Good news for investors.

Investors frustrated by incentives for energy projects, now tied to tax credits, welcome the news about cash grants.

On July 9th, Treasury and the U.S. Department of Energy announced the long-awaited details of how they intend to distribute approximately $3 billion of the Section 1603 energy grants to eligible renewable energy projects.

According to a circular from Larry F. Eisenstat, Energy Practice Leader at Dickstein Shapiro LLP,treasury plans to provide up to $3 billion as “Payments for Specified Energy Property In Lieu of Tax Credits” to support eligible renewable energy projects. What this means for investors is that up to 30% of project capital costs are eligible for grant funds, if those projects are placed in service in 2009-2010, or start construction within that time frame and are placed in service by 2013. Eligible energy property includes tangible property that is integral to the energy facility and for which depreciation is allowable.

As  Richard Lehtheldt, Partner at Dickstein Shapiro, remarked,

“This is a very big deal after a decade of tax policy that created a crumbling tax equity market.  Cash is the one thing everyone does understand still.”

He went on to add that project financing is a similar to home mortgages, and therefore subject to the same due diligence of the property and the community, as well as the existence of a PPA or Power Purchase Agreement which guarantees a buyer for the energy.  In his view, the treasury program is like a mortgage with a 30% down payment.  In an investor market still more comfortable with a technology model with returns in 3-5 years, a 30% government backed down payment will make such projects seem a lot less risky—and a lot more appetizing.

A Cooley Godward Kronish LLP circular noted that applications for Grants must be received by the Treasury Department before October 1, 2011, and that the grants cover the following types of renewable energy:

• solar electric, thermal, or lighting property
• wind energy property
• closed-loop and open-loop biomass property
• hydropower property
• marine and hydrokinetic renewable energy property
• geothermal property
• fuel cell property
• microturbine property
• combined heat and power system property
• landfill gas and trash combustion property

This bill will go a way to helping achieve the goal of 17% renewable fuels, that has so far been more policy than program.  Now businesses and major investors can seriously look to energy financing as part of a balanced portfolio.

This guidance and the two-part application are available on the Treasury website.