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Federal Incentives for Developing Combined Heat and Power Projects

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In 2008 and early 2009, two key federal bills were passed that include provisions that support CHP.

This Web page provides summaries of key provisions in EIEA and ARRA that affect CHP:

In addition to the incentives related to EIEA and ARRA, information about additional state and federal incentives applicable to CHP and biomass/biogas projects can be found in the CHP Partnership's funding database. This Web page also provides a list of resources developed by other organizations that summarize CHP-relevant components of the ARRA and other recent federal initiatives.

Tax Provisions

CHP Investment Tax Credit
The CHP Investment tax credit (ITC) is a tax credit for the costs of the first 15 megawatts (MW) of CHP property. To qualify for the tax credit, the CHP system must:

The 60 percent efficiency requirement does not apply to CHP systems that use biomass for at least 90 percent of the system's energy source. The ITC may be used to offset the alternative minimum tax, and the CHP system must be operational in the year in which the credit is first taken.

The CHP ITC is claimed through IRS Form 3468 (PDF) (3 pp, 249K), available on the IRS's website. Facility owners who claim the ITC cannot claim the production tax credit (PTC) or receive a grant in lieu of the ITC.

ARRA allows taxpayers eligible for the CHP ITC to receive a grant from the U.S. Treasury Department instead of taking the ITC for new installations. For eligible CHP projects, the Department of Treasury will make payments to qualified applicants in an amount equal to 10 percent of the system cost. The Treasury Department is now accepting applications for the grant program. The grant is only available to systems that are placed into service in 2009, 2010, or 2011, or after 2011 if construction on the property began in 2009, 2010, or 2011 where construction begins prior to December 31, 2011. A guidance document, terms and conditions, the application, and answers to frequently asked questions related to taking a grant in lieu of the tax credit is available on the U.S. Department of Treasury's website.

More information about the CHP ITC is available in the Partnership's funding database.

Investment Tax Credits for Microturbines and Fuel Cells
EIEA extended the ITC for microturbines and fuel cells. For microturbines, the credit is equal to 10 percent of expenditures, with no maximum credit limit stated (explicitly). The credit for microturbines is capped at $200 per kW of capacity. Eligible property includes microturbines up to two megawatts (MW) that have an electricity-only generation efficiency of 26 percent or higher.

For fuel cells, the credit is equal to 30 percent of expenditures, with no maximum credit. However, the credit for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity-only generation efficiency of 30 percent or higher. (The credit for property placed in service before October 4, 2008, is capped at $500 per 0.5 kW.)

The CHP ITC is claimed through IRS Form 3468 (PDF) (3 pp, 249K), available on the IRS's website. Facility owners who claim the ITC cannot claim the production tax credit (PTC) or receive a grant in lieu of the ITC.

The ITC for both microturbines and fuel cells is available for eligible systems placed in service on or before December 31, 2016. As with the CHP ITC, facility owners can choose to receive a one-time grant in lieu of receiving the tax credit as long as the facility is depreciable or amortizable. The grant is only available to systems that are placed into service in 2009, 2010, or 2011, or after 2011 if construction on the property began in 2009, 2010, or 2011 where construction begins prior to December 31, 2011. The Treasury Department is now accepting applications for the grant program. A guidance document, terms and conditions, the application, and answers to frequently asked questions related to taking a grant in lieu of the tax credit is available on the U.S. Department of Treasury's website.

More information about the investment tax credit for microturbines and fuel cells is available in the Partnership's funding database.

Renewable Electricity Production Tax Credit
EIEA extended the production tax credits (PTC) for biomass, geothermal, hydropower, landfill gas, waste-to-energy, and marine facilities and other forms of renewable energy through 2010, and ARRA further extended the tax credit through 2013. The renewable electricity PTC is a per kilowatt-hour (kWh) federal tax credit included under Section 45 of the U.S. tax code for electricity generated by qualified energy resources. The PTC provides a corporate tax credit of 1.1 cents/kWh for landfill gas, open-loop biomass, municipal solid waste resources, qualified hydropower, and marine and hydrokinetic (150 kW or larger). Electricity from wind, closed-loop biomass, and geothermal resources receive 2.2 cents/kWh. Projects that receive other government grants or subsidies receive a discounted tax credit.

The Renewable Energy PTC is claimed through IRS Form 8835 (PDF) (4 pp, 159K) and IRS Form 3800 (PDF) (3 pp, 219K).

ARRA allows taxpayers eligible for the federal PTC to take the federal business energy investment tax credit (ITC) or to receive a grant from the U.S. Treasury Department instead of taking the PTC for new installations. The Treasury Department issued Notice 2009-52 (PDF) (6 pp, 16K) in June 2009, giving limited guidance on how to take the federal business energy investment tax credit instead of the federal renewable electricity production tax credit. The Treasury Department is now accepting applications for the grant program. A guidance document, terms and conditions, the application, and answers to frequently asked questions related to taking a grant in lieu of the tax credit is available on the U.S. Department of Treasury's website.

