Financing Advanced Biofuels, Renewable Chemicals and Bioenergy

Transcription

1 Financing Advanced Biofuels, Renewable Chemicals and Bioenergy Pitfalls And Lessons Learned: Status Of Available Domestic And International Financing Mechanisms Pacific Rim Summit on Industrial Biotechnology and Bioenergy Panel: Utilizing Strategic Partnerships to Grow Your Business -- Financing Fundamentals -- Debt Presentation December 7-9, 2014 Westin Gaslamp Quarter Hotel, San Diego, California Mark J. Riedy Partner Kilpatrick Townsend & Stockton LLP th Street, NW Work: Cell: Kilpatrick Townsend

2 Mark J. Riedy, Esq. Has Represented Clients In Renewable And Conventional Energy (Fuels And Power And Infrastructure) Project Finance Since 1978, Government Funding Initiatives (Grants, Loans, Loan Guarantees, etc.) Since 1980, And Clean Tech Private Placements Since 1999, Domestically And Internationally. A Founder And Original General Counsel: Renewable Fuel Association Clean Fuels Development Coalition Since Clean Fuels Foundation Since American Council On Renewable Energy/Biomass Coordinating Council Since Latin American Council On Renewable Energy Since Assisted Clients In The Creation Of The Original Alternate Energy Tax Incentives In The 1978 And 1980 Tax Acts, And Their Expansions And Extensions Thereafter. Assisted Clients In The Renewable Fuels And Renewable Power Industries In The Development Of Provisions In The 1978 Public Utility Regulatory Policies Act, 1983 Caribbean Basin Economic Recovery Act, 1990 Clean Air Amendments (And Reformulated Gasoline Regulations Thereto), 1992 Energy Policy Act, 2005 Energy Policy Act, And The 2007 Energy Independence And Security Act, 2008 and 2014 Food, Conservation And Energy Acts, And 2009 American Recovery And Reinvestment Act. Named One Of The Top 100 Bioenergy Leaders Worldwide BiofuelsDigest (#67), (#50), and (#56). AV Preeminent Rating By Martindale-Hubbell For Last 17 Years. Named One Of Washington, DC & Baltimore s Top Rated Lawyers For Business & Commercial By Legal Leaders For 2012, 2013 And Vice Chairman For Project Finance, American Bar Association, Section For Energy & Natural Resources Since Kilpatrick Townsend Ranked #1 Worldwide For Infrastructure Construction Chambers 2011, 2012 And Graduated With JD Georgetown University Law Center And BA University of Michigan Summa Cum Laude And Phi Beta Kappa. 1

3 I. Where Were We Grants For Pilot And Demonstration Scale Projects DOE R&D grants for advanced carbon capture and storage technologies and efficient clean fossil energy systems. Integrated Biorefineries Grant Program. Advanced Marine and Hydrokinetic Grant Program. Clean Energy Fund. USDA Transportation Fuels and Biofuels: Rural Energy for America Program ( REAP ) (Section 9007). DOT Transportation Investment Generating Economic Recovery ( TIGER ) Grant Program. Federal Transit Administration ( FTA ) Clean Fuels Grant Program. FTA Transit Investment in Greenhouse Gas and Energy Reduction ( TIGGER ) Grant Program. EPA Clean Diesel Grant Program. National Science Foundation Clean Coal-to-Liquid or Gaseous Fuel Technologies Grant Program. 2

4 I. Where Were We (cont d) Loan Guarantees DOE Section 1703 (uncapped senior debt). Section 1705 (uncapped senior debt). USDA Section 9003, Section 9007, and the Business & Industry ( B&I ) Program (senior debt at $250MM, $25MM, $10MM-$25MM (potentially up to $40MM), respectively, at 60-90% of senior debt guaranteed) and Rural Utility Service ( RUS ) Program (uncapped senior debt for electric power only). Tax Incentives ARRA Section 1603 Cash Grant. Section 48 of the IRS Code ( IRC ) Investment Tax Credit ( ITC ). Section 45 of the IRC Production Tax Credit ( PTC ). Bioenergy Tax Credits and Bonus Depreciations for Renewable Power, Biodiesel, Green Diesel and Cellulosic Biofuels (100% bonus depreciation through 2011/ 50% bonus depreciation through 2013). 3

5 II. Where Are We A. Grants For Pilot And Demonstration Scale Projects 1. DOE Clean fossil fuels (all small scale projects, defined as projects under $200 million): DOE was appropriated $359 million in FY2012, $350 million in FY2013, and $120 million in FY2014 for small-scale R&D projects. No funding was appropriated for large-scale R&D projects. To date, some of these FY2014 funds and remaining FY2013 funds were distributed as follows: Opportunity Title Amount Each Award Size and Cost Share Deployment of Clean Energy and Energy Efficiency on Indian Lands Alternative Fuel and Advanced Vehicle Deployment Initiatives $4,000,000 - $7,000,000 $50,000 - $1,000,000 and 50% cost share $4,500,000 $250,000 - $1,000,000 Targeted Algal Biofuels and Bioproducts $25,000,000 $500,000 - $10,000,000 and 20% cost share RFP Issued Concept Paper Due Date 7/16/14-10/2/14 7/16/14-10/1/14 RFP Close Date 9/23/14 10/30/14 12/15/14 4

