Time to Assess Biomass Project Funding Options
With winter approaching and the credit crunch still bearing down on us, many might be inclined to write off biomass projects right now. But there is good news and reason for hope. A veritable alphabet soup of government funding programs exist that can help you get your project off the ground. These programs include:
• USDA Biorefinery Assistance: loan guarantees for development, construction and retrofitting of biorefinery facilities (other than corn ethanol).
• USDA Repowering Assistance: grants for retrofitting fossil fuel facilities to process biomass.
• USDA Advanced Biofuels Production: grants and guaranteed loans to expand advanced biofuelproduction facilities.
• USDA Rural Energy for America Program: grants and loan guarantees for agricultural producers and rural small businesses to improve energy efficiency, produce renewable energy and conduct energy audits.
• USDA Biomass Research and Development Grants: grants for research and development focused on cellulosic biofuels, including demonstration facilities.
• USDA Biomass Crop Assistance Program: matching payments to producers who sell crops to biomass facilities, and startup funding for purchasing perennial crops. Feedstock crops are not eligible.
• USDA Business and Industry Guaranteed Loan Program: low-interest loans for rural businesses that create jobs and reduce reliance on nonrenewable energy sources.
• DOE Improved Energy Technology Guaranteed Loans: low-interest loans for projects that reduce greenhouse gases and air pollution, including biofuels. Up to 100 percent of loan can be guaranteed.
• Tax Credits: Volumetric Ethanol Excise Tax Credit, Small Ethanol Producer, Biodiesel (both virgin and recycled), Small Agri-Biodiesel Producer, and Cellulosic Biofuels Production tax credits
In addition, the Defense Advanced Research Projects Agency provides assistance for biofuel research with military applications. The U.S. DOE’s Advanced Research Projects Agency-Energy office has similar funding programs for research with civilian application. The Federal Aviation Administration recently announced $7.7 million in funding for renewable jet fuel research and development. Other federal agencies have programs as well.
Many states also have funding programs, and construction of biomass facilities may qualify for subsidies meant to stimulate economic development, such as the New Market Tax Credit, historic rehabilitation credits, superfund cleanup funding, hiring incentives or angel investment credits. Will all of these programs continue despite the U.S. budget crisis? Maybe not, but many of these programs existed before the stimulus package and have a good chance at continued funding, albeit at reduced levels.
Now, the bad news—this money comes with strings attached. Each program has a different set of requirements and different amounts of available funding, geared toward the size and complexity of the targeted projects. For instance, most REAP grants are less than $20,000, while the Biomass Research and Development grants average $3 million to $7 million. Applicants may also be able to apply under more than one program. Just navigating through these programs to identify which ones work for you can be a major challenge, not to mention the cost and time required to apply.
One significant burden often overlooked by developers is the requirement for most of these programs to conduct a National Environmental Policy Act environmental assessment. While a NEPA assessment can be completed in a month, two to three months is a more reasonable estimate. A NEPA assessment usually has to be completed prior to beginning any construction, so it is important to start that process early.
Another often unexpected pitfall is the tax consequence of receiving “free” money. Some grants are taxable income; others decrease a developer’s tax basis in the project, causing lower depreciation deductions and increasing taxable gain on sale. Tax credits like the New Market Tax Credit generate taxable cancellation of debt income at the end of the financing term. These tax issues can significantly alter the financial return of a project and must be managed up front to avoid unpleasant surprises later for you and your investors.
These incentive programs should not be dismissed, despite all of their complexities. For a developer willing to spend the time and effort, these funding sources can mean the difference between realizing your dream, or applying for a job with the group that did seize the chance.
Authors: Emily Chad
Attorney, Fredrikson & Byron
Attorney, Fredrikson & Byron