More information about the Renewable Energy PTC is available in the Partnership's funding database.

Bonus Depreciation
Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. ARRA extended the five-year bonus depreciation schedule through 2010 and includes CHP, thereby allowing 50 percent of the depreciation value to be taken in the first year and the remainder over the following four years. In December 2010 the provision for bonus depreciation was amended and extended by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (H.R. 4853). Under these amendments, eligible property placed in service after September 8, 2010 and before January 1, 2012 qualifies for 100 percent first-year bonus depreciation. For 2012, bonus depreciation is still available, but the allowable deduction reverts from 100 percent to 50 percent of the eligible basis.

To qualify for bonus depreciation, a project must satisfy these criteria:

The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.

For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization (PDF) (2 pp, 420K), and Instructions for Form 4562 (PDF) (19 pp, 168K).

Advanced Energy Manufacturing Tax Credit

Note: This incentive is no longer available; an act of Congress is required to renew this tax incentive.

The ARRA established the advanced energy manufacturing tax credit to encourage the development of a U.S.-based renewable energy manufacturing sector. The ARRA authorizes the Department of the Treasury to issue $2.3 billion of credits under the program. In any taxable year, the investment tax credit is equal to 30 percent of the qualified investment required for an advanced energy project that establishes, re-equips, or expands a manufacturing facility that produces any of the following:

Qualified investments generally include personal tangible property that is depreciable and required for the production process. Other tangible property may be considered a qualified investment only if it is an essential part of the facility, excluding buildings and structural components.

To be eligible for the tax credit, a project must be certified by the Department of the Treasury. In determining which projects to certify, the ARRA directs the Department of the Treasury to consider those projects that most likely will:

After certification is granted, the taxpayer has up to one year to provide additional evidence that the requirements of the certification have been met and three years to put the project in service.

The Department of the Treasury, in consultation with the Department of Energy is no longer accepting applications for this tax credit. In January, 2010, the IRS certified or rejected applications, and notified the certified projects with the approved amount of their tax credit. Awardees received acceptance agreements from the IRS in April, 2010. Credits will be allocated until the program funding ($2.3 billion) is exhausted. Subsequent allocation periods will depend on remaining funds.

Clean Renewable Energy Bonds (CREBs)
The 2005 Energy Policy Act created CREBs within Section 54 of the U.S. tax code. Unlike traditional bonds that pay interest, tax credit bonds pay the bondholders by providing a credit against their federal income tax. In effect, CREBs provide interest-free financing for clean energy projects.

In 2008, EIEA provided authority for the issuance of an additional $800 million in "new" CREBs, and in 2009, the ARRA allocated an additional $1.6 billion for CREBs. The 2008 legislation also extended the deadline by which bonds must be issued for previous allocations to December 31, 2009.

The types of projects for which bonds can be issued include renewable energy projects utilizing landfill gas, wind, biomass, geothermal, solar, municipal solid waste, small hydroelectric, marine, and hydrokinetic. The Internal Revenue Service (IRS) has determined that facilities "functionally related and subordinate" to the generation facility itself are also eligible for CREB financing. Examples of these auxiliary components include transmission lines and interconnection upgrades.

EIEA of 2008 directs the IRS to allocate the bonding authority equally among electric cooperatives, government entities, and public power producers. Other changes for "new" CREBs are as follows:

The IRS awarded the last round of CREBs in late 2009. It is not currently accepting applications for CREB allocations.

In March 2010 Congress enacted H.R. 2847 (Sec. 301) permitting New CREB issuers to make an irrevocable election to receive a direct payment, a refundable tax credit, from the Department of Treasury equivalent to and in lieu of the amount of the non-refundable tax credit which would otherwise be provided to the bondholder. This option only applies to New CREBs issued after March 18, 2010. An IRS notice (PDF) (14 pp, 40K) provides more guidance on the direct payment option.

Qualified Energy Conservation Bonds (QECBs)
EIEA created a new funding mechanism similar to the CREB model in which a bondholder receives tax credits in lieu of interest. The act authorizes state, local, and tribal governments to issue energy conservation bonds to finance qualified energy conservation projects. The 2008 legislation allows the IRS to distribute up to $800 million in bond authorizations. In 2009, the ARRA provided an additional $2.4 billion in bonding authority. For QECBs issued after March 18, 2010, the bond issuer has the option to receive a direct payment from the Department of Treasury equivalent to the amount of the non-refundable tax credit, which would otherwise accrue to the bondholder. The direct payment comes in the form of a refundable tax credit in lieu of a tax credit to the bondholder.

