More than 100 people, including representatives of a broad cross-section of financial institutions, private equity funds and notable energy companies, attended a discussion of the economic incentives for renewable energy projects in the American Recovery & Reinvestment Act. The event, hosted by Shearman & Sterling’s Sustainable Development Group at the firm’s New York office, was part of the Sustainable Development Speakers Series, which the group presents quarterly to industry and business leaders.
Tax partners Alfred Groff (Washington, DC), Mitchell Menaker (New York) and John Sykes (New York) spoke on the panel and addressed certain key tax considerations arising for renewable energy under the American Recovery & Reinvestment Act. Michael McBride and Ben Yamagata of Van Ness Feldman PC, a Washington, DC-based firm that advises clients in energy regulatory matters, addressed issues related to the Department of Energy loan guarantee program. Shearman & Sterling partner Patricia Hammes (New York), who leads the firm’s Sustainable Development Group, introduced the speakers.
“Renewable energy has won the tax lottery,” Menaker noted. The recently passed American Recovery & Reinvestment Act, commonly referred to as the “stimulus bill,” provides incentives worth nearly $15 billion for investing in renewable energy, including “a veritable smorgasbord of tax benefits and direct subsidies,” he explained. These incentives encourage investment in projects such as wind, geothermal and solar energy.
Menaker explained that the tax benefits for renewable energy projects include depreciation as well as production and investment tax credits. In addition, direct grants are available for investors without a tax base. These benefits can be made available to companies and investors through two basic structures: partnerships and leases. Partnerships allow the participation of multiple unrelated investors, and leases are also viewed as an acceptable method for transferring the tax attributes of ownership, Menaker noted.
“I don’t remember ever seeing an aggregation of tax benefits this rich for any type of property—time will tell whether it leads to further investment in renewable energy,” he concluded.
Following Menaker’s discussion, Groff focused on projects structured with the participation of both US and non-US investors.
“US tax authorities have recognized that tax benefits will not be disallowed merely because the foreign tax treatment of the transaction differs from the US tax treatment,” Groff explained.
Groff discussed five approaches to structuring these types of transactions: cross-border leases, hybrid securities, repo transactions, dual resident corporations and reverse hybrids. He then analyzed the ways in which these transactions would work under the tax laws of France, Germany, the Netherlands and the UK.
The message to the renewable energy market, Groff said, is, “There is potential funding for your projects, and you should consider going forward in this area.”