16 November 2009
The federal stimulus act (“American Recovery and Reinvestment” or “ARRA”) makes substantial benefits available to developers of wind and other renewable projects located in the United States. However, a relevant question for prospective foreign buyers or investors of US renewable companies (as well as for the sellers to such buyers) is whether any ARRA provisions limit or discriminate against renewable companies or their projects due to foreign ownership. The following more closely examines this question with respect to a few of the ARRA provisions that are most significant to financing renewables projects.
Among other things, ARRA allows renewable project developers the option to forego tax credits and receive a cash grant from the US government for 30% of project cost for US renewable projects placed in service in 2009 or 2010 (or starts construction in 2009 or 2010 and are completed within a specified time thereafter). The US Treasury Department issued guidance on the cash grant program in July which specifies that a foreign person or company is only eligible to directly receive a cash grant with respect to property if more than 50 percent of the gross income from the property is subject to US federal income tax. Although the guidance is silent on the point, a Treasury representative has confirmed that a foreign person or company's direct or indirect ownership of an interest in a U.S. company will not adversely affect the US company’s ability to receive a grant it otherwise is eligible to take. As a result, for grant eligibility purposes, it is not necessary to use a so-called "blocker" corporation between the foreign owners and the US company, although it may be desirable to do so for other tax or liability reasons.
"Buy American" Provision
ARRA also contains a provision known as the "Buy American" requirement which prohibits use of ARRA stimulus funds for a project involving a "public building or public work" unless the iron, steel and manufactured goods used in the project are produced in the US. The Buy American provision should not be relevant to most privately-owned renewable projects, including those owned by foreign owners, for several reasons. Although the terms "public building or public work" are not defined under ARRA, it does not appear this was intended to include a privately-owned power project. Also, the Buy American provision applies only to projects receiving funds appropriated in one part of ARRA, Division A (as opposed to another part, Division B). This means that Buy American does not apply to funds appropriated under Division B of ARRA, which includes tax credits for renewable projects and cash grants in lieu of tax credits. Finally, the Buy American provision is to be applied in a manner consistent with US trade agreements, which means that, in certain circumstances, products made in certain foreign countries will be treated equivalently to US-made products.
DOE Loan Guarantee Program
The Department of Energy loan guarantee program originally established under Title XVII of the Energy Policy Act of 2005 was expanded under ARRA to cover new categories of "shovel-ready" projects, including renewable energy systems that generate electricity and that meet a number of other requirements (including commencing construction no later than September 30, 2011). There are no restrictions on foreign ownership of a US renewables company or project in the applicable legislation for the loan guarantee program, the implementing regulations or other guidance available as of the date of this article. Unless the DOE announces otherwise, an application for a loan guarantee may be submitted by a project sponsor, whether foreign owned or domestically owned, and the project may benefit from the guarantee, so long as the project is physically located in the US or its territories or possessions.