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Earle O'Donnell Discusses the American Recovery and Reinvestment Act's Impact on the Energy Sector
March 6, 2009

Provisions of the American Recovery and Reinvestment Act of 2009 will help shape the direction of future US energy policy by seeking to reduce greenhouse gas emissions and placing renewed emphasis on US energy efficiency, independence and security. The Act includes over $38 billion in spending as well as tax incentives for various renewable energy initiatives estimated to cost $20 billion over ten years. Much of the spending is for existing Department of Energy programs, as well as for several new and modified programs. White & Case partner Earle O'Donnell in Washington, DC discusses the Act below.

This Q&A was published in a slightly different form in Energy Intelligence.

Q: What is the significance of the stimulus act on the current and future energy policies of the US?

A: The American Recovery and Reinvestment Act of 2009 ("Act") sets the nation on a different course for energy policy and brings to light some of the issues President Obama discussed during his campaign. The Act embraces a new set of national energy priorities that are backed by an unprecedented commitment of federal financial resources. The purposes of the Act – to reduce greenhouse gas emissions, add "green" jobs and reduce dependence on insecure energy sources through expansion of renewables, greater energy efficiency and upgrade of the transmission grid - are not themselves unique. Congress has provided tax incentives to renewables in the past and it sought to induce more investment in the transmission grid in the Energy Policy Act of 2005. Many states have implemented strong programs to encourage the development of renewable energy, many of which, such as mandatory renewable procurement standards for utilities, are actually more aggressive than the measures contained in the Act. What is unprecedented is that the Act articulates a focused set of specific energy objectives and then commits huge resources – nearly $40 billion in grants and loan guarantees to the Department of Energy ("DOE") alone – to achieve these objectives.

It is far too early, of course, to know whether the Act will achieve these ambitious objectives. The challenges it confronts are daunting. Our energy problems are complex and long standing. Multiple energy plans and programs have been published to reduce our dependence on foreign oil but our dependence has continued to grow. Substantial public and private resources have been devoted to improving the grid but progress has been slowed by the sheer complexity of operating the grid, battles over who bears the cost of the upgrades and local opposition to virtually anything that brings transmission towers closer to people. Renewables similarly face daunting challenges including the difficulty of raising capital and overcoming local opposition. The ability of the Act to overcome or at least reduce the impact of these obstacles will hinge on several factors. First, can the government effectively and timely implement the myriad initiatives contained in the Act? Second, can sufficient projects be built without siting reform? There is the further risk of government overload arising from the sheer volume of other initiatives that the Administration has committed to pursue ranging from the vexing issue of health care reform to the plans for climate change legislation. Can the Administration sustain its commitment to these policies as it turns to other matters? These are important – indeed critical issues – but at the very least the Act puts us on a new and distinctive path toward an energy policy.

Q: What do you see as the most important or innovative aspects for the energy industry?

A: One of the most basic changes established by the Act is that it creates and expands a menu of incentives, such as Production Tax Credits ("PTCs"), cash grants and Investment Tax Credits ("ITCs"), from which a renewable developer may choose instead of the one size fits all approach (i.e. PTCs for wind projects) under prior law. Of equal importance, the Act makes these incentives available for a number of years. This addresses a real problem with prior legislation, which provided PTCs for only brief periods of time. Under past law, a project developer might not know whether the project would qualify for a PTC until well into the year that it had to be capable of producing energy, which made funding decisions a little like Russian roulette. The new Act provides a multi-year extension of the PTC. It also addresses a new issue – the decline in the number of investors with income against which they can apply the PTC and ITC by allowing projects to utilize other alternatives, such as ITCs or cash grants (in lieu of tax credits) from the Treasury.

One of the more controversial provisions of the Act, particularly to state utility regulators, is the requirement that states, as a condition to receiving certain energy grants, provide assurances that their regulatory authority will seek to implement policies allowing utilities timely recovery of the costs of utility energy efficiency programs and provide earning opportunities on those investments. This provision was vigorously opposed by the states because they regarded it as an intrusion on their historic regulatory authority. It was enacted because Congress wished to remove economic obstacles to utility participation in energy efficiency programs.

One of the potentially important features of the bill – given its focus on renewables to meet our energy requirements – involves support for a new generation of coal plants. The Act provides support for up to five commercial coal-fired plants, which would utilize carbon capture and storage technology.

The Act seeks to create "green" jobs in the manufacturing sector by establishing tax credits for domestic manufactures of renewable components. The Act also encourages development of a smart grid, which will include roll-out of new smart meters and similar devices, to make the transmission grid into an interactive network that can alert transmission operators of technical problems while also communicating pricing and other information to consumers to spur greater energy efficiency, reduce consumption at times of system peak or even allow plug-in cars to power the grid.

