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Community Developments Investments (Fall 2013)

A Look Inside…

The Elbow Creek Wind Farm, in Howard County, Tex., uses 53 turbine generators to provide electrical power to nearly 100,000 households. Courtesy of Siemens Energy Inc. ©2013. All rights reserved.
The Elbow Creek Wind Farm, in Howard County, Tex., uses 53 turbine generators to provide electrical power to nearly 100,000 households.

Barry Wides, Deputy Comptroller, Community Affairs, OCC

National banks and federal savings associations (collectively, banks) can be sources of financing for facilities that generate renewable energy, including wind energy installations. If a bank demonstrates that a wind energy facility provides a public benefit, such as job creation in low- and moderate-income areas, the bank can invest in the facility using the public welfare investment authority (12 USC 24 (Eleventh), 12 CFR 24). For banks with the requisite expertise and risk management capabilities, financing wind-generating installations and equipment manufacturing facilities can benefit a bank’s bottom line, be good for the environment, and help move the United States closer to energy independence.

Financing wind-generating installations can pose a variety of credit, operational, legal, and reputation risks that a bank must understand and manage before investing in such projects. These projects often require complex, structured transactions that demand specialized accounting, legal, environmental, and credit expertise. In this newsletter, the article  that describes how Wells Fargo, NA, has financed a community-scale wind energy project highlights the need for careful due diligence and a thorough understanding of compliance, legal, and accounting issues before undertaking such investments. National banks and federal savings associations that are considering such investments are encouraged to consult with their supervisory office to discuss potential legal requirements and safety and soundness issues.

American wind energy generation is growing quickly. According to the Wind Energy Foundation, wind power is the fastest-growing source of electricity production in the world, and there is enough onshore wind in the United States to power the country 10 times over.

Financing for the wind production industry creates benefits, including

  • expansion and diversification of renewable energy production.
  • new “green” production and manufacturing jobs that help grow the economy.
  • conserving water otherwise used in energy production.

Today’s wind industry produces more than 60,000 megawatts of cumulative wind capacity generated by more than 45,000 turbines. The manufacturing segment is growing as well, with more than 550 manufacturing facilities in 44 states making wind turbine components for use in the United States and overseas.

Banks can invest in these energy-saving, job-creating projects if the transactions meet the requirements of the public welfare investment authority. Such investments include projects that primarily benefit low- and moderate-income individuals and low- and moderate-income areas, projects that benefit areas targeted by a governmental entity for redevelopment, and projects that would receive consideration as a “qualified investment” under the Community Reinvestment Act.

Banks that invest in wind energy production facilities also can take advantage of federal production tax-credit (PTC) or investment tax credit (ITC) incentives. Although the PTC is set to expire on December 31, 2013, projects that begin construction by this date will be eligible to receive the credit. The Prioritizing Energy Efficient Renewables Act (PEER), HR 2539, which would permanently extend the PTC for wind and other renewables, has been introduced by Representative Jan Schakowsky (D-Ill.). The Obama administration’s FY 2014 budget also proposed making the PTC for wind energy permanent.1 The ITC is authorized through December 31, 2016.

In this newsletter, an article by the American Wind Energy Association explains how the PTC and the ITC work and illustrates how these tax credit programs have supported and encouraged wind energy growth. Another article describes how tax credit financing by Wells Fargo, NA, of wind generation projects is helping the bank meet its environmental and community goals, and provides a detailed description of a  community scale project in which the bank invested. The U.S. Department of Energy (DOE) contributed an article describing the various activities that the agency is engaged in to support and encourage wind energy expansion. With a budget of more than $88 million in 2013, the DOE’s efforts have improved turbine performance, brought costs down, and reduced market barriers.

In addition, this publication discusses two important regulatory issues of concern to banks that are active in the renewable energy sector. One article explains why and how banks can make real estate investments in wind energy projects by meeting the requirements of the public welfare investment authority. Another article covers situations in which a bank may receive positive consideration under the Community Reinvestment Act for wind energy projects if the bank can demonstrate that the investment activity’s primary purpose is community development, as defined in the CRA regulation.

Similar to our earlier Community Developments Investments issue on investments in solar energy facilities using federal energy investment tax credits, this issue serves as a guide for banks interested in how renewable wind energy transactions can fit into their overall investment strategies. 

  The Gratiot County Wind Project, the largest wind farm in Michigan, produces 213 megawatts through 133 turbines.  AWEA
The Gratiot County Wind Project, the largest wind farm in Michigan, produces 213 megawatts through 133 turbines.

