The American Recovery and Reinvestment Act of 2009 (the "Recovery Act") added a number of significant new tax incentives for businesses engaged in the renewable energy market, including a program that provides a tax credit to taxpayers who manufacture property to be used in producing specified types of renewable energy. Of the initial $2.3 billion of tax credits allocated under this program, just over $150 million are available for reallocation. These remaining credits are to be awarded pursuant to a competitive application process based on criteria set forth in the statute.

On February 7, 2013, the Treasury Department issued Notice 2013-12 (the "Notice"), which reported the results of Phase I of this tax credit program, established Phase II of the program to distribute Phase I credits available for re-allocation, and announced the procedures for applying for Phase II program credits. The Notice sets forth the criteria that the Department of Energy will apply in making its recommendations and ranking projects for the program. A copy of the Notice, which includes the requirements for the application for credits, can be found at http://www.irs.gov/pub/irs-drop/n-13-12.pdf.

Background

Section 48C of the Internal Revenue Code of 1986, as amended (the "Code"), provides for a credit equal to 30 percent of the basis of eligible property placed in service during the taxable year that is part of a qualifying advanced energy project of the taxpayer. A qualifying advanced energy project is defined to include a project that re-equips, expands or establishes a manufacturing facility for the production of:

• Property designed for the production of energy from the sun, wind, geothermal deposits, or other renewable energy resources
• Fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles
• Electric grids to support the transmission of renewable energy, including property for the storage of such energy
• Property designed to capture and sequester carbon dioxide and sequester carbon dioxide emissions
• Property designed to refine or blend renewable fuels or to produce energy conservation technologies
• Plug-in electric vehicles or components that are designed specifically for such vehicles
• Other property designed to reduce greenhouse gas emissions as may be determined by the Internal Revenue Service (the "Service")

Eligible property is any property that meets each of the following criteria:

• Is necessary for the production of specified advanced energy property
• Is either (1) tangible personal property, or (2) other tangible property (not including a building or its structural components) that is used as an integral part of the qualifying advanced energy project 
• Is eligible for depreciation

The credits are to be awarded by the Treasury Department in consultation with the Department of Energy ("DOE") pursuant to a competitive application process based on criteria set forth in Code section 48C. The total remaining amount of credits that may be allocated under the program is limited to $150 million.

Application Procedure

The Notice sets forth the application procedure for this allocation round of section 48C credits. It states that separate applications must be submitted for each project. Taxpayers are required to submit (1) a concept paper for consideration by the DOE, (2) an application for recommendation by the DOE and (3) an application for certification by the Service. Concept papers are due by April 9, 2013, and the applications for recommendation by the DOE and certification by the Service must be submitted by July 23, 2013. All documents must be submitted electronically through the online application portal of the DOE’s office of Energy Efficiency and Renewable Energy at https://eere-exchange.energy.gov.

Submission requirements for the DOE application are detailed in Appendix B of the Notice. Concept papers are limited to 10 pages of narrative and five pages of appendices. Full applications will be accepted only from taxpayers that have received an invitation to do so on the basis of the results of the concept paper review. The full application is to include a project information memorandum, as well as a series of appendices. The project information memorandum may not exceed 30 pages, single spaced. Required fonts and margins for concept papers and full applications are set out in the Notice.

Upon termination of the submission period, DOE will review, recommend and rank projects based on statutory eligibility and evaluation criteria, as well as on certain program policy factors set forth in the Notice (see discussion of DOE ranking criteria infra). The DOE will determine the merit of projects and provide recommendations to the Service by October 11, 2013, and the Service will accept or reject a taxpayer’s application for certification by November 15, 2013, with written notice to the taxpayer to follow. The project that is ranked highest will be allocated the full amount of credit requested, with remaining credits allocated in descending order to lower-ranked projects until the approximately $150 million of credit availability is exhausted. There is no right to confer with DOE or the Service, or to appeal adverse decisions.

If a taxpayer’s application is accepted, the taxpayer must execute an agreement setting forth various program requirements by January 10, 2014. Taxpayers will have one year from the date of acceptance to provide evidence that the requirements of certification have been met. This means taxpayers must receive all required permits, including environmental authorization or reviews necessary to commence construction, by that date. The project must be placed in service within three years of the date of issuance of the certification, or four years from the acceptance date (assuming the certification is issued on the one-year anniversary of the acceptance date).

DOE Ranking Criteria

The Notice states that DOE will review and recommend projects based on statutory eligibility requirements and merit review criteria set forth in the Notice. Under the eligibility criteria, the project must qualify as an advanced energy project and have a reasonable expectation of commercial viability. The merit review criteria consist of the following:

Concept Papers: The DOE will screen projects that have determined to be eligible for technical applicability and corporate viability on a pass/fail basis, and those that pass will be assigned numeric scores based on the following criteria (greater detail is included in the Notice):

• Market and product viability (35 points)
• Project financial viability (35 points)
• Other viability factors (e.g., level of commitment, management team track record, credibility of risk management mitigation) (25 points)
• Exceptional project strengths (e.g., short payback period, first-of-kind) (5 points)

In its evaluation, DOE will also consider the following program policy factors: American manufacturing significance, technological innovation, domestic job creation, program schedule time to completion, impact on air pollution and anthropogenic greenhouse gas emissions, U.S. economic competitiveness, regional economic development, geographic diversity, technology diversity, and project size diversity. Some of these factors are not in the statute, and the Notice does not state how they will be weighted. Concept papers must address in detail each of the eligibility and evaluation criteria.

Full Applications: Each proposed project will be reviewed based on specified advanced energy property (SAEP) or SAEP inputs to be produced at the manufacturing facility, including on the basis of the incremental energy produced, saved or stored as a result of the project. All necessary calculation steps must be detailed in the project’s narrative and, in addition, the application must include a Taxpayer Data Spreadsheet containing specific quantitative data. This will allow DOE to make a quantitative comparison across all eligible projects. Detailed instructions and examples are provided for these requirements in the Notice. Full applications will be evaluated on the basis of the following merit review criteria (greater detail is included in the Notice):

• Strong potential to expand American manufacturing (25 percent)
• Demonstrates significant potential for commercial viability (20 percent)
• Has the potential for technological innovation and commercial deployment (20 percent)
• Provides domestic job creation (15 percent)
• Has shortest project time from certification to completion (10 percent)
• Contributes to avoiding or reducing airborne pollutants and/or greenhouse gases (10　percent)

In its evaluation, DOE will also consider the following program policy factors: U.S. economic competitiveness, geographic diversity, technology diversity, project size diversity and regional economic development. These policy factors are not weighted. Full applications must address in detail each of the eligibility and evaluation criteria.

If you have questions or would like additional information on the material covered in this Tax Alert, please contact one of the authors, or the Reed Smith attorney with whom you regularly work.

To ensure compliance with Treasury Department regulations,we inform you that, unless otherwise indicated in writing, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Code or applicable state and local provisions, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Client Alert 2013-065