6 II. Where Are We (cont d) A. Grants For Pilot And Demonstration Scale Projects 1. DOE (cont d) Bioenergy: $15 million for pilot-scale projects closed. $35 million for biomass R&D in Biomass Research & Development Initiative closed. $40 million for military advanced biofuels $20 million for each of FY2012 closed and FY2013 closed. $10 million for advanced biofuels and biochemicals closed. $10 million for algae-to-biofuels (20% cost share) (announced 1/17/13, concept paper due 2/11/13 and full application due 4/1/13) closed. $10 million for high-performance biofuels (each award size from $0.5 to $2 million and 20% cost share) (announced 2/25/14, concept paper due 3/31/14 and full application due 5/23/14) closed. $20 million ARPA-E program for natural gas to clean liquid fuels (20% cost share) (announced 3/27/13, concept paper due 4/22/13 and full application due at a later date to be announced by DOE) closed. DOE was appropriated $280 million for advanced biofuels, with $28 million available until 9/30/15, in the Omnibus Appropriations Act of $10 million for advanced biofuels (20% cost share) (announced 4/15/14, concept paper due 5/1/14 and full application due 6/13/14) closed. 5

7 II. Where Are We (cont d) A. Grants For Pilot And Demonstration Scale Projects (cont d) 1. DOE (cont d) Advanced Marine and Hydrokinetic Grant: $7.25 million to 6 awardees closed. Clean Energy Fund for storage projects: $14.3 million to 3 awardees closed. 2. EPA Bioenergy: $20 million in grants for clean diesel projects closed. Clean Diesel: $5 million in grants for reducing emissions from marine and inland water ports located in areas of poor air quality open until 12/11/ DOT Transportation Investment Generating Economic Recovery ( TIGER ) Grant Program open, on-going rolling grant. FTA Clean Fuels Grant Program (competitive grant program) closed. FTA Transit Investment in Greenhouse Gas and Energy Reduction ( TIGGER ) Grant Program (competitive grant program) closed. 4. USDA On February 11, 2014, the House (Rep. David Loebsack (D-Iowa)) introduced a bill (H.R. 4051), the Refuel Act, which would add a new Section 9014 to the Farm Security and Rural Investment Act of 2002 to establish a competitive grant for renewable fuels. If this bill is passed into law, the grant will be funded by 1% of the royalties received by the U.S. for the production of oil under oil and gas leases granted under Section 8 of the Outer Continental Shelf Lands Act. Each individual grant awarded under the Refuel Act would be capped at $100,000. 6

8 II. Where Are We (cont d) A. Grants For Pilot And Demonstration Scale Projects (cont d) 4. USDA (Cont d) Section 9007 offers up to $500,000 in grant funding for projects, $12.38 million in total available for grants and $57.8 million for loan guarantees for FY2014. The Farm Act of 2014 provides $50 million for loan grants and loan guarantees. This funding would be scored and increased by OMB by nearly 5x, or $250 million, and possibly 7x, $350 million, plus carry-over money from previous rounds. 5. National Science Foundation $13 million grant program for clean coal-to-liquid or gaseous fuel technologies closed. 6. The Following New Funding Statutes Were Enacted In 2014: Farm Act of 2014 with mandatory funds and authorized discretionary funds. Omnibus Appropriations Act of 2014 with appropriated funds. 7. Foreign Funding for Clean Energy Technologies and Projects Australia United Kingdom EU Biomass Initiative Canada India Brazil 7

9 II. Where Are We (cont d) A. Grants For Pilot And Demonstration Scale Projects (cont d) 8. Domestic Funding for Clean Energy Technologies and Projects President Obama has requested that Congress pass into law the $10 billion Rebuild America Partnership Plan ( RAPP ) to provide loans and loan guarantees for energy, transportation and water infrastructure projects. He also has proposed a $2 billion Energy Security Trust from oil and gas leasing revenues for breakthrough energy technologies. This Trust would provide $200 million/year for each of 10 years to reach this goal. Connecticut Green Fund ($50 million plus established July 2011). New York Green Bank ($1 billion plus established January 2013 and will be located in NYSERDA NY State Energy R&D Authority. Funding is available for clean energy and energy efficiency projects. The NY Green Bank principally will provide guarantees as credit enhancement and loans. Assuming a conservative default rate of 10%, 1 million of those guarantees could mobilize more than $100 million in construction capital.) On September 10, 2013, Governor Cuomo authorized the commencement of the fund and the reallocation of approximately $165 million in already-available NY State funds. In January 2013, New York contributed another $53 million in its share of the Regional Greenhouse Gas Initiative ( RGGI ). Together, these contributions from the New York State government total $218 million. The New York Green Bank currently is accepting funding applications on a rolling basis. 8

10 II. Where Are We (cont d) A. Grants For Pilot And Demonstration Scale Projects (cont d) 8. Domestic Funding for Clean Energy Technologies and Projects (cont d) California Green Bank ($13 billion plus established in 2012). These funds are available for sales and use tax exclusion for California-based manufacturing, advanced transportation projects that reduce greenhouse gases, clean diesel truck lending, and tax-exempt project bonds that reduce pollution. California has a $100 million grant program for clean fuels and vehicles. California s governor proposed to earmark $30 million of this amount for Anaerobic Digestion ( AD ) and waste-to-biofuel projects. AD technologies are expected to grow in California, New York, and New England in the next 2 years. California, in particular, is expected to double its AD facilities each year in the next few years. AD technologies are promising in that they may eliminate organic waste while enabling market participants to meet renewable fuel standards. Hawaii Green Bank to be funded up to $150 million by green bonds and may become a model for other states. State funds created from shale gas revenues Alaska, North Dakota, Pennsylvania. 9

