Stimulating change in the US energy markets – Hogan & Hartson

The US Stimulus Plan maintains momentum towards the use of renewable sources, and to encourage energy efficiency, offering incentives to both operators and investors

The US Stimulus Plan helps bring renewed momentum to aspects of the US energy market while also opening up entirely new opportunities for investors, says Mary Anne Sullivan, partner at Hogan & Hartson in Washington DC and former General Counsel of the US Department of Energy (DOE).

‘The Stimulus package has brought long-needed and significant investment to established elements of the US energy mix while also bringing other areas out of their infancy. The upgrading of the national transmission grid, for example, through the injection of Federal funds, loan guarantees, and other debt instruments brings new life to initiatives that over recent years have largely failed.’

Likewise, she says, the focus of the package towards encouraging the creation of smart grids, using digital technology to save energy, reduce cost and increase reliability, it is hoped, will encourage new areas of investment.

‘Smart Grid initiatives have until now taken baby steps. The allocation of $4.5bn in Federal funding towards their development, with costs shared on a 50:50 basis between the government and the operator, signifies a very real change of emphasis in moving things forward.’

Renewables is another clear beneficiary, says Sullivan. The US had seen rapid growth, notably in solar photovoltaic and wind energy schemes, over the past decade but the economic downturn had bought much of this activity to a halt.

‘The intention is that the loan guarantees and incentives outlined in the package reinvigorate investor interest. It is not a new policy initiative but an attempt to get the sector back to where it was.’

Significant sums have also been set aside for carbon capture technologies and research and development programmes promoting energy efficiency, including in renewable energy storage and stability of supply, adds James Wickett, a tax partner with Hogan & Hartson in Washington DC – with changes introduced to the way projects are funded, including wider eligibility for loan guarantees and development grants

‘The government’s guaranteed loan program has been extended beyond merely ‘innovative’ technologies to encompass established commercially renewable technologies – which if it includes an innovative aspect may qualify for further loans or grants.’ The aim, he explains, is that the federal loan guarantees will help unstick the finance markets, injecting certainty and encouraging the banks to start lending again.

The various Federal packages amount to $6bn dollars but this equates to an estimated leverageable loan value up to $60bn. The loans offer guarantees to companies or schemes that otherwise might not get finance. The government has stepped in to keep the normal markets functioning.

Another significant element of the bill for the energy sector is the treatment of tax credits, they say, which can be offset against energy project production and investment costs.

A Production Tax Credit (PTC) scheme had been utilised in the wind, and more recently, biomass and geothermal sectors, to help finance projects with operators joining with ‘tax equity partners. Credits were recoverable based on project outputs, and often utilised by sponsoring financial institutions as a way of reducing their own corporate tax liabilities.

‘The issue recently has been however that very few institutions were even making a profit, so the PTC offered no short-term incentive to fund new projects,’ says Wickett.

Consequently, under the Stimulus Plan PTCs may evolve into Investment Tax Credits (ITCs) and then to government grants, through which the Federal government will provide grants of 30 per cent for qualified expenditures on renewable energy projects, through to the end of 2010.

‘For investors, the ITC has monetised the PTC and given it further certainty. It focuses on the cost of putting new projects together. We are currently awaiting the specifics of the scheme implementation and when the first cheques will be sent out.’

The belief, they say, is that for many international companies already active in the US the stimulus package offers incentives for further investment. The extension of loan guarantees, tax and funding schemes adding new attractions to the most energy-hungry market in the world.