New Markets, Energy Credits to Help Finance Power Facilities in Pacific Northwest
By Caitlin Jones
5 min read
Tax Credit Advisor, August 2009: Two earth-friendly energy projects in the Pacific Northwest that are combining federal new markets and renewable energy tax credits will do good for their communities by doing well financially.
One project is a wind farm that will help generate additional revenues for the social services programs operated by a local nonprofit. The second is a new biomass plant that will benefit the environment and the economy of the sponsoring Native American tribe.
In both cases, the energy facilities will be funded in large part by capital generated by the federal new markets tax credit (NMTC) and federal energy tax credits.
Both facilities were described by speakers at a recent conference in Washington, D.C. sponsored by Novogradac & Company LLP.
Wind Farm Project
The roughly $17 million wind farm project is located near Aberdeen, Wash., a city of about 16,000 on the state’s west coast.
The six megawatt capacity wind farm project, which hadn’t closed yet as of mid-July, will be developed by a nonprofit social services organization, Coastal Community Action Program (CCAP) on land it owns.
Colin Rowan, of United Fund Advisors (UFA), Portland, Ore., said CCAP should receive about $11 million in revenues each year from selling the electricity generated by the wind farm to the local utility company. “That money will go into their services, help them continue to do what they do,” said Rowan. Noting the group’s current annual operating budget is about $7 million, he said the extra revenues will enable CCAP to reach “further into the community.” CCAP provides critical help to predominantly low-income households in the rural community, including housing services, health care, food, employment, and other aid.
Rowan said the project is an example of how federal new markets and energy tax credits can be harnessed and combined for a project that will satisfy the NMTC program’s community impact goals (e.g., job creation, benefiting low-income households). “You’ve got a great mission-driven underlying organization that provides critical services to the low-income community, and they’re going to now generate revenue from this wind farm,” he explained.
Two community development entities (CDEs)are providing allocations of new markets tax credit authority for the wind project. US Bancorp Community Development Corporation (CDC), one of two tax credit investors, will claim new markets and energy tax credits. The second investor is Wells Fargo.
The federal energy tax credits claimed will be the 30% investment tax credit (ITC). Steve Cramer, of US Bancorp CDC, indicated that the use of the ITC, rather than the energy production tax credit (PTC) made it easier for his firm to underwrite the deal and get comfortable with it as an investment. “We don’t know how to really underwrite the risk of the wind blowing,” he said, referring to the PTC. With the ITC, the credit amount is known and claimed all in the first year. With the PTC, the credit amount generated is uncertain and varies, since it’s based on the amount of electricity produced each year.
Cramer said US Bancorp CDC decided last year to “put our toe in the water” on renewable energy tax credits, and did about six deals, all involving ITCs, totaling $80 million. He anticipated his firm will probably do another $120 million in transactions in 2009, all solar ITC deals.
A master lease pass-through structure has been used for the Aberdeen transaction. CCAP made a leveraged loan for the project from a grant received from the state.
Biomass Plant
In rural North Central Oregon, the NMTC and PTC are being paired to help fund a new biomass energy plant to be built on the reservation of The Confederated Tribes of Warm Springs, which consist of the Warms Springs, Wasco, and Paiute Native American Tribes.
The plant, to be located by the tribal lumber mill, will burn wood chips to generate “clean” electricity that will be sold. Portland, Ore. attorney Karen Williams, of Lane Powell PC, which structured the deal, said the plant will produce a net 15.8 megawatts of power à enough for 15,000 homes.
Williams said the project will create additional jobs and economic and environmental benefits for a tribe of 4,000 people that has a 60% unemployment rate. In addition to 25 to 30 new jobs at the biomass plant, the project is expected to create at least 50 extra jobs in nearby forests, which will supply part of the fuel for the biomass plant. This will include debris generated by a forest restoration and thinning effort designed to keep the forests at a healthy level and reduce the threat of fires common in the region.
Another source of fuel for the plant will be wooden pallets that a major tire company has piled up for years in landfills.
Williams described the biomass plant project as a “sustainable perfecta” for the tribe. “We end up with economic, social, and environmental benefits,” she noted.
Williams said the roughly $54 million project will use new markets tax credit allocations from three CDEs.
The tribe will lease the plant to a taxable entity à the tax credit tenant à that will operate the plant and receive tax credits. As a tax-exempt entity, the tribe has no use for the tax credits itself.
Williams said critical requirements for the success of a biomass project include having a power purchase agreement, qualified contractor, and long-term fuel supply for the plant lined up at the outset.