11 II. Where Are We (cont d) B. Loan Guarantees 1. DOE a. Section 1703 Clean Fossil Energy Loan Guarantees Recently is being used by DOE with a redirection of previously appropriated funding of $8 billion (with credit subsidies paid by the borrower, and not DOE) for advanced fossil energy technology use in electrical and non-electrical appropriations. Senior debt amounts are uncapped. 6 rounds 2 parts per round: Round 1, Part 1 less than $1 billion of senior debt for 2 applicants. Round 2, Part 1 more than $1 billion plus of senior debt for 3 applicants. Round 3, Part 1 less than $4 billion in senior debt for 5 applicants. Most applicants are asking for 80% Federal Finance Bank coverage, despite the fact that DOE strongly encourages colending and seeks to commit no more than 65% of total project costs to senior debt. As such, to date, DOE has received 10 applicants representing approximately $6 billion in senior debt requests. Three invitations have been made to applicants into Part 2. No Conditional Commitments issued to date. Fossil energy is defined broadly as coal, natural gas, oil, shale gas, coal based methane, methane hydrates, and other fossil sources. On July 9, 2014, DOE lowered the application fee to $50,000 (non-refundable) from $75,000 for a Part 1 application fee. It also reduced the Part 2 Application fee of $350,000 for senior debt at or exceeding $150 million or $100,000 for senior debt less than that amount, down from a previously steep and non-refundable $925,000 fee. 10

12 II. Where Are We (cont d) B. Loan Guarantees 1. DOE (cont d) a. Section 1703 Clean Fossil Energy Loan Guarantees (cont d) This program is available for projects using natural gas and natural gas-biomass blends in Fisher Tropsch and other conversion units to create clean fuels. DOE issued an RFP for nuclear energy on September 30, 2014 in the amount of $12.6 billion. These programs generally use the Federal Finance Bank at 37.5 basis points over Treasury s plus a credit spread (based on the project s credit rating e.g. a BB+ rated project will provide an additional 72.5 basis points or = 110 basis points over the effective Treasury rate) for approximately 50%-70% of total project costs for an average of 22-year tenors. Must be sited in the U.S. Need to demonstrate significant GHG emissions reductions use a Lifecycle Analysis Report. Must be new and unique technology, i.e. not three (3) or more identical technologies running commercially in the U.S. foreign commercial projects are not counted against this limit, with a site in the U.S. Must demonstrate reasonable likelihood of repayment. 11

13 II. Where Are We (cont d) B. Loan Guarantees (cont d) 1. DOE (cont d) b. Section 1703 Renewable Energy and Energy Efficiency Loan Guarantees On July 3, 2014, DOE issued a Loan Guarantee Final Solicitation for renewable energy and energy efficiency projects ( REEE Solicitation ) for an approximate $2.5 billion in funding / $169 million in credit subsidy. The program is to be awarded in 5 rounds (2 Parts per round) on a competitive basis, with Round 1, Part 1 applications due on October 1, The Part 1 Application is $50,000 (nonrefundable) with a Part 2 Application fee is $350,000 for senior debt at or exceeding $150 million or $100,000 for senior debt less than that amount. As part of the program, unlike for clean fossil energy, DOE has $169 million to pay for credit subsidy costs which it hopes to keep to less than 10% of the senior debt provided. DOE would apply up to $17 million in credit subsidy funds for credits subsidies at or exceeding 7%. Credit subsidies below 7% would be self-funded at financial closing. However, if it runs out of credit subsidy, or is applied in small amounts to all projects, you may be able to buy down the upfront credit subsidy paid from equity, by increasing the interest rate on the loan over the term of the loan guarantee. The FFB rates are similar to those above stated for the Clean Fossil Energy Loan Guarantee Program. 12

14 II. Where Are We (cont d) B. Loan Guarantees (cont d) 1. DOE (cont d) b. Section 1703 Renewable Energy and Energy Efficiency Loan Guarantees Must be located in the United States. Must use one of the following technologies: renewable energy systems; efficient electrical generation, transmission, and distribution; or efficient enduse energy technologies. Need to demonstrate significant GHG emissions reductions use a Lifecycle Analysis Report. Must be new and unique technology, i.e. not three (3) or more identical technologies running commercially in the U.S. foreign commercial projects are not counted against this limit, with a site in the U.S. Catalytic technologies are encouraged. Must demonstrate a reasonable likelihood of repayment. DOE expects a good number of applicants on or before October 1, 2014 at the Round 1, Part 1 due date. c. Other DOE Programs The DOE also has a $16 billion Advanced Technology Vehicle Manufacturing ATVM Loan Guarantee Program which accepts applications on a rolling basis. DOE issued the Nuclear Loan Guarantee Program at approximately $12.6 billion. 13

15 II. Where Are We (cont d) B. Loan Guarantees (cont d) 1. DOE (cont d) c. Other DOE Programs (cont d) The Clean Fossil Energy Program is not available to applicants who already have received federal funding in any amount (but NMTCs and ITCs/ PTCs do not count). The Renewable Energy Loan Guarantee Program has a similar restriction. The difference is that DOE discourages, but does not prohibit, renewable energy applicants who have received federal funding including federal offtakes, as it states that it can increase the credit subsidy potentially very substantially. Since its 2005 inception, DOE has closed 33 loan guarantees in the amount of $34 billion with $17 billion disbursed to date (28 in Sections 1703 and 1705 (including one nuclear) and 5 in the Advanced Technology Vehicles Manufacturing Loan Guarantee ( ATVM ) Program) a 98% success rate. Kilpatrick attorneys have worked on each of these closings either when inside DOE or on the sponsor side of the specific transaction. Secretary Moniz addressed the National Press Club on February 19, 2014, stating that DOE still has nearly $40 billion available for funding all types of energy technologies. The FY2014 Budget proposed to provide $282 million for advanced biofuels (a 46% increase over FY2012), $615 million for renewable power (a 29% increase over FY2012) and $575 million for advanced vehicle technologies (a 75% increase over FY2012). The Omnibus Appropriations Act of 2014, however, provided $280 million for advanced biofuels, $162 million for renewable power and $6 million for advanced vehicle technologies. Therefore, additional RFPs for grants should continue to become available for FY

