Never before have so many economic incentives and renewable energy opportunities lined up for commercial and industry energy consumers especially throughout the Northeast region of the U.S. as businesses consider ways to improve energy reliability, independence and sustainability. For the solar energy industry in particular, which has struggled with higher production costs, renewed tax breaks and more competitive product pricing mean great opportunities for consumers, alternative energy equipment manufacturers and service providers alike. This article explores some of the many programs and benefits available to business customers, which also benefit their providers, and identifies some strategies they are considering when planning on-site renewable energy projects.

Many states throughout the Northeast and elsewhere in the U.S. have been promoting investments in renewable energy, energy efficiency and conservation for many years but recent concerns about the risks of climate change have added enhanced urgency in the various states to use policies such as a renewable portfolio standard or public utility incentives to achieve three major public policy objectives: (i) reduce greenhouse gas emissions; (ii) increase renewable energy production; and (iii) reduce consumption of energy.

Most recently, on March 29, 2011, the California legislature reaffirmed that state's ambitious commitment to support renewables with the enactment of Senate Bill X1-2, expressing the policy intent that the amount of electricity generated per year from renewable energy resources in California be increased to 20% per year by 2013 and 33% by the end of 2020, the second most ambitious state standard in the U.S., second only to Hawaii's 40% standard. Governor Jerry Brown was expected to sign the legislation at press time. Meanwhile, New Jersey is certainly the leading state in the Northeast in implementing market-based solar incentives that have attracted massive investments, but initiatives in other states are adopting similar approaches. Massachusetts enacted the Green Communities Act with strong support for solar and other renewables and the Connecticut legislature is expected to pass a strong solar program of its own later this Spring.

When the state incentives are added to the recently expanded federal tax incentives, end-use business consumers are winning terrific benefits to support investment in renewable and the renewable energy industry is scrambling to ramp up to satisfy demand while capitalizing on investment opportunities.

Federal Tax Incentives: Recent good news from Washington for the renewables industry generally and the solar industry in particular started in the fall of 2008 as Congress enacted the Energy Improvement and Extension Act of 2008 (as part of the bill informally known as the TARP legislation) and then-President Bush signed the bill into law on October 3, 2008, providing nearly $17 billion in various tax credits to promote clean power generation technologies, alternative fuels, renewable energy and energy efficiency.

The solar industry emerged as one of the clear winners in the legislation as it extended for eight years the existing 30 percent investment tax credit to owners for 30% of the capital expenditures for solar facilities and eliminated the previously applicable $2,000 cap on 30 percent tax credits for investments in residential solar. The law also renewed the production tax credit for other renewable energy sources, such as wind, geothermal, and biomass, and provided owners a new 10 percent investment tax credit for expenditures for combined heat and power sources (for instance using biomass) and geothermal equipment that uses ground water for heating or cooling purposes and increased the tax credit available for investments in fuel cells.

President Obama signed into law the American Recovery and Reinvestment Act (ARRA) in February, 2009, expanding even more the federal incentives for renewables. Most prominently was ARRA Section 1603, which created a Treasury Grant program that provided the option for renewable project developers to obtain a 30% cash grant in lieu of tax credits with the payment to be made within 60 days of achieving commercial operation. While the grants were to sunset unless a 5% safe harbor was satisfied for projects in development by December 31, 2010, a year-end legislative scramble extended that deadline to the end of 2011 with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("Tax Relief Act of 2010"). Also within the Tax Relief Act of 2010 was a mechanism allowing for renewable developers to claim 100% bonus depreciation for the full cost of the project on their tax returns in the year placed in service, provided the equipment is acquired and placed in service after September 8, 2010 and before January 1, 2012. After that date, the bonus depreciation drops to 50% and is called a "bonus" in this context because the developer is also eligible to claim the other 50% using the usual MACR depreciation deduction rules over the applicable period of time.

Overall, the federal tax credit renewals and expansions represent a major boost to the industry and provide energy consumers with unprecedented access to incentives to support new on-site generation of renewable energy.[2]

State Renewable Energy Incentives: A growing list of states are adopting legislation that provides state tax incentives and market-based incentives for renewable energy or taking executive action to promote renewables. A case in point for programs that have produced results is New Jersey. Within the last few years, New Jersey's governors have signed legislation that exempts renewable energy systems from real property taxes in the state, establishes zoning preferences and limits the ability of municipal zoning authorities to regulate solar. In addition, the state enacted a solar bill that steadily increases the quantity of solar energy that will need to be procured over at least the next decade to satisfy the state's renewable portfolio standard. In addition, New Jersey's 2008 law called the Global Warming Response Act authorized the state’s investor-owned electric utilities to invest directly in renewable energy projects and recover their investment costs in utility rates, which the state viewed as a strategy to jump start its efforts to achieve more than 20 percent renewable energy by the year 2020, a goal prominently featured in the New Jersey Energy Master Plan as well.

Separately, the public utility commissions in various states continue to issue orders and adopt policies that encourage enforcement of renewable portfolio standards and that provide separate funding support for renewable energy systems. New Jersey's market-based approach that is now embedded in state statutes started, for example, with the Board of Public Utilities ("BPU") issuing orders authorizing and directing the electric utilities to implement solar programs that support the growing market. One utility was authorized to start a solar loan program that covers 60 percent of the project cost and allows repayment of the loans in the form of assignment of solar renewable energy certificates, or SRECs,[3] instead of in cash.

