Federal Grants Spur Electricity Production

By Hamang B. Patel and Porter J. Martin | August 10, 2009
Ethanol producers who are considering expanding their facilities to be able to produce electricity can get a jolt to their efforts from the federal government. The American Recovery and Reinvestment Act of 2009 (known as the Stimulus Bill) created a program where the U.S. Department of the Treasury will issue grants to help offset the cost of constructing projects that produce electricity from various renewable energy sources, including biomass, wind power and solar power. The Treasury outlined the terms of this program in guidance published on July 9, 2009.

Biomass to Electricity
This federal program is most relevant to an ethanol producer as a way to fund part of the cost of constructing a facility to burn waste biomass material to generate electricity.

Although the biomass material that will typically be most readily available for an ethanol producer is stillage, a variety of other biomass materials are also eligible for the program - including various forest-related resources, solid wood waste materials, orchard tree crops, grains, legumes, sugar and other crop byproducts or residues.

The electricity generated by the facility can be used by the ethanol plant, sold to a utility or a combination of the two. It should be noted that the grant will not be available for constructing a co-fired facility that burns fossil fuels beyond the fossil fuels required for startup and flame stabilization.

Amount and Payment of the Grant
The amount of the grant is generally equal to 30 percent of the tax basis of tangible property used in the facility, excluding any cost of constructing a building or "soft costs" such as engineering and installation fees. The grant will be paid in one lump-sum payment shortly after the facility starts generating electricity. An ethanol producer would typically need to obtain financing of the entire cost of the facility and use the grant to pay down a portion of the financing when the facility becomes operational.

To be eligible for the grant, the facility must become operational by the end of 2010. Alternatively, if construction of the facility starts before the end of 2010, the facility need not become operational until Dec. 31, 2013. Construction is treated as starting in 2010 only if physical work of a significant nature has begun. A safe harbor allows this test to be met if more than 5 percent of the total cost of the facility is incurred (or in the case of a cash method taxpayer, paid) before Dec. 31, 2010. The cost of the land and preliminary activities (such as planning, designing, securing financing, exploring or researching) are excluded in calculating the total cost of the facility.

The application for the grant must be filed on or before Oct. 11, 2011. If the facility is not operational by the time the application is filed, documents showing that construction has begun must be submitted. By claiming the grant, the taxpayer cannot also apply for the investment tax credit or production tax credit. However, there is no such restriction to couple this grant with other federal incentives (including federal new market tax credit financing and various federal loan guarantee programs).

The creation of this grant program should cause an ethanol producer to re-evaluate how it disposes of waste materials. To the extent that burning the waste to generate electricity can produce a better financial return than other uses of the waste, an ethanol producer may be well served to learn more about this program.

Hamang B. Patel and Porter J. Martin are partners at Michael Best & Friedrich LLP, a full-service law firm serving the renewable energy industry. Hamang can be reached at (608) 283-2278 or hbpatel@michaelbest.com. Porter can be reached at (608) 283-0116 or pjmartin@michaelbest.com.