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The US House of Representatives has moved a step closer to extending cash grant payments to renewable energy projects. But it remains unclear if the bill will pass Congress before the measure expires at the end of the year.

"I would put the odds (of it passing) at around 50%," says Keith Martin, a lawyer in the Washington office of Chadbourne & Parke LLP.

Representative Sander Levin, a Democrat from Michigan and chairman of the tax-writing Ways & Means Committee, released the draft text of a bill in late July.

If passed, the bill would give developers two more years to qualify for a cash grant equal to 30% of eligible project costs. Under current rules, projects have to start construction this year and come online by the end of 2012 to receive the payment.

"The difficulty is not in the House," says Martin. "The House could move on this very quickly. It is the Senate."

According to Martin, there are three problems in the Senate, one of which is the near impossibility of getting anything done in the current political environment. "The (centre-right opposition) Republicans have the whole place tied up in knots," says Martin. "Almost nothing is going through."

A second is that key Senate members have never been keen on the cash grant. "I do not think they like the look of the Treasury Department writing cheques to big companies," explains Martin.

The third difficulty is the cost attached to the extension, coming as it does at a time when the US budget deficit is projected to reach a record $1.47 trillion.

A staff analysis by the Joint Committee on Taxation pegs the cost of the proposed extension at $4.8 billion over five years, decreasing to $2.7 billion over ten years because the government will have recovered some of the money in the form of tax payments on revenue from the projects.

With lawmakers back at work this month after their summer recess, and November's mid-term elections looming, Levin will have to decide whether to proceed with the bill in the light of expected opposition in the Senate.

The cash grant extension is only one of the provisions in the bill, which carries a total price tag of $25.1 billion, and Levin is required by law to announce where he will find the revenue to offset that cost.

"I think he will be loath to do so if it is just a wasted effort," says Martin, adding that staff at the Ways & Means Committee place the odds of getting an extension this year at only 40%.

Other options

The US wind industry says that without the extra two years of grants proposed by Levin, projects that start construction in 2011 or 2012 will only have the choice of taking either an investment tax credit (ITC) - which allows them to deduct 30% of the capital cost of the wind farm in the year the project comes into service - or a $0.022/kWh production tax credit (PTC) - paid on the energy produced over the first ten years of a project's life.

The problem is that most project developers have no tax appetite to use either the ITC or the PTC, forcing them to find equity investors who do.

The bottom fell out of that market as the global financial crisis took hold in the autumn of 2008 and, although so-called tax- equity investors are starting to return to the market, they are limited in what they can do.

The equation is further complicated by the availability to wind projects of another tax benefit, known as accelerated depreciation.

Most developers do not have a big enough tax bill to use this deduction, either, so need to pass it along to tax-motivated investors as well.

With the cash grant in place, those tax investors only have to take one deduction instead of two on every wind project, which stretches out their ability to invest and allows more wind farms to get built.

"There is still a limited supply of tax capacity to absorb these tax subsidies, and right now they are able to spread that scarce capacity over a larger number of transactions," explains Martin.

Once the cash grant programme ends, developers will be forced to go back to relying on tax-equity investors to use both the PTC and the depreciation benefit, which will use up available tax appetite much more quickly.

"There are 16 active tax-equity investors right now," says Martin. "But I'm told that between three and five of them would drop out of the market pretty rapidly if there were no cash grants."

Even if Levin's extension passes, that too will add complications for developers.

The bill would actually convert the cash-grant programme into a tax-refund programme to avoid having to convince the House and Senate Appropriations committees to commit to new spending for the measure.

"The way it works is that they pretend you over-paid your taxes by the amount of the grant and then you apply to the Internal Revenue Service for a refund," says Martin.

The benefit would be the same as the cash grant, but developers would have to wait as much as a year to get the money, as opposed to the current 60-day turnaround. That, in turn, could complicate financing arrangements (“uåX˜äŠÊ˜·³Ç, April 2010).

In addition to the cash grant extension, Levin's bill would give offshore wind projects until 2016 to qualify for the cash grant. Currently, they must be in service by 2012 to qualify.

The bill also proposes adding $6.5 billion in renewable-energy manufacturing tax credits to the $2.3 billion in last year's stimulus bill. It now comes down to how Levin reads the Senate's mood.