Tax Update Keith Martin

Transcription

1 Tax Update Keith Martin

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3 Four large pivot points are expected in the US power market in the next year or two. These are events that will create both winners and losers. Private equity and hedge funds like them because change creates opportunities.

4 The looming carbon controls are a huge event financially. The value or cost of carbon allowances required by the publicly-traded US utilities over the first 10 years have a present value of roughly 40% of the market capitalization of the entire sector. windfall profits SEC disclosures tax treatment

5 The House voted in August for a federal renewable portfolio standard that would require 2.75% of electricity to be supplied from renewables starting in 2010, increasing to 12.25% in post-2000 plants repowering cofiring increments 4% efficiency

6 Renewable sources are solar, wind, ocean, tidal, geothermal, biomass, landfill gas and incremental hydropower. Municipal solid waste does not count. $30 compliance payment state RECs

7 Federal tax subsidies pay as much as 63% of the capital cost of some types of renewable energy projects. The third pivot point is the expectation that Congress will extend these subsidies. outlook

8 A fourth pivot point is the growing ratepayer backlash against high electricity prices. In Illinois, this led to forced rebates even for some wholesale generators. The Maryland legislature voted to disband the public service commission after it approved rate increases. Maryland has hired Kaye Scholer to sue wholesale generators. future conferences

9 There are a lot of tax subsidies currently in play in Congress for renewable energy projects. Mexico or Brazil

10 Production tax credits for wind, geothermal, biomass and other renewable energy projects are almost certain to be extended. The House voted to extend them by 4 years and the Senate taxwriting committee favors extending them by 5 years. ocean msw gasification 35% cap inflation adjustment net metering

11 A 30% investment tax credit for solar and fuel cell projects would be extended another 8 years by both the House and Senate. Congress would also drop a bar against regulated utilities owning solar projects. AMT

12 A tax credit of $5.68 a ton for making coal less polluting so-called refined coal would be extended only under the Senate bill. The Senate would require a greater reduction in pollution. 50% market value 20% NOx 40% SO2 or mercury

13 The House voted to authorize another $2 billion in clean renewable energy bonds. The Senate would authorize another $900 million in each of the next four years. Applications for a 2007 round of $400 million in bonds had to be submitted by July 13. $3.2 million $31 million 709 applications in 2006

14 The Senate wants a 10% investment tax credit for cogeneration facilities. To be eligible, the plant would have to be placed in service by It would have to have at least 60% energy conversion. Clinton

15 The IRS is working on guidelines for the partnership flip deals that wind developers are using to monetize the tax subsidies on their projects. The guidelines are expected this fall % residual no partner guarantees

16 Tax equity returns have fallen below 6% in large portfolio wind deals. They are in the low 7% range for aggregated rooftop solar deals. The equity will require another 200 to 250 basis points in return if there is debt at the project level. deal volume

17 One of five recurring questions this year has to do with conversions of fossil-fuel power plants in California to run on biomass or upgrades of existing biomass plants. The question is whether the plant will be considered a different plant after the conversion or upgrades so that it qualifies for 10 years of production tax credits test facility decommissioning costs

18 Wind farms that sell power under contracts that were originally signed before 1987 do not qualify for production tax credits unless the contracts are amended. California utilities

19 Prepaid service contracts are being negotiated with several California munis. This is a contract where the muni prepays for a portion of the electricity it will be delivered over the contract term in exchange for a discount. The developer reports the prepayment as income over time. soft debt lower cost of capital lessee economics

20 Many solar developers in California fail to take into account the rebate they expect from the state or local utility as taxable income. These rebates are usually assigned to the solar developer by the offtaker for the electricity. Some developers try to spread the income over time. prepaid PPA lease

21 The IRS view is that power plants that run on trash, but gasify the garbage before converting it into electricity, do not qualify for production tax credits or 5-year depreciation. ruling request biomass gasification?

22 Percentage of Americans in 1983 who thought it was possible to start out poor in this country and become rich : 57%

23 Percentage who think this today: 80%

24 A man asked on my way in, Has anybody told you you look like Ted Kennedy? I said, Well yes, they had. He said, It must make you mad as hell. Senator Ted Kennedy in a speech last month.

25 Tax Update Keith Martin