Baker Tilly recently presented at a webinar for the American Biogas Council.
Moving projects forward: A closer look at the tools used and steps taken to complete a project
Biogas projects can be very complicated to complete given the number of participating parties often required to make a successful project move forward. Each project has its own unique circumstances as to why it is being built. Is it a waste treatment or distributed energy generation facility, a resource to fuel vehicle fleets, an extension of manufacturing … or all of the above?
"Baker Tilly has been involved with over 15 biogas projects that are either operating or under construction, representing 25 food processors and $200 million of funding."
This webinar addressed how to get biogas projects done and spoke to the growing trend of biogas development in the food processing industry. It covered:
- Energy legislative updates
- Assessing a project’s viability
- Selecting the project team and managing construction/operating risks
- Example projects: What is getting done and why
Questions and answers that developed from this webinar:
Q: Will the 10% ITC for CHPs extend to the larger facility (reception, pretreatment, digesters, gas treatment, digestate management, etc.) or be limited to the CHP units only?
A: If for some reason one chose to claim the 10% credit for combined heat and power system property, we believe that qualified costs would include costs that are on-site and integral to the production of biogas. On the other hand, if one were to begin such a project by 12/31/13 and create electricity, a significant part of the project could alternatively qualify for the 30% credit under IRC section 48 as a trash or biomass facility. One cannot claim both the 30% and 10% credit on the same costs.
Q: Will you make the presentation available? If so, where?
A: Yes, the presentation is available at http://americanbiogascouncil.org/webinar_26feb13.asp.
Q: What is your view on the ITC for biogas...any renewal in the works...if not, apart from the NMTC, what federal tax credits can be monetized?
A: Currently these project must begin construction by 12/31/13. While we are not aware of any further extension or renewal of either the PTC or ITC for biogas to energy projects, it has been suggested that other renewable energy lobbying organizations (e.g. wind) may be asking for another extension which could include a phase out provision for the credits of anywhere from 3 to 6 years. In recent years the credits for biogas to energy projects have generally followed these larger industries when it comes to credit extensions. All of this is pure speculation at this point.
Q: For the Closed Loop Production Tax Credit, what percentage of the feedstock needs to be grown to get the $.022 kWh credit?
A: There is a provision whereby a facility that is modified to co-fire closed-loop biomass with other biomass may qualify, but only if approved under the Biomass Power for Rural Development Programs or is part of a project of the Commodity Credit Corporation as described in 65 Fed. Reg. 63052 [IRC section 45(d)(2)(A)(ii)]. Although this provision seems to deal with modifying an existing coal or open-loop biomass facility, it might apply to a new facility as well. The definition of a qualified closed-loop biomass facility is "a facility using closed-loop biomass to create electricity." It does not say primarily or exclusively using closed-loop biomass. Since the law does not require sole use of closed-loop biomass and since the above provision of the IRC contemplates co-firing with open-loop biomass, one would logically assume they meant to allow co-firing with open and closed-loop biomass. In fact IRS Notice 2008-60 concludes that "electricity produced from open-loop biomass that is co-fired with fuels other than fossil fuels may qualify for the sec 45 credit." So clearly co-firing is allowed.
It would appear that such a facility would then be eligible for a combined PTC of 1.1 or 2.2 depending on what percentage of energy is produced from closed-loop vs open-loop biomass. So if 75% of the electrical energy comes from closed-loop biomass and 25% from open-loop in a given year, then one could use 2.2 cents PTC on 75% of the kW hours produced during the year and 1.1 cents on the other 25%. The percentage should be based on the thermal content of the biomass used.
Q: Have you worked with any customers looking at Gas Cleanup instead of Gensets? What are the best programs that can assist in financing?
A: We have worked with a number of clients that are looking at alternatives to utilizing gas for electrical generation. These include applications such as using gas in a boiler or compressing the gas for use as a transportation fuel. At the federal level, to date, a majority of the financial support has been for projects that produce electricity. We have worked with clients recently that are pursuing heat and transport fuel off-takes for biogas projects where alternative incentives like RINs and blenders’ tax credits are currently applicable. Due to the historic enforcement of RFS, the value to a project of these incentives is less predictable and therefore more difficult to use as a tool to attract third party financing. At the state level, there may be specific programs to financially support projects that utilize biogas for purposes other than electrical generation on a case by case basis. California recently passed AB32 which has created the first mandated carbon market in the United States. This does not apply to all feedstocks for biogas projects but does for manure and can apply to projects that are built outside of the state of California.
Q: I am trying to understand why so much talk of the 1603 if it is expired. Am I missing something?
A: Certain projects are still eligible for the 1603 cash grant if they met certain criteria relative to the 12/31/11 "beginning of construction" requirement as defined by Treasury AND they are placed in service prior to the end of 2013.
Q: Are you familiar with the nuance of ITC for advance energy credit for manufacturers, Section 48C and potentially expanding this beyond the electricity generation portion?
A: Section 48C, unlike the traditional Section 48 ITC, is a competitively awarded tax credit for "qualified advanced energy projects" which have a specific definition, but generally are facilities which make components which may be used as a part of "advanced energy property designed to reduce greenhouse gas emissions". The US is trying to bring the manufacturing base to the US so that things like wind turbines and blades, solar modules and digesters are manufactured here. There are $150 million of these credits currently available to projects on a competitive basis. Please contact us for more specifics if you feel you have a manufacturing facility that may qualify.
Q: When and how will the slides be available?
A: The slides were circulated to all registrants. You will also find it in the member’s only section of the American Biogas Council website.
