Financing Public Sector Projects with Clean Renewable Energy Bonds; Fact Sheet Series on Financing Renewable Energy Projects, National Renewable Energy Laboratory (NREL) Page: 2 of 6
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municipal utilities, are no longer made on a smallest to
largest project basis. The "New CREBs" methodology
allows all eligible projects, regardless of project size, to
receive funds. Public power providers will receive a pro-
rata share of the overall allocation of funds in this category
(U.S. Congress House 2008). Each project will be allocated a
portion of the $800 million, based on the fraction of its total
request to the total requested for all public power projects
(U.S. House 2009).
The CREBs Tax Credit and Term
The tax credit received is calculated by multiplying the cur-
rent tax credit rate by the CREB's outstanding principal. The
tax credit is calculated quarterly and can be claimed against
regular income tax liability or alternative minimum tax
liability. Unlike the interest on traditional tax-exempt bonds,
the CREBs tax credit is considered taxable income (i.e., as if it
were interest income for the investor).
Because longer bond terms mean longer-lasting tax benefits
for investors but increased costs to the Treasury Department,
the CREBs program limits the maximum term of the bonds.
Term limitations are currently on the order of 14 to 15 years.1
Thus, as interest rates (including applicable federal rates) fall,
the maximum maturity of a CREB rises. Waiting to lock into
a bond with a longer maturity might make sense if interest
rates are expected to fall. For example, the long-term adjusted
applicable federal rate (AFR)2 fell from 4.56% in April 2009 to
4.53% in May 2009, resulting in an increase in the maturity
limit from 14 to 15 years for bonds issued in May.
The Treasury Department must set the credit rate such that
the issuer need not discount the bond nor pay additional
interest payments (Internal Revenue Code Section 54A(b)(3)).
For the first two rounds of CREBs in 2006 and 2007, the Trea-
sury Department determined the tax credit rates based on the
market rate for AA-rated corporate bonds (U.S. Department
of Treasury 2007). However, this method proved problematic
because many municipalities had credit ratings lower than
AA and were unable to borrow at a rate equivalent to the AA
corporate rate; i.e., their borrowing rate was higher. Addition-
ally, investor demand was limited because investors were
unfamiliar with the instrument and because the size of the
bonds tends to be small (IRS typically allocates funds from
1 The maximum term of a CREB is set by the Secretary of the Treasury and
is based on a quantitative estimate of the present value of half the bond. The
discount rate is equal to 110 percent of the long-term adjusted applicable fed-
eral rates (AFR), compounded semi-annually, for the month in which the bond
is sold (U.S. Department of the Treasury 2009a). First, half of the face value of
the bond is assumed to be the balance in year one. Then, the 110% discount
rate is applied to determine the present value of the loan during each 6-month
period. Once the discounted amount of the loan balance reaches the face
value of the bond, the total years of the term of the CREBs is determined.
2 Each month, the IRS provides various prescribed rates for federal income
tax purposes. The IRS publishes these rates, known as applicable federal
rates (or AFRs), as revenue rulings.
the smallest to the largest). Consequently, many issuers have
had to discount the bonds or have agreed to pay supplemen-
tal interest to attract investors (Serchuk 2008). In addition,
many potential issuers decided against issuing CREBs when
the transaction costs and interest payments were higher than
originally anticipated. In light of this market reaction, the
Treasury Department modified its methodology for deter-
mining the tax credit rate. For "New CREBs," the Treasury
Department bases the tax credit rate on yield estimates on
outstanding bonds with investment grade ratings between
"single A" and BBB for bonds of a similar maturity (U.S.
Department of Treasury 2009b).
"New CREBs" reduce the annual tax credit rate allowed.
Before the recent program changes, CREBs issuers were
required to repay a fraction of the principle annually over
the term of the loan, such that the investor received a tax
credit on the full amount of the bond for the full term. Under
"New CREBs," borrowers will repay the entire principal at
the bond's maturity. As a result, the Energy Act reduced the
annual tax credit rate allowed to 70% of the rate determined
by the IRS (Hunton & Williams 2008). Table 1 shows recent
rates published by the Treasury Department, with and with-
out the 70% credit reduction. Given the current rates, issuers
are likely to have to pay some supplemental interest (see
Analysis section below).
Table 1. Tax Credit Rates, Maturities, and Permitted
Sinking Fund Yields for "New CREBs" in June 2009
7.88% 16 yrs 4.66% 5.52%
7.98% 16 yrs 4.66% 5.59%
7.90% 16 yrs 4.66% 5.53%
7.59% 16 yrs 4.66% 5.31%
7.54% 16 yrs 4.66% 5.28%
7.43% 16 yrs 4.66% 5.20%
7.59% 16 yrs 4.66% 5.31%
7.41% 16 yrs 4.66% 5.19%
* Permitted Sinking Fund Yield (PSFY) is the return allowed on a reserve fund for
Source: U.S. Department of the Treasury 2009c. Rates found at https://www.treasury-
For example, if the recipient of an allocation were to issue a
CREB on June 22, 2009, the term would be 16 years and the
tax credit interest rate would be 5.12%. If the risk profile of a
given project were such that the market required a rate
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Kreycik, C. & Couglin, J. Financing Public Sector Projects with Clean Renewable Energy Bonds; Fact Sheet Series on Financing Renewable Energy Projects, National Renewable Energy Laboratory (NREL), report, December 1, 2009; Golden, Colorado. (digital.library.unt.edu/ark:/67531/metadc933350/m1/2/: accessed February 18, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.