16 II. Where Are We (cont d) B. Loan Guarantees (cont d) 1. DOE c. Other DOE Programs (cont d) Section 1705 expired. On March 4, 2014, President Obama introduced a proposed budget for FY2015 ( FY2015 Budget ), which would eliminate $4 billion per year in fossil fuel subsidies, but provides $27.9 billion in discretionary funds for the Department of Energy, the majority of which targets investments in clean energy and reduce carbon pollution. The FY2015 Budget provides $23.7 billion in discretionary funding to the Department of Agriculture. 2. USDA a. Section 9003 This Loan Guarantee Program had no FY2012 or FY2013 mandatory or appropriated funds, although funds remain from previous fiscal years. As a result, USDA issued a FY2014 First Round NOFA for $181 million on October 2, 2013 for applications required to be submitted on or before January 30, USDA began issuing the awards on September 30, Approximately 8 applicants submitted responses to the FY2014 First Round NOFA representing approximately $510 million of senior debt for a currently available $181 million for senior loan guarantee coverage. However, additional funds may become available to increase the available funds to qualify more of the applicants for conditional commitments. Kilpatrick attorneys are now 13 for 13 in client finalists and/or awards from USDA. 15

17 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) a. Section 9003 (cont d) Moreover, the Farm Act of 2014 provides $100 million for FY2014 and $50 million for each of FY2015 and FY2016 in mandatory funding and opened the program to renewable chemicals and biobased products. The funding for biobased products is subject to a 15% funding restriction on biobased product manufacturing projects (defined as the development, construction, and retrofitting of technologically new commercial-scale processing and manufacturing equipment and required facilities that will be used to convert renewable chemicals and other biobased outputs of biorefineries into end-user products on a commercial scale ) for each of FY2014 and FY2015. The language appears to distinguish (i) the further refining of renewable chemicals and other biobased products as feedstocks to higher-value products from (ii) the original refining of the renewable chemicals and biobased products from biomass feedstock. The latter (or original refining) seems to be unrestricted, while the former (or further value-added refining) seems to be restricted. 16

18 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) a. Section 9003 (cont d) That said, USDA may require a renewable chemical project to produce some amount of advanced biofuels in the original refining, which is unrestricted for funding, due to a glitch in the legislative process per Farm Act However, further value-added, yet restricted funding, renewable chemical refining is not subject to the simultaneous production of advanced biofuels. Furthermore, renewable chemicals and bio-based products, unlike advanced biofuels, are able to use corn starch feedstock as the Farm Act 2014 did not restrict its use. Earlier statutes only restricted its use to produce biofuels. No mandatory funding is available for FY2017 and FY2018. These funds are available until expended. This mandatory funding amount of $100 million for FY2014 may be subsidy-scored between 3 to 1 and 4 to 1 by the OMB (based upon past program subsidy scoring) to permit potentially $300 million to $400 million (plus any carry-over from earlier years) of loan guarantee authority. Discretionary funding is set at $75 million for each of FY2014 through FY2018. However, since the program s inception, Congress has never appropriated additional funds to it in any fiscal year. USDA is preparing a Notice of Proposed Rulemaking for the changes in the 2014 Farm Act for Renewable Chemicals and is drafting a NOFA for the FY nd Round Funding. USDA is scheduled to issue each of these notices in 4 th Quarter 2014 and in the range of $300 million to $400 million. 17

19 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) b. Section 9007 This Loan Guarantee Program has a senior debt cap of $25 million for commercial renewable power and fuels projects. USDA issued a NOFA for approximately $80 million in late 2013 from carry-over funding. The Farm Act of 2014 provides mandatory funding in an amount of $50 million for FY2014 and each fiscal year thereafter. This mandatory funding amount of $50 million for FY2014 may be subsidy-scored by the OMB, as in earlier years, at approximately 5 to 1, providing potentially $250 million plus any carry-over funds from earlier years for loan guarantee and grant authority. That said, USDA recently stated that the subsidy score could rise to 7 to 1, providing potentially $350 million in such funding. Discretionary funding is $20 million for each of FY2014 through FY2018. Unlike Section 9003, Section 9007 was not expanded to renewable chemicals and biobased products. This program is an alternative for advanced biofuels and renewable power. It can also be added to available B&I loan guarantees to increase senior debt coverage by another $25 million, or a total of $50 million. 18

20 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) b. Section 9007 As of September 18, 2014, USDA issued over $12 million in grants and over $56 million in loans, for a grand total of over $68 million in both grants and loans. Of this amount, two projects received both grants and loans, 15 projects received grant awards greater than $50,000 each, 4 projects received grant awards greater than $100,000 each, and 1 project received the largest grant award at $290,000. The next round, to be announced at a future date, will make available $70 million in grant funds and $200 million in guaranteed loan funds. 19

21 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) c. B&I Program It had $850 million for FY2012, approximately $425 million through the March 27, 2013 Continuing Resolution and another $425 million through the new September 30, 2013 Continuing Resolution. The Omnibus Appropriations Act of 2014 provided nearly $1 billion in B&I funding for FY2014. On May 8, 2014, USDA rescinded the artificial $10 million ceiling imposed since mid-year FY2011 until 1 st Quarter FY2014 for the B&I Program. As a result, USDA now permits the senior debt ceiling of $10 million for B&I to increase back to its historical level of $25 million at the Administrator s discretion, and the Secretary may approve loans in excess of $25 million up to $40 million for rural cooperative organizations. USDA also issued a Notice of Proposed Rulemaking for the B&I Program the first in more than 10 years in the near term on September 15, Written comments are due on or before November 14, As part of written comments, we must have removed each of the 51% US ownership restriction and rural location mandate, as earlier accomplished in the FY2011 Section 9003 rulemaking. Further, USDA will permit loan guarantees in each of Section 9007 and B&I to be stacked together to increase senior debt amounts up to $50 million. 20