The definition of qualified energy conservation projects is fairly broad and contains elements relating to energy efficiency capital expenditures in public buildings; renewable energy production; various research and development applications; mass commuting facilities that reduce energy consumption; several types of energy related demonstration projects; and public energy efficiency education campaigns.

An IRS notice (PDF) (12 pp, 28K) contains more details about the bond program, including an outline for the bond cap for each state.

In contrast to CREBs, QECBs are not subject to a U.S. Department of Treasury application and approval process. Bond volume is instead allocated to each state based on the state's percentage of the U.S. population as of July 1, 2008. Each state is then required to allocate a portion of its allocation to "large local governments" within the state based on the local government's percentage of the state's population. Large local governments are defined as municipalities and counties with populations of 100,000 or more. Large local governments may reallocate their designated portion back to the state if they choose to do so. Interested individuals should contact their State Energy Office for information on how the program will be administered in their state.

More information about QECBs is available in the Partnership's funding database.

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Grants/Production Incentives

Deployment of CHP Systems, District Energy Systems, Waste Energy Recovery Systems, and Efficient Industrial Equipment
On June 1, 2009 the U.S. Department of Energy (DOE) announced plans to provide $156 million from ARRA to support projects that deploy efficient technologies in the following four areas of interest:

Applications were due by July 15, 2009.

On November 3, 2009, DOE announced its award of more than $155 million to 41 industrial energy efficiency projects across the country. The nine largest projects, totaling $150 million and leveraged with $634 million in private industry support, will promote the use of CHP, district energy systems, waste energy recovery systems, and energy efficiency initiatives in hospitals, utilities, and industrial sites.

A full list of recipients is available on the DOE's Industrial Technology Program Web site.

Combined Heat and Power Systems Technology Development Demonstration
The Combined Heat and Power Systems Technology Development Demonstration aims to accelerate the development and deployment of CHP technologies and systems to work towards a goal of increasing U.S. electricity generation capacity from CHP. Applications for CHP technology development and demonstration were considered for three areas of interest. The areas of interest are based on the output range of the CHP system and are as follows:

All three areas were seeking applications that could perform research, development, and demonstration of technologies that increase the efficiency and reduce the cost of CHP systems. Applications were due by August 4, 2009.

The large CHP systems have an estimated total budget of $30 million—$15 million from the Department of Energy (DOE). The medium systems have an estimated budget of $30 million—$15 million from the DOE. Small CHP systems have an estimated budget of $20 million—$10 million in DOE cost-share.

Demonstrations funded are aimed at accelerating the project development process through collaborative partnerships with key industry partners. Key technologies are those capable of sizable energy savings and corresponding greenhouse gas emissions while providing a least cost approach to compliance with relevant emissions regulations. All technologies have a defined pathway to commercialization.

Waste Energy Recovery Registry and Grant Program
Title IV of the Energy Independence and Security Act of 2007 contains extensive new provisions designed to save energy in buildings and industries. Subtitle D of the Act focuses on industrial energy efficiency and contains new provisions designed to improve energy efficiency by promoting CHP, waste energy recovery, and district energy systems. EPA is required under EIEA Subtitle D, Part E to establish a recoverable waste energy inventory program.

Subject to appropriations, EIEA also directs the U.S. Department of Energy to develop a waste energy recovery incentive grant program to provide incentive grants to:

EPA's obligation under EISA is to develop an ongoing Survey of major domestic industrial and large commercial sources, as well as the sites at which the sources are located, and to conduct a review of each source for the quantity and quality of potential waste energy produced. This Survey is a necessary first step to gather the data needed to establish the Registry. The purposes of the Survey and Registry are to:

On July 16, 2009, the EPA Administrator signed a draft rule which proposes to establish the criteria for including sources or sites in a Registry of Recoverable Waste Energy Sources (Registry), as required by EISA. The draft rule also proposes the Survey processes by which EPA will collect data and populate the Registry. The proposed rule would apply to major industrial and large commercial sources as defined by EPA in the rulemaking. The proposed rule would not require the installation of new monitoring equipment, rather it would require only that sources above certain threshold levels that wish to be included in the Registry enter specific already-monitored data points into the Survey. The Survey is a software tool that will calculate the quantity and quality of potentially recoverable waste energy.

The proposed rule and relevant background information can be accessed on the Waste Energy Recovery Registry Web site.

EPA Clean Water and Drinking Water State Revolving Funds
ARRA provides funding for states to finance high-priority infrastructure projects needed to ensure clean water and safe drinking water. ARRA provided $4 billion for the Clean Water State Revolving Fund (CWSRF) program, in place since 1987, including funds for Water Quality Management Planning Grants. ARRA also provided $2 billion for the Drinking Water State Revolving Fund (DWSRF) program, in place since 1997. States must provide at least 20 percent of their grants for green projects, including green infrastructure, energy or water efficiency, and environmentally innovative activities. CHP projects at wastewater treatment facilities qualify for grants under the 20 percent set-aside.

