Section 9006 of Title IX of The Farm Security and Rural Investment Act of 2002 (the '2002 Farm Bill') established the Renewable Energy Systems and Energy Efficiency Improvements Program (the 'Section 9006 program'). Administered by the United States Department of Agriculture (USDA), the Section 9006 program provides grants, loan guarantees, and - perhaps in the future - direct loans to farmers, ranchers, and rural small businesses for assistance with purchasing renewable energy systems and making energy efficiency improvements. In the three rounds of Section 9006 funding to date (FY03-FY05), roughly 40% of all grant dollars in aggregate have been awarded to 'large' (defined as > 100 kW) wind projects. Such projects are also typically eligible for the Federal Production Tax Credit (PTC) codified in Section 45 of the US tax code. Because the PTC provides a significant amount of value to a wind project, most 'large wind' applicants to the Section 9006 program have also tried to take advantage of the PTC. Through what are known as 'anti-double-dipping' or, more colloquially, 'haircut' provisions, however, the size of the PTC is reduced if a project receives certain other forms of governmental support. Specifically, Section 45(b)(3) of the US tax code reduces the size of the PTC in proportion to the aggregate amount of government grants, tax-exempt or subsidized financing, or other Federal tax credits that a project receives over time, relative to its overall capital cost (with the proportion not to exceed 50%). The legislative and regulatory history surrounding the PTC's haircut provisions suggests that grants and direct loans (but not loan guarantees) provided under the Section 9006 program will cause a PTC haircut. Focusing exclusively on 'large wind' projects, this report demonstrates that the magnitude of the haircut can be significant: Section 9006 grants lose between 11% and 46% of their face value (depending on the wind project's capital cost and capacity factor) to PTC haircuts. And because Section 9006 grants are most likely considered taxable income, an additional 20%-37% (depending on tax bracket) is lost to income tax payments on the grant. In combination, depending on the specific combination of tax bracket, capital cost, and capacity factor that pertain to a given wind project, the percentage of a Section 9006 grant lost to both income tax payments and the PTC haircut can range from 31% to 83% of the dollar value of the grant. Our base-case scenario falls in the middle of that range, at a combined loss of 58% (37% due to income tax payments, and 21% due to PTC haircut). Add to this the transaction costs of applying for a Section 9006 grant, as well as the possibility of an unsuccessful application, and some might be left with relatively little motivation to apply.
