Once perceived to be a leader in renewable energy development, Oregon now risks becoming a diminishing market. The Oregon Business Energy Tax Credit (“BETC,” pronounced “Betsy”) has been degraded from an effective incentive into something risky, confusing, and uncertain in application, particularly as applied to developing large renewable energy projects and renewable energy equipment manufacturing facilities in Oregon. Investment in these larger, capital-intensive projects is increasingly unattractive because of uncertainty about whether and under what circumstances a project may qualify for a BETC, and whether the rules of the Oregon Department of Energy (the “Department”) will change between the start of construction and completion of a project. In addition, recent and multiple changes to the rate of return available to a BETC investor (which is set by the Department) reduced the effectiveness of the BETC as an incentive, both by injecting further uncertainty into the business community and by making the BETC essentially unmarketable.
In 2009, the Department adopted temporary BETC rules that became effective November 3, 2009. For developers of large renewable energy generation projects (those with capital costs exceeding $20 million), one of the most significant and disappointing changes made by the temporary rules was amending the Department criteria in determining when multiple projects should be treated as one project for purposes of the BETC, i.e., determining when a proposed facility is not “separate and distinct” from one or more other facilities. The temporary rules expired on April 30, 2010, and have since been replaced with permanent rules.
Both the temporary rules and the permanent rules permit the Department to apply criteria to determine whether a facility is “separate or distinct.” The previous BETC rules (effective June 28, 2008) limited the Department’s review to existing and proposed facilities of the person or business filing an application for a BETC. Under the temporary rules, however, the Department understood that it was permitted to compare a proposed facility to any other existing or proposed facility or facilities, regardless of common ownership. In other words, the Department could find that a solar facility proposed to be developed in southern Oregon was “the same facility” as an existing wind facility hundreds of miles away owned by a completely unrelated party.
With permanent rules just released, it is not yet clear how the Department will interpret its authority with respect to aggregation of projects owned by unrelated parties. The “separate and distinct” criteria in the permanent rules differ only slightly from those in the temporary rules, and there is significant uncertainty about what the rules mean and how the Department will apply them to pending and new applications. Also unclear is how the new rules will apply to preliminary determinations made by the Department under the temporary rules that are inconsistent with the permanent rules.
Fortunately, the “separate and distinct” debate has less impact on energy efficiency projects, which tend to be more succinctly defined in the statute and rules. This makes it easier for a developer/investor and the Department to determine which costs are allocable to a particular tax-credit application. In addition, the real or perceived abuses to the BETC program that resulted in many of the recent rule changes were associated with renewable energy resource facilities, causing the Department to examine those projects with greater scrutiny, at least with respect to multiple applications. Because of the overall cost of the BETC program, however, all BETC applications are being reviewed very carefully.
The release of permanent rules may seem to be a favorable turn of events, but it remains to be seen whether the Department will interpret the rules in such a way as to permit projects to actually move forward. Oregon developers and investors are trying to understand which rules apply to their projects at any particular time. Until developers and investors understand the Department’s position on how the permanent rules will be applied, development of large renewable energy projects in Oregon will likely continue to decline.
On top of this, adverse economic conditions are forcing elected officials to examine every program that impacts the general fund, including the BETC program (which reduces the amount of tax revenue received by the state). When the legislature convenes in 2011, one of the issues that it will consider is whether to let the BETC program expire in 2012 as scheduled.1 The legislature may extend some or all of the program, but it is unlikely to remain in its current form. In this revenue-constrained environment, the larger incentives (those for renewable energy resource and manufacturing facilities) will likely be removed from the BETC program. Ideally, new incentive programs will be adopted for those types of projects to enable further renewable energy development in Oregon and add to the strength of Oregon’s reputation as a leader in conservation, efficiency, and renewable development.
Michelle Slater focuses her practice on the energy and sustainability industries. She is a member of the Oregon State Bar Sustainable Future Section Executive Committee. Michelle can be reached at (503) 205-2565 or at [email protected]. This article also appeared in the Future of Energy newsletter at www.futureofenergypdx.org
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