Unlike "feed-in tariff" programs common in Europe, the SREC programs developed in states like New Jersey create market mechanisms that support private investments in renewables without direct cash grants from the government or utilities. Under these programs, the renewable portfolio standard mandates load-serving entities (typically, utilities and competitive suppliers) to purchase a portion of supply of electricity from clean energy sources or make a penalty payment, called an alternative compliance payment (or ACP), into a state clean energy fund. In an effort to simplify clean energy transactions in the wholesale market, owners of renewable energy projects are allowed to "disaggregate" or sell separately the renewable energy "attributes" of their project outputs from the actual electrons delivered into the power grid by selling renewable energy certificates (or SRECs in the case of solar) separately in the market. Once the state determines the ACP amount, which is more than $600 range in New Jersey for SRECs, the ACP becomes the ceiling price for SRECs and the trading market for SRECs can flourish under typical supply-demand market forces below the ACP. As the state-mandated demand for renewables continues to grow, the value of SRECs remain strong below the ACP and as project developments eventually lead to saturation in the market, the SREC values will drop. Long term, the market risk therefore becomes how low will SREC values drop.

In New Jersey's case, the state allowed three of its electric utilities to ameliorate this long-term SREC valuation risk by launching auctions to procure long-term contracts supplying them with SRECs (over 10 to 15 years) to satisfy the utilities' own renewable portfolio standard obligations. When the mandate for acquisition of SRECs by load-serving entities (such as utilities or competitive energy suppliers) is added to the regulators' increase in the solar ACP more than $600 per SREC this year, market forces have been steadily rising to encourage the solar industry to focus on New Jersey as one of the hottest markets for expansion.

The results speak for themselves. Through February, 2011, New Jersey has more than 8,600 residential and commercial solar projects installed that are producing more than 175 MW of power supply, second only to California.

New Jersey is certainly not the only state to provide strong incentives that favor expanded production of renewable energy, market support for the value of SRECs or to encourage customers to install on-site generation of energy facilities. Connecticut, for example, has provided many millions in grant funds to hundreds of commercial and industrial customers at the rate of $450 per KW for combined heat and power or renewable energy, with multiple funding programs available. Furthermore, Connecticut's legislature reported out of committee in March, 2011 a measure that would create a solar "feed-in" tariff and its prospects for passage are considered quite high. Delaware, Pennsylvania, New York and Massachusetts are among the states that similarly have various programs and incentives that support expanded investments in renewable energy. Massachusetts enacted the Green Communities Act more than two years ago which included a solar mechanism and solar project development is accelerating there as a result as well. In Massachusetts, SRECs are currently trading in the $500/MWh range as demand continues to outstrip supply, but that balance is expected to tip in the opposite direction once the aggregate capacity for one percent of nongovernmental net metered projects is reached probably later this year.

Business Customer Options: Industrial and commercial electric consumers that have installed alternative or renewable energy projects on their buildings or properties (behind the meter) or invested in energy efficiency programs realize that by investing in renewable energy or even cogeneration on-site, they are increasing on-site reliability of electric supply to their facilities, reducing carbon footprints, and expanding sustainability. Depending on the selected technology and energy savings, companies that install such distributed generation, renewable energy and energy efficiency may also enjoy significant stakeholder relationship benefits that could come in handy in the form of community support for the next zoning application or positive corporate benefits for marketing and disclosure to shareholders.

More significantly, on-site renewable energy, especially with all of the financial incentives supporting such project deployments, enables end-use customers to achieve a predictable long-term cost of power supply and credits for supplying clean power back to the grid.

So how does a business that wants to install an on-site renewable energy plant such as solar go about doing it?

There are generally two different business models and legal frameworks for these projects. One option is for the business to buy directly the on-site energy system and enter into a contract for the system to be installed, with the business responsible for ownership, operation and maintenance. These project owners will also be the “tax owner” for purposes of the incentives and, therefore, directly eligible to claim applicable tax credits and accelerated depreciation benefits.

The second option, which the industry calls a power purchase agreement (or “PPA”) model, is one in which the business customer enters into a contract for a third-party energy provider to design, install, own, operate and maintain the energy system on the business customer’s premises pursuant to an agreement that can look like both a lease and a long-term power sales contract. The PPA model features a lease in the sense that the energy provider’s system is located on the business customer’s property as a “host,” and features a power sales contract as the business customer pledges to buy the power output from the system. The PPA model is especially beneficial for business customers that prefer to “stick to their knitting” in running their business without sinking lots of capital in a new energy plant. It also ensures a predictable long-term on-site supply of electricity to the business. The PPA model is also especially desirable for allowing a third-party or bank to access federal investment tax credits or production tax credits unavailable to commercial customers that are non-profits (i.e., schools or hospitals).

Speaking of federal tax credits, it is critical that parties entering into agreements for on-site electric generation, renewable energy or energy efficiency projects understand all of the various streams of cash and monetary benefits available to the project owner or energy services provider. This is critical to negotiating price and allocating risk and other business terms between the contract counter-parties.

For example, the contracts need to specify which party is entitled to claim ownership of and trade the SRECs that are generated by the project because the renewable portfolio standard prevalent in the Northeast requires the electric load-serving entities to either buy a certain portion of their energy supply from renewable energy sources or buy SRECs that are registered and traded through the power grid system. So these SRECs have real value that need to be understood as part of the transaction.

In summary, now is a great time for U.S. businesses to consider taking control of their own electricity costs and to secure their energy future by exploring on-site electric generation, investing in renewable energy and installing energy efficiency equipment. And it is a great time for buyers of renewable energy equipment and manufacturers and distributors and service providers of related services to enter the renewable energy market in the Northeast . Such opportunities are currently supported substantially by federal and state policies and grant programs promoting their use, but some of these lucrative benefits are not likely to last indefinitely. There are various options for installing such systems and various energy service providers can offer contract terms and options to capture these benefits. Naturally, educated and well-advised businesses are best able to understand what programs and options are most suited for their needs.