electric NOX credits this site with 3,750 lbs (1.875 Tons) of NOx Allowances at $2,750/ton * tons = $5, 156 per year for 5 Years NPV of Emissions Credits is ERC at $82,500 + NPV of $5156 per year for 5 years = $82,500 + $19,547 = = $102,047

Utility / Regulatory Incentives Location-Based Incentives for new investments (e.g. $/kW payment in auction for resources within constraint) Special clean DG / CHP gas rates Standby Tariff waiver for clean, high-efficiency DG

Summary: Consider the Objectives Clean DG for T&D System Relief? Clean DG for Environmental Benefits? Clean DG for Economic Development / Reliability?

SUMMARY: Consider the Objectives Tax Policy (Credits, ITC, Loan Programs) are typically not geographically targeted – though they can be EDZ’s and NYS Brownfield Cleanup Tax Credits are examples of programs that are targeted to census tracts. If improving reliability is paramount – the PTC might be favored, if Environmental Improvements, then pay for progressively better emissions profiles

SUMMARY: Consider the Objectives Use Existing institutions where feasible – e.g., a hospital/ health-care/ university financing agency, or, an existing economic development agency Align with pre-existing programs when possible – e.g. cross market energy, economic, and environmental incentives and technical assistance. Be aware of interactions with other jurisdictions and regulatory authorities