Q: Two of the cited examples cite fairly high investment cost ($20-28 per Watt el. installed). We know out of Europe those prices to be rather $3.5 to $5 or $350 to $550 per ton treated. Any thoughts?
A: In some of the cases represented, we were working with waste treatment facilities with very high flow rates (in some cases up to 1 million gallons/day). Much of the equipment installed was to deal with flow as much as strength (treatment) of the waste being handled. Additionally, some of the projects had things such as aerobic treatment and nutrient (phosphorus) pelletization given the requirements of the discharge permits. This may be part of the reason for the disparity.
Q: On the Project Finance side, you omitted the captive financing offered by CAT Finance and GE Capital.
A: Please clarify your question. We did mention the financing offered by Caterpillar Financial verbally on the webinar. We are not aware of any participation by GE Capital in US digester projects on a non recourse basis to date.
Q: In what states are the opportunities for biogas projects?
A: There are numerous states with biogas opportunities. Our firm has worked on projects in such states as WI, MN, NY, CA, ID, MO, and SD, to name a few. Drivers for successful projects in states tend to vary by environmental regulations, density of waste producers, renewable portfolio standards, and other state specific factors.
Q: What national banks are actively financing Anaerobic Digestion projects?
A: Very few, if any, national banks that we are aware of are actively funding digester projects on a "non recourse" basis. Caterpillar Financial has been an early leader in pursuing these opportunities. We have also seen regional banks finance digester projects with additional credit support (e.g., USDA loan guarantees).
Q: What food and beverage companies have you worked with on biogas projects?
A: While we are not at liberty to disclose the names of our clients in most cases, we work with a number of food and beverage companies in evaluating the most cost effective way to deal with their waste issues. Some of the industry sectors we have worked with include meat processing, dairy processing (cheese, yogurt, milk), and brewing.
Q: How do you account for qualitative advantages such as higher flexibility, lower regulatory risk, more stable process, in a business case?
A: Unfortunately there is not an exact playbook to follow, and no two projects are alike. However, the factors you mentioned, and others, all have varying degrees of importance when driving a decision making process by a waste producer.
Q: Contracting methods have a large impact on the total cost of a project. Do you have experience financing projects utilizing multiple prime contractors rather than an Engineer, Procure, Contract approach?
A: Yes, we have seen projects get financed with multiple contracts, e.g. design/process, generator, and balance of plant. The more contracts, the more complexities to the deal, obviously. However, we have seen funding parties willing to, at a minimum, recognize the cost/benefit decision making process of going with multiple contractors versus one EPC contractor. The financing parties in any transaction will ultimately determine if the approach selected is acceptable or if additional risk mitigation is required. We have also seen insurers start to enter this market to provide another potential alternative/option for these scenarios.
Q: Can a facility be classified as both an open loop biomass facility and a trash facility?
A: Yes it would appear that a facility could use both open loop biomass and trash as a feedstock. Since the 30% ITC, 1.1 cent PTC and 12/31/13 beginning of construction deadline are identical for both, this shouldn’t provide any unique complexities.
Q: What is the definition of open loop biomass qualifying feedstock for the ITC and 1603?
A: Open loop biomass facilities include (1) facilities that utilize agricultural livestock waste nutrients with a nameplate capacity of 150 kW or more to generate electricity; (2) facilities that use certain other solid, nonhazardous cellulosic waste material to generate electricity. They do not include facilities that burn biomass in conjunction with a fossil fuel (co-firing) beyond such fossil fuel required for startup and flame stabilization.
Q: Does FOG or food processing waste count as a qualified feedstock for ITC? Where can I find a source for this information?
A: Yes, this type of feedstock would likely qualify as a "Trash Facility" for purposes of the ITC. A "Trash Facility" is defined as a facility (other than a landfill gas facility) which uses municipal solid waste to produce electricity, including facilities that burn municipal solid waste and produce steam and drive a turbine. The definitions can be found in the internal revenue code.
Q: On slide 27, how did food waste take advantage of 1603? Was there manure in the project?
A: This project qualified as a "Trash" facility. There was no manure in this project.
Q: For projects that use a mix of feedstock such as FOG and manure, how do you calculate the ITC?
A: The ITC is 30% of the qualified energy property, assuming that all of the gas is being used to create electricity at the qualified facility. The ITC rate is 30% for both biomass and trash feedstocks.
Q: In the case of a digester/CHP project, is there any difference in treatment of onsite generated waste and waste received from outside sources?
A: For purposes of calculating the tax credit, no. Equipment used to treat and transfer offsite waste to the qualified facility may not qualify for the ITC.
Q: How important are Feedstock Studies in the early development of project finance? Are 3rd party assessments typically used to verify feedstock availability and cost?
A: From a funding perspective, feedstock studies provide some comfort to financing parties that there is a significant amount of feedstock within a given geography to support the project, however they will be viewed with much less importance than actual term sheets from feedstock suppliers (in the early stages) and ultimately, binding contractual arrangements (prior to any funding being released). Lenders would much rather see actual term sheets or contracts with credit worthy parties in our experience.
Q: Is there any market for the GHG credits, are they retained by the project proponent even with the government funding programs?
A: GHG credit markets are still emerging in the United States, with long term contracts at pricing that would be viable, seemingly difficult to come by. Additionally, project owners will often be required to give title to the GHG credits produced to the utility that is purchasing the power from the project. Over time, this could change, but in our experience most projects today are financed based upon tipping fees (what you can charge to take waste from a producer) and electrical or gas sales.