Q: Does the stimulus legislation fully address the electric infrastructure challenges for a smart grid to come to fruition? What about other alternative power sources such as wind and solar?

A: The Act does not address obstacles that can arise in state and local siting proceedings for new transmission and renewable projects. The new transmission lines that many renewables need to reach energy loads, frequently will traverse multiple states, each of which will have its own concerns with the development. If a project proposes to drop off its power in one state but will traverse an intermediate state, local officials in the intermediate state can be expected to question why they should bear the criticism of local residents to benefit another state. Similarly, renewables frequently give rise to intense opposition from those who prefer their vistas unchanged.

Siting issues have, if anything, become more acute in the short term since the Act became law. The Federal Energy Regulatory Commission (FERC) was granted limited backstop authority by the Energy Policy Act of 2005 to issue permits to transmission projects in areas that the DOE designated as being within national corridors if the state withheld approval for more than one year. In February, a federal court of appeals found that this authority only applied when the state failed to act, not when it denied the application, in one year. This may well negate the value of this very limited federal siting power since a state apparently can evade the backstop authority by issuing a quick "no" to an application.

The issue of siting is one of the most vexing and politically sensitive issues confronting development of new transmission and renewable projects. Absent some politically feasible and workable solution to siting issues, the infrastructure development that the Act seeks to accelerate could well be stymied, notwithstanding the economic incentive provided by the Act. Senate Majority Leader Harry Reid has promised to consider further energy legislation this year but it is unclear whether the bill will address siting.

Q: Tax incentives are a major component of the stimulus bill. How significant are they?

A: Tax incentives are indispensable. Although the costs of renewables have fallen sharply, they cannot compete with fossil fuel projects at least until the costs of climate change legislation are known and factored into energy prices.

To redress this situation, the Act provides that owners of qualifying renewable energy projects, like wind and solar, are eligible to take a PTC equal to approximately two cents per kilowatt hour of energy produced during the first 10 years of operation, beginning on the placed-in-service date. Historically, the PTC provisions have included sunset dates and Congressional approval of extensions of the PTC has been less than consistent. This lack of consistency has resulted in an inefficient stop-and-start development process for renewable energy project developers.

The Act takes some action to stabilize economics for the renewable power sector by extending the placed-in-service date for wind facilities through December 31, 2012, and an extended placed-in-service date through December 31, 2013, for certain other qualifying facilities, such as solar, closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy and marine renewable facilities.

Under existing legislation, owners of qualifying energy facilities that produce electricity from solar technology are eligible to take a 30 percent ITC, while owners of facilities that produce electricity from certain other sources such as wind, closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible to claim the PTC but not the ITC.

The Act offers flexibility for owners of certain qualifying facilities, including wind power facilities and certain other renewable energy facilities, to elect to claim the ITC in lieu of the PTC. This is significant since the PTC is payable over a 10-year period and the ITC can be claimed in the year when the facility is placed in service.

These tax credits have been a crucial element supporting the renewables financing market by helping to attract tax equity investors to invest in renewable energy projects. Current economic conditions, however, have substantially weakened this source of financing largely because the relatively small group of tax equity investors may not continue to have sufficient tax-liability of their own to be able to benefit from tax credits. Without a sufficiently robust tax equity market, many renewable projects will find it difficult to obtain project financing.

The Act allows taxpayers who are eligible to claim the PTC or ITC to instead elect to receive a grant from the Treasury Department in lieu of tax credits. In general, within 60 days of receiving an application for such a grant (or 60 days from the date the facility is placed in service, if later), the Treasury Department will issue a grant in an amount equal to 30 percent of the applicant's basis in "specified energy property." Generally speaking, to qualify for the grant the project must be placed in service during 2009 or 2010 although the Act does provide certain exceptions to this rule for wind and other energy projects so long as construction commences in either of those years.

Q: Will the legislation allow for new players or incumbents to enter the market? What are the opportunities and challenges for each?

A: There are benefits and opportunities for both. Some of the Act's incentives are available only to new projects such as the depreciation bonus, allowing a deduction of 50 percent of the cost of a new renewable project that is placed in service before January 1, 2010. One would expect additional parties to enter the renewable area to take advantage of these inducements, but they will face sharp competition from the existing developers who can be expected to aggressively expand their position in response to these very same initiatives.

