Senate Finance Committee Chairman Ron Wyden, D-Ore., has reintroduced legislation that would restore direct-pay or tax credit bonds in the form of Clean Energy Bonds.
If the proposal becomes law, 99.9% of issuers are likely to opt for direct-pay bonds rather than tax credit bonds which are “a clunky product,” according to Ed Oswald, an attorney with Orrick Herrington & Sutcliffe in Washington.
Oswald pointed out that the direct pay option would have a “significant subsidy” of up to 70%.
The two options would be available to state, local, and tribal governments, in addition to public power providers and electric cooperatives.
Facilities would begin qualifying if they are zero-emission, in the case of power facilities, or 25% cleaner than the current average, in the case of clean fuels. The maximum credit is 70% of the interest on the bond for facilities producing zero-emission electricity or fuel.
“I think with climate change being more on the horizon and more prominent that there’s a real appetite among state and local governments to, if you will, go green,” Oswald said. “So I think these will be warmly embraced by the sector that it applies to and the market at large.”
The Clean Energy Bonds proposal is part of a larger legislative proposal called The Clean Energy for America Act released Wednesday on the eve of President Biden’s speech Thursday at a multi-nation virtual conference on climate change.
Biden announced a national goal of reducing carbon emissions by 50% by 2030 compared to 2005 levels.
“Energy policy is tax policy, and the federal tax code is woefully inadequate to address our energy challenges,” said Wyden in a statement that accompanied the release of his legislation, which has 24 Senate co-sponsors, all of whom are Democrats.
Wyden said the bill would replace a hodgepodge of 40 temporary energy credits, “replacing them with emissions-based, technology-neutral credits to turbocharge investment in clean electricity, clean transportation and energy conservation.”
The Senate bill could be included in broader infrastructure legislation expected to move through Congress this year.
However, direct-pay and tax credit bonds are not popular among congressional Republicans, who terminated them as part of the 2017 Tax Cuts and Jobs Act.
That legislation eliminated all federal tax credit bonds, including New Clean Renewable Energy Bonds (CREBs), effective January 1, 2018.
Matthias Edrich, an attorney at Kutak Rock in Denver, said the 2017 tax legislation “left a void for financing tools that are tailored to clean and renewable energy” and the proposed Wyden bill “would seem to go a long way to encouraging broader investment in clean energy.”
Edrich said it’s “good to see that this proposal would provide for protection against subsidy reductions that would otherwise impact payments due to sequestration.”
Annual sequestration cuts are the major complaint that linger from the issuance of Build America Bonds as part of the American Recovery and Reinvestment Act of February 2009. ARRA was enacted as an economic stimulus near the end of the 18-month Great Recession.
Clean Energy Bonds, or CEBs, would be permanent and not be subject to a volume cap unlike previous bond programs.
However, they would be subject to the same issuance and arbitrage rules as those in effect for tax credit bonds prior to the 2017 tax law.
Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 and were later modified as “new” CREBs in the Emergency Economic Stabilization Act of 2008, according to the nonpartisan Congressional Research Service.
The original CREBs, which were authorized for issuance through 2009, had a national limit of $1.2 billion of which a maximum of $750 million can be granted to governmental bodies. In addition to governmental bodies, cooperative electric companies and a “clean renewable energy bond lender” were authorized to issue CREBs.
Wyden’s proposal for a successor to New CREBs will require time for the bond industry, “in particular those professionals who focus on energy financing,” to fully review as the bill progresses, Edrich said.