22 II. Where Are We (cont d) B. Loan Guarantees (cont d) 2. USDA (cont d) In non-loan guarantee programs, USDA has the following approximate mandatory and discretionary funding amounts from the Farm Act of 2014: Section 9004 Repowering Program -- $22 million. Section 9005 Advanced Biofuels Payments Program -- $35 million. Section 9008 Biomass R&D Program -- $23 million. Section 9011 Biomass Crop Assistance Program -- $25 million. Each of these programs also may have carry-over mandatory funding amounts from earlier years. d. Rural Utility Service ( RUS ) Program The RUS Program has unlimited funds for greenfield power projects and brownfield power project expansions. This funding is available for renewable and fossil electricity of all types. The funding is at 12.5 basis points over US Treasuries for the shorter of 35 years or the term of the PPA on either a corporate finance basis (100% recourse financing with a corporate guarantee) or project finance basis (non-recourse financing with 75% debt and 25% equity). Projects can be located anywhere. However, retail electricity sales must be made in rural areas of 20,000 person census tracts or less closed $9 billion in senior debt, 2012 $7 billion, and 2013 $4.5 billion. 21

23 II. Where Are We (cont d) C. Tax Incentives 1. ARRA Section 1603 Cash Grant program qualification has expired. In construction is the new trigger for the 10-year PTC and ITC (where PTC eligible projects irrevocably elect the ITC) in lieu of placed in service by 12/31/13 (wind), 12/31/13 (biopower) or 12/31/13 (geothermal), as a result of the enactment of H.R. 8, The Taxpayer Relief Act of 2012, January 2, 2013, subject to a potential further extension. IRS issued regulations thereto on April 15, 2013, providing a safe harbor that requires a project to be placed in service by the end of The placed in service trigger remains, however, like it does for solar power (through 12/31/16), if biopower, wind power, geothermal power and marine power elected and met the requirements to take the ARRA Section 1603 Cash Grant (available only until 12/31/13) in lieu of the PTC. The ARRA Section 1603 Cash Grant and ITC programs were the most significant mechanisms/ incentives to spur significant project finance for the renewable power industry. 2. ARRA Section 1603 Cash Grants, ITC and PTC were to be subject to a reduction of 7.6%, when the Sequestration took effect on March 1, 2013, after being extended from January 2, However, the Sequestration percentage was increased to 8.7% for at least the ARRA Section 1603 Cash Grants. 3. Treasury, to date, has paid out more than $20 billion in ARRA 1603 Cash Grants, alone, for renewable power. Also, tax equity volumes for renewable energy ITCs were approximately $6.5 billion in 2013 versus $5.5 billion in

24 II. Where Are We (cont d) C. Tax Incentives (cont d) 4. On April 3, 2013, the IRS increased the PTC from 2.2 cents/kwh to 2.3 cents/kwh for wind, geothermal, and closed-loop biopower projects; while open-loop biopower projects remained at 1.1 cents/kwh. The President s FY2014 Budget proposed to transform the PTC into a refundable tax credit. It also was to make renewable electricity tax incentives permanent (at a cost of $23 billion over the next 10 years). That said, the Omnibus Appropriations Act of 2014 did not implement these proposals, but Senator Wyden s recent tax incentives extenders bill would provide a two (2) year extension through 12/31/ The ITC expired for biopower on 12/31/13, but the new in construction triggers offered more project opportunities and extended use of the 10-year PTC, where it was selected in lieu of ITC. The Wyden tax incentives extenders bill also would extend the ITC and PTC through 12/31/ The $1.01/gal. cellulosic biofuels (which now includes algae, cyanobacteria, or lemnato-biofuels per H.R. 8 enactment) PTC expired on December 31, 2013; as did the biodiesel/green diesel PTC at $1.00/gal., 10 /gal. for small biodiesel, $0.50/gal. alternative fuels and alternative fuels mixtures tax incentives after an extension through the enactment of The American Taxpayer Relief Act of 2012 (H.R. 8). The Wyden tax incentives extenders bill would extend all of these incentives through 12/31/15. 23

25 II. Where Are We (cont d) C. Tax Incentives (cont d) 7. The American Taxpayer Relief Act of 2012 extended the 50% Bonus Depreciation for renewable power and cellulosic biofuels (including algae, cyanobacteria, or lemna-tobiofuels) through 12/31/13. The Wyden tax incentives extenders bill would extend this Bonus Depreciation incentive through 12/31/ H.R. 860 (Congressmen Ron Kind D. Wisc and John Lewis D. Ga) would qualify biogas for a 30% ITC. This ITC would be for applications that would not produce renewable electrons and would convert biomass into a gas containing not less than 52% methane and captures such gas for use as a fuels an inroad into the current ITC qualification process for renewable electrons generation only. 9. On July 31, 2014, Sen. Schumer (D-NY) introduced the Biogas Investment Tax Credit of 2014 (S.2739) which would amend the IRS Code to allow a 30% energy investment tax credit through 2019 for investment in biogas assets and financing of biogas projects with new clean renewable energy bonds. Qualified biogas assets would include anaerobic digesters and other processes that convert biomass into a gas that is no less than 52% methane and that uses such gas as a fuel. This bill was referred to the Senate Committee on Finance, however, no further legislative action is available yet. 10. On September 18, 2014, Sen. Menendez (D-NJ) introduced a bill (S. 2856) that would alter the Section 45 tax credit for renewable energy produced from certain open-loop biomass and trash facilities, including those facilities that use MSW to produce electricity. This bill would provide for a PTC at a 1.5 cents/ KwH for a qualified facility during a 10-year period; provided that the facility is placed in service by December 31, The bill was referred to the Senate Committee on Finance. 24

