Renewable energy developers using tax credits to finance projects may now have to rethink how they fund future projects.
A Jan. 7 Federal Claims Court decision sided with the Treasury Department and ordered a wind energy developer to pay back $5.63 million in grants in lieu of tax credits, an inflated amount that stemmed from the company’s advantageous tax planning. The opinion is currently sealed and will be released after proprietary information about the company is redacted.
Solar and wind energy developers are watching closely for the release of the court’s opinion in the case involving California Ridge Wind Energy LLC because the court’s reasoning for reversing the cash grant could impact how future developers consider raising capital.
The opinion could impact the formula companies use when applying for tax credits, though the case doesn’t specifically deal with tax law. Energy companies may be more cautious when applying for investment tax credits in the future after seeing what happened to California Ridge.
Projects could become more expensive if companies begin to qualify for smaller tax credits, “and the more expensive the capital, the fewer the number of projects that will get built,” said Keith Martin, a tax partner at Norton Rose Fulbright. The firm is a member of the American Council on Renewable Energy.
At the heart of the case is a now-expired, Treasury-run program that issued grants in lieu of tax credits for renewable energy projects. The program, known as the Section 1603 program, was part of the government stimulus package created after the 2008 financial crash.
In creating the program Congress intended to make the grants mimic tax credits, practitioners said.
A 1603 cash grant is calculated on the tangible cost basis, or total cost of construction, of a solar or wind energy project. The 30 percent solar investment tax credit for developers works the same way.
California Ridge, based in Illinois, sued Treasury after the department issued it a $128 million grant for a wind project it had started building in 2011. The company argued it deserved $136.9 million, 30 percent of the project’s basis.
The attorney representing California Ridge didn’t return a request for comment. Invenergy LLC, the parent company, said it was reviewing the decision.
The 1603 program awarded $26.2 billion to 109,766 projects, according to a 2018 report.
“By 2010, the vast majority of solar projects used this grant but then the Treasury department started questioning the value of grants, causing solar sector to go back to tax credits,” Martin said.
All About Value
The court’s opinion could validate Treasury’s claim that California Ridge inappropriately calculated the grant amount for which it should qualify. That assertion would not only hurt future renewable energy projects, but could also come up in current audits of renewable energy companies.
Even as the grant-making program was in operation, Treasury had begun to challenge how companies calculated the total costs of projects, arguing the amounts were inflated.
There are currently at least three cases in which Treasury is challenging the amount of a company’s 1603 grant request, practitioners said.
Part of the problem is that valuation is a subjective matter, and Treasury and the Internal Revenue Service “have done little to provide meaningful guidance to the renewable energy industry regarding valuing projects,” said David Burton, who leads the renewable energy group at Mayer Brown LLP.
More certainty will come with the judge’s opinion. But the pro-Treasury decision “is likely to make tax equity investors and their counsel more cautious,” Burton said.
The case is Cal. Ridge Wind Energy, LLC v. United States, Fed. Cl., No. 1:14-cv-00250, judgment 1/7/19.