On the other hand, the Act increased the bond limits for federal power administrations, such as the Bonneville Power Administration (BPA) and the Western Area Power Administration (WAPA). This will flow only to incumbent power administrations for the simple reason that they can only be created by legislation and no new players are under consideration. This provision already has impacted one project. BPA has announced that it plans to proceed with a $246 million, 500 kV transmission project based on the additional borrowing authority provided by the Act. The project has already completed NEPA review so it can begin construction soon.

Q: How can energy companies best leverage these provisions to their advantage?

A: The first and most important point that companies must keep in mind is that the Act will not convert a bad project into a good one. It will still be necessary to locate projects that can get power to the purchaser without undue transmission cost or time delay, that do not raise insoluble environmental concerns and are financially viable, which usually requires entering into an off-take contract with a creditworthy purchaser of the output. Although capital markets are in disarray, it still is important to identify and work with lenders early, particularly since many deals will require funding from many lenders. With the new Act, it is important to evaluate the menu of options carefully to determine if PTCs are the best alternative or if ITCs or cash grants are best. Moreover, projects developers will need to be nimble and alert to take advantage of these incentives. The DOE has $32.7 billion of grant money and $6 billion to support a substantial amount of loan guarantees to distribute under the new Act. Stung by criticism of DOE's past failure to issue any of the loan guarantees authorized under the Energy Policy Act of 2005, new DOE Secretary Chu has announced an ambitious schedule that calls for issuance of loan guarantees under the new Act by the end of the summer with 70 percent of the total package of DOE–administered incentives to be disbursed by year end. Energy companies should include government agencies on their list of entities to meet with early in the process and plan to be vigilant and persistent in monitoring and pursuing agency funding or guarantee options.

Q: How big a problem are bureaucratic hurdles, interagency conflicts and regulatory and legal issues?

A: In the past, these have been serious obstacles to development. Developers frequently complain that the process for siting on federal land, which is almost inevitable for a major transmission project in the West, is uncertain and unduly time consuming. The DOE has not issued a single loan guarantee to nuclear applicants since it was authorized to do so by the 2005 Act. Secretary Chu has made it clear that he wants action now. This is extremely encouraging but this is an area that will require watchful monitoring by potential applicants.

"Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Earle O'Donnell, contact Francine Minadeo at fminadeo@whitecase.com.

Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.