26 II. Where Are We (cont d) C. Tax Incentives (cont d) 11. For renewable power projects, the IRS recently has permitted Indian tribes to pass through ITCs to lessees under lease structures. This permission opens up new funding to such projects and could open the way for similar treatment for churches, schools, pension funds and other similar tax exempt entities. 12. There also has been talk of a carbon tax to raise revenue November 2012 Brookings Study $20 per metric ton in year one with 6% annual increases, raising up to $154 billion by Another study would place the revenue raised at more than $1 trillion over the next 10 years. On January 28, 2012, 18 Republican Senators, led by Senator David Vitter (R-La.), however, introduced a concurrent resolution (S. Con. Res. 4) stating that a carbon tax is not in the economic interest of the U.S. To date, nothing has happened to implement a carbon tax, as has been done in Australia. 13. The Section 48C Advanced Energy Manufacturing Tax Credit became available again with a new funding round of $150 million (which closed in late 2013) in remaining program funds from the original $2.3 billion funding level. Winners were announced in 4 th Quarter The program would require an appropriation for another round. 14. Congress may extend these tax incentives in 2014 for future years, as new Senate Finance Committee Chairman Ron Wyden (D.-Ore.) seeks to extend more than 55 energy tax incentives that expired on December 31, Senator Wyden then would pursue a major tax reform initiative (including all energy tax incentives) after the Fall 2014 Mid-Term Congressional elections. 25

27 II. Where Are We (cont d) C. Tax Incentives (cont d) 15. However, Congressman Camp (R-Mich.), Chairman of the House Ways & Means Committee, introduced a comprehensive tax reform measure on February 26, 2014, which would eliminate all renewable energy and the majority of hydrocarbon energy tax incentives. This Camp tax reform measure would repeal: (i) tax credits for alcohol used as fuel, including first-generation ethanol; (ii) $1.01 per gallon cellulosic biofuel producer credit that expired at the end of 2013; (iii) tax credits associated with biodiesel and renewable diesel, including the biodiesel fuel-mixture credit, the biodiesel credit, and the small agri-biodiesel producer credit; (iv) tax credits for electricity produced from renewable resources, including reverting the PTC to 1.5 cents per kwh until 2024, at which point the PTC would be repealed altogether. This tax reform measure has little chance of success in the current legislative session. 16. Senator Baucus, while still the Senate Finance Committee Chairman and before becoming the new U.S. Ambassador to China, introduced a tax reform bill to replace the majority of the 55 plus expired energy tax incentives with 2 major clean energy tax incentives: (1) 20% ITC for CAPEX applications; and (2) 20% PTC for OPEX applications. Each tax incentive would be dependent on significant reductions in GHG emissions. 26

28 II. Where Are We (cont d) C. Tax Incentives (cont d) 17. As mentioned earlier, Senator Wyden released a modified version of the earlier Baucus draft tax reform bill on February 25, 2014 as part of a Senate Finance Committee draft. This draft similarly distinguished between renewable power and advanced renewable fuels, as follows: (i) renewable power PTC extended through 12/31/15 at 2.3 cents per KwH or ITC extended through 12/31/15 at 30% and (ii) advanced renewable fuels cellulosic biofuels at $1.01, green diesel/ biodiesel at $1.00, alternative fuel and alternative fuel mixture (excluding hydrogen related fuels) tax incentives at 50 cents/gallon for fuel sold or used after 12/31/13 and alternative fuel and alternative fuel mixtures related to hydrogen for fuel sold or used after 9/30/14, each through 12/31/15. Thereafter, commencing on 1/1/16, these incentives would be further extended as follows: (i) renewable power the taxpayer would select either a 10-year PTC at 2.3 cents per KwH based upon 25% GHG reductions below 2015 levels or a 20% ITC during a 10-year period based upon the same GHG reductions and (ii) advanced renewable fuels the taxpayer would be allowed either a 10-year PTC of $1.00 per gallon or a 20% ITC during a 10-year period for cellulosic biofuels, green diesel and biodiesel, with either incentive available upon a demonstration of a 25% GHG emissions reduction below 2015 levels of conventional gasoline. 18. A simple short extension of the 55 expired tax incentives may have a better chance of success than the current Senate draft proposal with considerably longer periods, even at lesser amounts. On April 3, 2013, the Senate Finance Committee expressed its objective of commencing a comprehensive tax reform during the next Congress and before any 2014 generated tax extenders have expired. 27

29 II. Where Are We (cont d) C. Tax Incentives (cont d) 19. One of the proposed Baucus tax reform bill provisions would provide a 20% CAPEX ITC for retrofitting existing facilities with CCS technologies that capture at least 50% of the facility s CO2 emissions. Whether such a new incentive would be included in a Wyden clean energy tax incentives extension bill is still to be determined. 20. Carbon dioxide sequestration tax credit (IRC Section 45Q) for facilities that capture at least 500,000 metric tons of CO2 during the tax year. In FY2013, the credit rate was: (i) $21.25 per metric ton for qualified CO2 captured and disposed and not used as a tertiary injectant in an enhanced oil or natural gas recovery project; and (ii) $10.63 per metric ton for qualified CO2 captured and disposed and used as a tertiary injectant in an enhanced oil or natural gas recovery project. In FY2014, these credit rates will be adjusted for inflation. The Wyden energy tax reform draft would not extend this incentive. 21. The Wyden draft tax reform act would provide a 20% ITC for CCS equipment that (i) is installed in a facility placed in service before 1/1/17 and (ii) results in a reduction of CO2 emissions of 50% or greater. 28