The CWSRF program is available to fund a wide variety of water quality projects, including all types of nonpoint source, watershed protection or restoration, and estuary management projects, as well as more traditional municipal wastewater treatment projects. Through the CWSRF program, each state and Puerto Rico maintain revolving loan funds to provide independent and permanent sources of low-cost financing for a wide range of water quality infrastructure projects. Funds to establish or capitalize the CWSRF programs are provided through federal government grants and state matching funds (equal to 20 percent of federal government grants).

The DWSRF program provides public water systems with affordable financing for infrastructure improvements which enable them to comply with national primary drinking water standards and protect public health. States use federal capitalization grant money awarded to them under this program to set up an infrastructure funding account from which assistance is made available to public water systems. Loans made under the program can have interest rates between 0 percent and market rate and repayment terms of up to 20 years. Loan repayments to the state provide a continuing source of infrastructure financing.

More information and program guidance, including grant allocations to each of the states is available through the Clean Water and Drinking Water State Revolving Funds Web site.

Renewable Energy Production Incentive (REPI)
The REPI Program was created by the Energy Policy Act of 1992 and reauthorized by the Energy Policy Act of 2005 to extend through 2026. REPI provides financial incentives for renewable energy electricity produced and sold by qualified renewable energy generation facilities, which include not-for-profit electrical cooperatives, public utilities, state governments, U.S. territories, the District of Columbia, and Indian tribal governments. The facilities are eligible for annual incentive payments of approximately 2.0 cents/kWh for:

To be eligible, qualified renewable energy facilities must be operational before October 1, 2016. Funding is subject to annual appropriation, and the program has historically been under-funded. During years in which there is a funding shortfall, legislation requires DOE to allocate 60 percent of REPI funds to solar, wind, ocean, geothermal, or closed-loop biomass technologies and the remainder to landfill gas, livestock methane, and open-loop biomass projects. If funds are not sufficient to make full payments to all qualifying facilities, payments are made to those facilities on a pro rata basis.

To assist DOE in its budget planning, DOE requests that the owner or operator of a qualified renewable energy facility provide notification at least six months in advance of electricity generation. To receive payment, qualified facility owners and operators submit information, such as monthly electricity generation, to DOE during the first quarter (i.e., October 1 through December 31) of the next fiscal year.

More information, and details about the application procedures, are provided on the REPI's Web site and in the Partnership's funding database.

Energy Efficiency and Conservation Block Grant Program (EECBG)
The EECBG Program provides grants to local governments, tribal governments, states, and U.S. territories to reduce energy use and fossil fuel emissions, and to implement energy efficiency improvements. Through formula and competitive grants, the Program empowers local communities to make strategic investments to meet the nation's long-term goals for energy independence and leadership on climate change.

The EECBG Program is intended to assist U.S. cities, counties, states, territories, and Indian tribes to develop, promote, implement, and manage energy efficiency and conservation projects and programs designed to:

Funding for the EECBG Program under ARRA totals $3.2 billion. Of this amount, approximately $2.7 billion will be awarded through formula grants. In addition, approximately $454 million will be allocated through competitive grants.

All states are eligible to apply for direct formula grants and competitive grants from DOE. Depending on population, cities and counties are eligible for EECBG Program funds either directly from DOE or from the state in which they are located.

To date, DOE has awarded more than 1,200 Energy Efficiency and Conservation Block Grants, totaling over $1.4 billion. The first EECBG formula grant awards were made on July 24, 2009.

On October 19, 2009, DOE issued its competitive EECBG funding opportunity announcement. The announcement seeks innovative state and local government and Indian tribe programs, and will use up to $454 million in ARRA EECBG funds for these competitive grants awarded in the two topic areas described below. Applications were due to DOE by December 14, 2009, and the voluntary letters of intent were due by November 19, 2009.

For complete details, please visit the EECBG Web site.

State Energy Program (SEP)
SEP provides grants to states to address their energy priorities in the areas of energy efficiency and development of renewable energy technologies. The ARRA appropriated $3.1 billion for the program for fiscal year 2009. In order for a state to be eligible for these funds, it must commit to all three of the following:

States will have discretion over how the money is distributed. Local governments and others interested in developing CHP projects should contact their State Energy Office to learn more about their state's process for distributing grants. DOE has posted the list of State Energy Offices.

The Weatherization and Intergovernmental Program in the DOE Office of Energy Efficiency and Renewable Energy manages SEP. More information about SEP can be viewed on the SEP Web site and in the Partnership's funding database.

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