	In the Media
Expertise Project Finance Lawyers Earle H. O'Donnell	Earle O'Donnell Discusses the American Recovery and Reinvestment Act's Impact on the Energy Sector March 6, 2009 Provisions of the American Recovery and Reinvestment Act of 2009 will help shape the direction of future US energy policy by seeking to reduce greenhouse gas emissions and placing renewed emphasis on US energy efficiency, independence and security. The Act includes over $38 billion in spending as well as tax incentives for various renewable energy initiatives estimated to cost $20 billion over ten years. Much of the spending is for existing Department of Energy programs, as well as for several new and modified programs. White & Case partner Earle O'Donnell in Washington, DC discusses the Act below. This Q&A was published in a slightly different form in Energy Intelligence. Q: What is the significance of the stimulus act on the current and future energy policies of the US? A: The American Recovery and Reinvestment Act of 2009 ("Act") sets the nation on a different course for energy policy and brings to light some of the issues President Obama discussed during his campaign. The Act embraces a new set of national energy priorities that are backed by an unprecedented commitment of federal financial resources. The purposes of the Act – to reduce greenhouse gas emissions, add "green" jobs and reduce dependence on insecure energy sources through expansion of renewables, greater energy efficiency and upgrade of the transmission grid - are not themselves unique. Congress has provided tax incentives to renewables in the past and it sought to induce more investment in the transmission grid in the Energy Policy Act of 2005. Many states have implemented strong programs to encourage the development of renewable energy, many of which, such as mandatory renewable procurement standards for utilities, are actually more aggressive than the measures contained in the Act. What is unprecedented is that the Act articulates a focused set of specific energy objectives and then commits huge resources – nearly $40 billion in grants and loan guarantees to the Department of Energy ("DOE") alone – to achieve these objectives. It is far too early, of course, to know whether the Act will achieve these ambitious objectives. The challenges it confronts are daunting. Our energy problems are complex and long standing. Multiple energy plans and programs have been published to reduce our dependence on foreign oil but our dependence has continued to grow. Substantial public and private resources have been devoted to improving the grid but progress has been slowed by the sheer complexity of operating the grid, battles over who bears the cost of the upgrades and local opposition to virtually anything that brings transmission towers closer to people. Renewables similarly face daunting challenges including the difficulty of raising capital and overcoming local opposition. The ability of the Act to overcome or at least reduce the impact of these obstacles will hinge on several factors. First, can the government effectively and timely implement the myriad initiatives contained in the Act? Second, can sufficient projects be built without siting reform? There is the further risk of government overload arising from the sheer volume of other initiatives that the Administration has committed to pursue ranging from the vexing issue of health care reform to the plans for climate change legislation. Can the Administration sustain its commitment to these policies as it turns to other matters? These are important – indeed critical issues – but at the very least the Act puts us on a new and distinctive path toward an energy policy. Q: What do you see as the most important or innovative aspects for the energy industry? A: One of the most basic changes established by the Act is that it creates and expands a menu of incentives, such as Production Tax Credits ("PTCs"), cash grants and Investment Tax Credits ("ITCs"), from which a renewable developer may choose instead of the one size fits all approach (i.e. PTCs for wind projects) under prior law. Of equal importance, the Act makes these incentives available for a number of years. This addresses a real problem with prior legislation, which provided PTCs for only brief periods of time. Under past law, a project developer might not know whether the project would qualify for a PTC until well into the year that it had to be capable of producing energy, which made funding decisions a little like Russian roulette. The new Act provides a multi-year extension of the PTC. It also addresses a new issue – the decline in the number of investors with income against which they can apply the PTC and ITC by allowing projects to utilize other alternatives, such as ITCs or cash grants (in lieu of tax credits) from the Treasury. One of the more controversial provisions of the Act, particularly to state utility regulators, is the requirement that states, as a condition to receiving certain energy grants, provide assurances that their regulatory authority will seek to implement policies allowing utilities timely recovery of the costs of utility energy efficiency programs and provide earning opportunities on those investments. This provision was vigorously opposed by the states because they regarded it as an intrusion on their historic regulatory authority. It was enacted because Congress wished to remove economic obstacles to utility participation in energy efficiency programs. One of the potentially important features of the bill – given its focus on renewables to meet our energy requirements – involves support for a new generation of coal plants. The Act provides support for up to five commercial coal-fired plants, which would utilize carbon capture and storage technology. The Act seeks to create "green" jobs in the manufacturing sector by establishing tax credits for domestic manufactures of renewable components. The Act also encourages development of a smart grid, which will include roll-out of new smart meters and similar devices, to make the transmission grid into an interactive network that can alert transmission operators of technical problems while also communicating pricing and other information to consumers to spur greater energy efficiency, reduce consumption at times of system peak or even allow plug-in cars to power the grid. Q: Does the stimulus legislation fully address the electric infrastructure challenges for a smart grid to come to fruition? What about other alternative power sources such as wind and solar? A: The Act does not address obstacles that can arise in state and local siting proceedings for new transmission and renewable projects. The new transmission lines that many renewables need to reach energy loads, frequently will traverse multiple states, each of which will have its own concerns with the development. If a project proposes to drop off its power in one state but will traverse an intermediate state, local officials in the intermediate state can be expected to question why they should bear the criticism of local residents to benefit another state. Similarly, renewables frequently give rise to intense opposition from those who prefer their vistas unchanged. Siting issues have, if anything, become more acute in the short term since the Act became law. The Federal Energy Regulatory Commission (FERC) was granted limited backstop authority by the Energy Policy Act of 2005 to issue permits to transmission projects in areas that the DOE designated as being within national corridors if the state withheld approval for more than one year. In February, a federal court of appeals found that this authority only applied when the state failed to act, not when it denied the application, in one year. This may well negate the value of this very limited federal siting