Is Treasury more closely scrutinizing cash-grant applications? 

Western Wind Energy Corp. recently announced that it had received a Section 1603 cash grant in the amount of $78.3 million for its 120 MW Windstar wind farm, located in Tehachapi, Calif. However, the company says the grant received was $13.2 million less than the amount it submitted to the U.S. Department of the Treasury.

In its explanation for the shortfall, Western Wind claimed that the Treasury had changed the administration of the program. And Western Wind is not alone. Many solar and wind developers are echoing the company’s claims.

“That’s the rumor,” explains David Burton, a partner at New York-based law firm Akin Gump Strauss Hauer & Feld. “The feeling is that Treasury is applying new rules.”

However, Burton says the Treasury has not published updated guidelines since a June 2011 memo discussing how to determine the cost basis of solar projects.

Cash grants – created after the financial collapse of 2008, when tax equity available for renewable energy projects declined 80% – provide a direct payment in lieu of a tax credit, therefore providing renewable energy developers increased flexibility – at the same net cost to the government.

In the case of Western Wind, the question surrounds developer fees.

According to Keith Martin, a partner at New York-based law firm Chadbourne & Parke, so-called developer fees are becoming more common with renewable energy projects. He says developers are using them to increase the tax basis on which Treasury cash grants are paid under Section 1603 of the American Recovery and Reinvestment Act of 2009.

When the program first started, developer fees of 8% to 15% were not uncommon. Nowadays, it appears the Treasury is approving developer fees closer to 3% to 5%.

In the typical arrangement, the project owner pays the company that did the actual development work a fee at the end of construction.

Developer fees are common in many real estate projects, and they were common during the 1980s and 1990s in the independent power industry, where a project company would pay the developer a fee that was often leftover construction loan proceeds or additional borrowing from a term lender as a reward for bringing the project across the finish line.

Although the Treasury would not go into specifics about the mechanics of the cash-grant program, it did say that development fees are allowable in appropriate cases, although the fees and their magnitudes can be scrutinized if paid, for example, between affiliates. According to the Treasury, each case is fact-specific and the amount allowed will vary depending on the circumstances.

For his part, Burton has two theories for the lower cash-grant awards. The first is that the Treasury is reacting to a March 15 letter from the House Subcommittee on Oversight and Investigations sent by Reps. Fred Upton, R-Mich., and Cliff Stearns, R-Fla., which states that “significant doubts have been raised about the program’s vetting and selection of recipients” and goes on to ask seven pointed questions.

The second theory is that the Treasury has hired a new batch of contractors to process grant applications and that each may review applications differently. “It is not clear whether this different standard is in response to political pressure or is simply a different interpretation of existing law and guidance,” says Burton.

The Treasury’s behavior is likely to make developers more hesitant to rely on the cash grant, which will increase developers’ dependence on tax-equity investors, when the demand for tax equity already far exceeds the supply, he adds.

“Changes midstream in programs which have been relied upon by investors and developers are never welcome, and we could see a number of these reductions being questioned or challenged by developers before the U.S. Court of Claims,” he explains.