Oregon to Expand Business Energy Tax Credit

• Nearly triple the amount of credit available for projects that produce electricity from renewable resources and for manufacturers of equipment that uses renewable resources;

   

• Extend the credit to high-efficiency cogeneration projects and the manufacturing or distribution of alternative fuels, including ethanol, methanol, gasohol and biodiesel;

   

• Add new credits for renewable energy systems installed by home builders; and

   

• Eliminate a potential cutback to the BETC for projects that are eligible for certain federal tax credits.

In a separate bill, the legislature also modified Oregon’s "kicker" refund law to enable project developers to more easily sell BETCs.

Governor Ted Kulongoski, who strongly promoted the legislation as a major part of his sustainability platform, is expected to sign both bills shortly. For related legislative changes affecting renewables, see our recent alerts: Oregon Set to Adopt Aggressive Biofuels Incentives and Oregon Legislature Makes Waves by Promoting Wave Energy.

Increase to the BETC Amount. The legislation increases the cap on eligible project costs from $10 million to $20 million. However, to arrive at the correct tax credit, the total project costs must be multiplied by the credit limitation percentage. The new legislation also increases the credit limitation percentage from 35 percent to 50 percent. Under prior law, the amount of the BETC was capped at 35 percent of $10 million in eligible costs, for a maximum credit of $3.5 million. Under the new legislation, the amount of the BETC for certain facilities maxes out at 50 percent of $20 million in eligible costs, for a maximum credit of $10 million. This increased amount specifically applies to facilities that use or produce renewable energy resources, to a "renewable equipment manufacturing facility" or to a "high-efficiency combined heat and power facility." For all other facilities, the prior $3.5 million BETC limit will continue to apply.

Manufacturers of Renewable Energy Resource Equipment. The bill makes it explicit that a renewable energy resource equipment manufacturing facility is eligible for the BETC, at the new $10 million maximum BETC amount. This kind of facility includes any structure, building or installation (including an addition, reconstruction or improvement), excavation, machinery, equipment or device that is used primarily to manufacture equipment, machinery or other products that are designed to use a renewable energy resource. Such facilities must meet standards to be established by the Oregon Department of Energy.

High-Efficiency Cogeneration Projects. A high-efficiency combined heat and power facility includes equipment or devices that simultaneously produce heat and electricity from a single source of fuel. The new $10 million maximum BETC amount applies. These facilities also must meet standards to be established by the Oregon Department of Energy.

Alternative Fuels. The legislation expands the definition of "energy facility" to include facilities that manufacture or distribute alternative fuels, including ethanol, methanol, gasohol and biodiesel.

Home-Builder-Installed Renewable Energy Systems and High-Performance Homes. HB 3201 extends the BETC to renewable energy systems installed by home builders, with an extra potential credit amount for "high-performance homes." A renewable energy system that is installed in a single-family dwelling gives rise to a credit of up to $9,000. A high-performance home, however, qualifies for a credit of up to $12,000. A "high-performance home" includes any new single-family dwelling designed and constructed to reduce net purchased energy through the use of both energy efficiency and on-site renewable energy resources. The bill directs the Oregon Department of Energy to adopt criteria for home-builder-installed renewable energy systems and high-performance homes.

Elimination of Cutback. HB 3201 eliminates reference to federal tax credits as a potential cutback to the BETC. Under the bill, only federal grants may reduce the certified cost of a facility eligible for the BETC.

Monetizing the BETC. The existing BETC law allows a BETC to be sold outright, which frees up cash that can be used to build the project. The new legislation makes no change to that feature. In recent months, however, concern about the size of the Oregon corporate "kicker" has discouraged Oregon businesses from buying BETCs from project developers, undermining the purpose of the BETC. The kicker is a constitutionally required refund to taxpayers of any state budgetary surplus in excess of 2 percent above projections. For corporations, the kicker for 2005-07 was projected to be 67 percent of tax paid, which would have reduced any incentive for a corporation to purchase a BETC. Two bills address this issue. First, HB 2707, which has been signed by the Governor and enacted into law, repeals the corporate kicker refund for the biennium 2005-07, dedicating the resulting revenues to a rainy-day fund. Second, SB 819, which was passed by the Oregon legislature at the Governor’s request, changes the way that the Oregon corporate kicker is calculated. This legislation is intended to revive the market for the sale of BETCs, as it avoids putting Oregon taxpayers in a position of having to choose between taking their kicker refund or buying a BETC. Considering all of the bills together, not only has the amount of the BETC increased, but the changes to the corporate kicker will help renewable project developers and producers that need to monetize the BETC.

Effective Date. The changes to the BETC law are retroactively effective to facilities acquired, erected, constructed or installed on or after January 1, 2007, and to tax years beginning on or after January 1, 2007.

Sunset. HB 3201 establishes a sunset date of 2016. The Oregon Department of Energy is prohibited from certifying a facility for the BETC on or after January 1, 2016. Also, no BETC may be claimed if the first tax year of the BETC otherwise would be a tax year beginning on or after January 1, 2016.

For more information on the BETC legislation please contact Ashley Henry, Energy Industry Liaison, 503-294-9506, ahenry@stoel.com