30 II. Where Are We (cont d) C. Tax Incentives (cont d) 22. The Wyden draft tax reform act would modify a special depreciation allowance for second generation biofuel plant property to include property for renewable chemicals produced from biomass. Renewable chemical property with a depreciable life of 20 years or less would receive the 50% bonus depreciation available to second generation biofuel plant property. Renewable chemicals are those with a biobased content of at least 25%. This provision was placed into the Wyden Tax Extenders Bill by Senator Stabenow through Senate Amendment 168(l). However, it ultimately was not incorporated into the final Senate Finance package that was out for a vote in May IRS and the Treasury Department released a guidance (IRS Notice ) on August 8, 2014 reducing the threshold from 5% down to 3% of total project cost for renewable projects to qualify for federal tax credits. To qualify, such project costs must have been incurred before the beginning of 2014 and the work begun must have been of a significant nature, a term that remains unclear. It also attempted to clarify the definition of in construction to determine what type of construction qualifies as work of a significant nature. 24. The upcoming elections will factor significantly into whether Congress extends these tax incentives and in the manner and length currently prepared. A Republican Senate and House may change the dynamics here. However, some believe that Congress (including many Republicans) would like to extend these incentives now and then address the broader tax reform package in the next two years. 29

31 III. Where Are We Going A. It would be great to extend the 30% ARRA 1603 Cash Grant for renewable power and add the incentive for advanced biofuels, as it has done more for the project financing expansion of the qualified industries than any other single measure. However, the likelihood is nearly impossible in the current economic climate and with the current and projected Congress (post-election). The likelihood of passing a major tax bill in 2014 to address energy incentives and other issues is impossible. However, a simple short-term extension of the 55 expired energy tax incentives is possible. Nevertheless, we doubt that such energy incentives will be extended much beyond 2016, as these industries are becoming mature and Congress will seek to reduce expenditures, notwithstanding these performance-based/ GHG-reducing extensions beyond 2016 as provided in the recent Wyden tax reform draft. B. Need to protect the Renewable Fuels Standard ( RFS ) 1. Senate has established the Biofuels Investment and RFS Market Congressional Study Group (Senators James Inhofe-R-Okla and Chris Coons-D-Del) to study RFS. 2. Eight States had requested RFS waivers. On November 16, 2012, EPA denied these waivers finding no evidence of severe economic harm to justify any waiver of the RFS. 30

32 III. Where Are We Going (cont d) B. Need to protect the Renewable Fuels Standard ( RFS ) (cont d) 3. The American Petroleum Institute ( API ) filed a lawsuit on September 18, 2012 in US Court of Appeals for District of Columbia Circuit challenging cellulosic ethanol requirements under RFS due to requirement to purchase RINs when fuel availability is limited. On January 25, 2013, the Court ruled that the EPA must revise its cellulosic biofuels projection of 8.65 million gallons for 2012 and vacated only the cellulosic biofuels volumes set by EPA for that year. The Court did not overrule the EPA s decision to reduce the total volume of advanced biofuels that refiners, importers and blenders must purchase under the RFS. Also, the Supreme Court, in late June 2013, rejected an API attempt to overrule a Federal Court of Appeals decision supporting EPA s ruling to allow 15% ethanol in gasoline. 31

33 III. Where Are We Going (cont d) B. Need to protect the Renewable Fuels Standard ( RFS ) (Cont d) 4. On November 29, 2013, the EPA proposed the new RFS requirements for FY2014, as follows: Biomass-based diesel 1.28 billion gallons. Advanced biofuels 2.20 billion gallons. Cellulosic biofuels 17 million gallons. Total renewable fuels billion gallons (including corn-based biofuels). This proposal has incensed the respective industries, as they try to secure funding to construct advanced biofuel projects. The unexpected proposed target reductions have chilled the procurement of both debt and equity for such projects. EPA has been expected to issue final RFS requirements for quite some time and has yet to do so. The final rule is bouncing between EPA and OMB. On April 22, 2014, the EPA revised down the 6 million gallon per year FY2013 cellulosic biofuels target to 810,185 to reflect the actual production for that period. The RFS FY2015 EPA targets have been delayed to June Representatives Pete Olsen (R-Tx), Gene Greene (D-Tx) and Martha Blackburn (R- Tenn) introduced H.R Stop RIN Fraud Act of 2012 on September 20, 2012 to protect obligated parties from fraudulent RINs. On July 25, 2014, EPA reviewed two different proposals to assist RIN-obligated parties to avoid costs associated with fake RINs. One such proposal addressed fraud in the biodiesel credit market, and the other proposal added Compressed Natural Gas ( CNG ) and Liquefied Natural Gas ( LNG ) from biogas to the list of approved renewable fuels. 32