power since a state apparently can evade the backstop authority by issuing a quick "no" to an application. The issue of siting is one of the most vexing and politically sensitive issues confronting development of new transmission and renewable projects. Absent some politically feasible and workable solution to siting issues, the infrastructure development that the Act seeks to accelerate could well be stymied, notwithstanding the economic incentive provided by the Act. Senate Majority Leader Harry Reid has promised to consider further energy legislation this year but it is unclear whether the bill will address siting. Q: Tax incentives are a major component of the stimulus bill. How significant are they? A: Tax incentives are indispensable. Although the costs of renewables have fallen sharply, they cannot compete with fossil fuel projects at least until the costs of climate change legislation are known and factored into energy prices. To redress this situation, the Act provides that owners of qualifying renewable energy projects, like wind and solar, are eligible to take a PTC equal to approximately two cents per kilowatt hour of energy produced during the first 10 years of operation, beginning on the placed-in-service date. Historically, the PTC provisions have included sunset dates and Congressional approval of extensions of the PTC has been less than consistent. This lack of consistency has resulted in an inefficient stop-and-start development process for renewable energy project developers. The Act takes some action to stabilize economics for the renewable power sector by extending the placed-in-service date for wind facilities through December 31, 2012, and an extended placed-in-service date through December 31, 2013, for certain other qualifying facilities, such as solar, closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy and marine renewable facilities. Under existing legislation, owners of qualifying energy facilities that produce electricity from solar technology are eligible to take a 30 percent ITC, while owners of facilities that produce electricity from certain other sources such as wind, closed- and open-loop biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine renewable facilities are eligible to claim the PTC but not the ITC. The Act offers flexibility for owners of certain qualifying facilities, including wind power facilities and certain other renewable energy facilities, to elect to claim the ITC in lieu of the PTC. This is significant since the PTC is payable over a 10-year period and the ITC can be claimed in the year when the facility is placed in service. These tax credits have been a crucial element supporting the renewables financing market by helping to attract tax equity investors to invest in renewable energy projects. Current economic conditions, however, have substantially weakened this source of financing largely because the relatively small group of tax equity investors may not continue to have sufficient tax-liability of their own to be able to benefit from tax credits. Without a sufficiently robust tax equity market, many renewable projects will find it difficult to obtain project financing. The Act allows taxpayers who are eligible to claim the PTC or ITC to instead elect to receive a grant from the Treasury Department in lieu of tax credits. In general, within 60 days of receiving an application for such a grant (or 60 days from the date the facility is placed in service, if later), the Treasury Department will issue a grant in an amount equal to 30 percent of the applicant's basis in "specified energy property." Generally speaking, to qualify for the grant the project must be placed in service during 2009 or 2010 although the Act does provide certain exceptions to this rule for wind and other energy projects so long as construction commences in either of those years. Q: Will the legislation allow for new players or incumbents to enter the market? What are the opportunities and challenges for each? A: There are benefits and opportunities for both. Some of the Act's incentives are available only to new projects such as the depreciation bonus, allowing a deduction of 50 percent of the cost of a new renewable project that is placed in service before January 1, 2010. One would expect additional parties to enter the renewable area to take advantage of these inducements, but they will face sharp competition from the existing developers who can be expected to aggressively expand their position in response to these very same initiatives. On the other hand, the Act increased the bond limits for federal power administrations, such as the Bonneville Power Administration (BPA) and the Western Area Power Administration (WAPA). This will flow only to incumbent power administrations for the simple reason that they can only be created by legislation and no new players are under consideration. This provision already has impacted one project. BPA has announced that it plans to proceed with a $246 million, 500 kV transmission project based on the additional borrowing authority provided by the Act. The project has already completed NEPA review so it can begin construction soon. Q: How can energy companies best leverage these provisions to their advantage? A: The first and most important point that companies must keep in mind is that the Act will not convert a bad project into a good one. It will still be necessary to locate projects that can get power to the purchaser without undue transmission cost or time delay, that do not raise insoluble environmental concerns and are financially viable, which usually requires entering into an off-take contract with a creditworthy purchaser of the output. Although capital markets are in disarray, it still is important to identify and work with lenders early, particularly since many deals will require funding from many lenders. With the new Act, it is important to evaluate the menu of options carefully to determine if PTCs are the best alternative or if ITCs or cash grants are best. Moreover, projects developers will need to be nimble and alert to take advantage of these incentives. The DOE has $32.7 billion of grant money and $6 billion to support a substantial amount of loan guarantees to distribute under the new Act. Stung by criticism of DOE's past failure to issue any of the loan guarantees authorized under the Energy Policy Act of 2005, new DOE Secretary Chu has announced an ambitious schedule that calls for issuance of loan guarantees under the new Act by the end of the summer with 70 percent of the total package of DOE–administered incentives to be disbursed by year end. Energy companies should include government agencies on their list of entities to meet with early in the process and plan to be vigilant and persistent in monitoring and pursuing agency funding or guarantee options. Q: How big a problem are bureaucratic hurdles, interagency conflicts and regulatory and legal issues? A: In the past, these have been serious obstacles to development. Developers frequently complain that the process for siting on federal land, which is almost inevitable for a major transmission project in the West, is uncertain and unduly time consuming. The DOE has not issued a single loan guarantee to nuclear applicants since it was authorized to do so by the 2005 Act. Secretary Chu has made it clear that he wants action now. This is extremely encouraging but this is an area that will require watchful monitoring by potential applicants. "Talking" features White & Case lawyers answering questions about emerging legal and business issues. For more information or to schedule an interview with Earle O'Donnell, contact Francine Minadeo at fminadeo@whitecase.com. Any information contained in this interview is for educational purposes only. It should not be construed as legal advice.