Renewable Wind Energy Tax Provisions

Section 45 of the Internal Revenue Code (IRC) of 1986 (26 USC 45) provides a renewable energy production tax credit (PTC) to owners or operators of electric generation facilities that produce electricity from “qualified energy resources,” including wind energy generation, at “qualified facilities” that are placed into service by a specified date. The tax credit earned by the owner or operator is based on the amount of energy that is produced. The PTC authority has been renewed periodically, most recently in January 2013. The American Taxpayer Relief Act of 2012 (Pub. L. No. 112-240, 126 Stat. 2313) extended the PTC authority through December 31, 2013, and the eligibility requirement that the facility be “placed in service” was changed to require that a qualified facility must have “begun construction” before January 1, 2014.

Instead of using the PTC, qualified wind energy facilities may use the energy investment tax credit (ITC) authorized by section 48 of the IRC (26 USC 48) if the facilities are placed in service before December 31, 2016, and had begun construction before January 1, 2014, pursuant to Notice  2013-29.1  The amount of the ITC is 30 percent of the total cost of a wind energy installation, including both equipment and labor but not the building or structural components on which the equipment is placed. The full value of the energy ITC is earned when the wind energy facility is ready and available for its intended use (i.e., placed in service). For the first five years, however, the tax credit is subject to recapture if either (1) the property ceases to be a qualified energy facility, or (2) a change in ownership interest occurs. The recapture rate declines by 20 percent annually until the five-year compliance period expires.

The Internal Revenue Service (IRS) has guidance on the meaning of “begun construction.” Notice 2013-29, issued on May 13, 2013, indicates that in order to be eligible to receive the PTC or ITC, a renewable energy facility must have begun construction before January 1, 2014, by showing that either (1) “physical work of a significant nature” has begun, or (2) at least 5 percent of the total cost of the project has been incurred (referred to as “safe harbor”). Additionally, “continuous efforts to advance towards completion of the facility” must be made after construction has begun. Notice 2013-29 is available at http://www.irs.gov/irb/2013-20_IRB/ar09.html. Subsequently, the IRS issued Notice 2013-60, on September 20, 2013, which provides more certainty through a “deemed satisfaction” rule, so that developers could offer more assurance to investors that projects will qualify for the PTC or ITC. This clarification treats a facility as having satisfied the continuous construction test or the continuous efforts test if the taxpayer places the facility in service before January 1, 2016.

Another tax consideration for investments in wind energy equipment is the benefit from the modified accelerated cost recovery system, which provides accelerated depreciation over a five-year period, using the straight-line 20 percent double declining balance depreciation treatment under 26 USC 168.

Banks should consult their tax planners for advice about these tax provisions and the provisions’ applicability to specific transactions, as well as the consequences that may apply to their own transactions.

1Originally, the energy ITC provided a 10 percent tax credit, but the Energy Policy Act of 2005 increased this credit to 30 percent. To further encourage the growth and stability of the renewable energy industry, the Energy Improvement and Extension Act of 2008 extended the credit through December 31, 2016. The American Recovery and Reinvestment Tax Act further enhanced the benefit of the energy ITC by eliminating the requirement to reduce the amount to which the energy ITC applied by the value of any subsidy that the project receives.

For More Information

OCC Resources

Public Welfare Investments (12 CFR 24) Resource Directory
www.occ.gov/topics/community-affairs/resource-directories/public-welfare-investments/index-public-welfare-investments.html

Renewable Energy Resource Directory
www.occ.gov/topics/community-affairs/resource-directories/tax-credits/tax-credits-renewable-energy.html

Web Resources

American Council on Renewable Energy
www.acore.org/

American Wind Energy Association
www.awea.org/

DSIRE, Database of State Incentives for Renewables & Efficiency, North Carolina Solar Center, North Carolina State University, a comprehensive source of information on federal, state, local, and utility incentives that promote renewable energy and energy efficiency
www.dsireusa.org

Lawrence Berkeley National Laboratory
http://emp.lbl.gov/research-areas/renewable-energy

Lawrence Livermore National Laboratory
https://missions.llnl.gov/?q=energy

List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies
www.ffiec.gov/cra/distressed.htm

National Renewable Energy Laboratory
www.nrel.gov/wind/

Novogradac Renewable Energy Tax Credit Resource Center
www.novoco.com/energy/index.php

Sandia National Laboratories
www.sandia.gov/wind

U.S. Department of Energy Wind Program, which provides information about federal programs involving wind energy generation
www.wind.energy.gov

U.S. Energy Information Administration, which provides statistical information and analysis regarding renewable energy
www.eia.doe.gov/fuelrenewable.html

Publications

2012 Market Report on Wind Technologies in Distributed Applications
www1.eere.energy.gov/wind/pdfs/2012_distributed_wind_technologies_market_report.pdf

2012 Wind Technologies Market Report
www1.eere.energy.gov/wind/pdfs/2012_wind_technologies_market_report.pdf