34 III. Where Are We Going (cont d) B. Need to protect the Renewable Fuels Standard ( RFS ) (cont d) 6. President Obama has pledged to support the continuation of the RFS, but his actions through the EPA RFS cuts speak volumes to the contrary. 7. Senator Murkowski s early 2014 proposed energy plan would open the RFS to nonrenewable feedstocks such as natural and coal-derived products. 8. Congress has held multiple RFS hearings since Summer There may be some tweaks to the RFS, but a repeal does not have Congressional support at present. That said, a Republican House and Senate may result in serious RFS changes. 9. On September 24, 2013, the EPA issued a final rule expanding the RFS to include heating oil from algae and advanced biofuels principally for residential and commercial use. This action should assist the biofuels industries broaden their use. On July 18, 2014, EPA expanded the RFS to include biogas-based CNG and LNG. 10. California Assembly member Muratsuchi introduced a new legislative measure (AB 2390) to create a Low Carbon And Renewable Fuel Credit Reserve ( Green Credit Reserve ) to purchase Low Carbon Fuel Standard ( LCFS ) and RFS credits from California advanced biofuels producers under 15-year contracts to then resell to obligated parties. The Green Credit Reserve will assist California advanced biofuels manufacturers secure funding for their projects. The Green Credit Reserve is to become fully operational to purchase these credits on or before September 1, One apparent flaw is that the Green Credit Reserve must purchase a liquid gallon from a producer, before the RFS credit is decoupled, unless the producer is the blender who can decouple the credit. The Green Credit Reserve, however, expressly will not purchase either LCFS or RFS credits from obligated parties. 33

35 III. Where Are We Going (cont d) C. Farm Act of 2014 and the Omnibus Appropriations Act of The Farm Act of 2014 provides $881 million in mandatory funding over 5 years for the USDA energy programs and nearly $1 trillion over 10 years in overall funding to USDA. This energy program funding constitutes a 47% reduction in funding levels provided in the last Farm Act of The Farm Act of 2014 provides the following mandatory and discretionary funding for Sections 9003 and 9007: Mandatory Discretionary $100MM mandatory funds for FY2014 ($50MM for each of FY2015 and FY2016, $0 for FY2017 and FY2018) (subsidyscored by OMB at 3 to 1 or 4 to 1 for $ MM in funding) $75MM discretionary funds for each of FY2014 through FY2018 $50MM mandatory funds for FY2014 and each FY thereafter (subsidy-scored by OMB at 5 to 1 for $250MM in funding) and possibly an increase of 7 to 1 for $350MM $20MM for each of FY2014 through FY

36 III. Where Are We Going (cont d) C. Farm Act of 2014 and the Omnibus Appropriations Act of 2014 (cont d). 3. Omnibus Appropriations Act of 2014 provides the following funding to B&I: In addition to the nearly $1 billion provided for loans and loan guarantees, Congress provided another $96MM total, of which $67MM for guaranteed loan subsidy, $24MM for rural business enterprise grants, $2MM for rural business opportunity grants, and $3MM for the Delta Regional Authority. 4. As mentioned, the Farm Act of 2014 expanded the 9003 Program to Renewable Chemicals and Bioproducts with a 15% funding restriction on biobased product manufacturing projects (defined as the development, construction, and retrofitting of technologically new commercial-scale processing and manufacturing equipment and required facilities that will be used to convert renewable chemicals and other biobased outputs of biorefineries into end-user products on a commercial scale ) for each of FY2014 and FY2015. The language appears to distinguish the further refining of renewable chemicals and other biobased products as feedstocks to higher-value products from the original refining of the renewable chemicals and biobased products from biomass feedstocks. The latter seems to be unrestricted, while the former seems to be restricted. Corn starch feedstock to produce renewable chemicals and biobased products remains unrestricted, unlike the existing prohibition on use of corn starch feedstock to produce biofuels. USDA, as noted, may require some amount of biofuels production, as part of our renewable chemicals manufacturing application. 35

37 III. Where Are We Going (cont d) D. Need to fill equity holes Company level Project level E. On July 24, 2014, the White House announced the Rural Infrastructure Opportunity Fund ( Fund ), a $10 billion investment fund that will provide pension funds and large investors the opportunity to invest in energy and infrastructure projects in rural US. The initial $10 billion of the Fund is committed by CoBank, a cooperative bank and member of the Farm Credit System. F. Need to develop new financing mechanisms, particularly for first commercial projects. G. EPA s New Source Performance Standard ( NSPS ) the EPA issued a proposal for carbon pollution from new power plants on September 20, There has been no additional regulatory action regarding NSPS since September The EPA was expected to finalize the NSPS in June 2014, but has not done so yet. On June 2, 2014 EPA issued a proposed standard for existing sources that would reduce power sector CO2 emission levels to approximately 30% below 2005 levels. EPA is accepting comments until October 16, If the proposed rule is finalized in its current form, any such EPA final rule would have an adverse effect on coal, natural gas and biomass electric power facilities. Similarly, such a final rule would chill potential debt finance and equity funding for coal, biomass and gasfired power projects. 36

38 IV. How Do We Succeed in Funding Integrated Biorefineries A. Pilots & Demos 1. Australia The following funds should be targets for the Renewable Chemical and Bio-Based Products Industries to gain Inclusion: Australian Renewable Energy Agency ( ARENA ) is offering $3.2 billion in funding for pilot and demonstration projects for renewable energy available until Clean Energy Finance Corporation ( CEFC ) is offering $10 billion in funding for renewable energy and energy efficiency commenced operations on July 1, $170 million also is available for R&D on low-pollution and energy efficiency technologies commenced operations on July 1, The Australian elections on September 7, 2013 were expected to change the source of these funds from a carbon tax to carbon trading. Despite the position of new Prime Minister, Tony Abbott, from the conservative Liberal National Coalition, to end the carbon tax, the pro-environment Greens and Labor parties hold the balance of power in the Australian Senate necessary to make any legislative change. In fact, on March 20, 2014, the Australian Senate voted to retain the carbon tax despite the efforts of the new Abbott Administration to have it repealed. However, effective on July 1, 2014, the Australian government repealed the carbon tax, in spite of the fact that the tax was providing significant revenues. Since the Australian Senate elections have shifted to the conservative party, in addition to the carbon tax repeal, the large CEFC fund is at risk of being defunded, too. 37