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renewable energy funding RESIDENTIAL CUSTOMERS 2011 introduction . . . Thank you for taking the time to view this publication. Its purpose is to help residential customers understand financing opportunities and options other than NorthWestern Energy’s Universal Systems Benefits (USB) Program. Customers should consider that finance programs change frequently and the best sources for up-to-date funding specifics are reputable renewable energy dealers. The publication also has links and brief summaries to several business and agricultural funding opportunities. Most business programs deal with considerably higher funding amounts and more rigorous application standards. These include Small Business Administration and bond funding that are not included in this publication, due to their complexity. Because of the State’s relatively low population and large geographic area, many programs found in larger populations and urban areas have not yet reached Montana. This is especially true with solar and small wind leasing and local financing. As these types of financing packages become available, RE dealers and installers will be the most reliable and up-to-date sources for information. The demand for USB funding for residential energy systems has steadily increased, leading to more applications and competition. NorthWestern Energy urges all customers to look at all financing opportunities, whether it is the customer’s intent to utilize them with or independent of a USB grant. a reminder about usb incentive funds . . . For an overview and step-by-step description of NorthWestern Energy’s USB Program and how to submit a RE proposal, please refer to the NWE publication, “Green Sense” - Making Sound Renewable Energy Choices. This publication is available at northwesternenergy.com, or it can be requested through mail by calling 1-888-700-6878. In order to qualify for USB funding, the customer must include the “grant requirement” form and cover letter detailed in Green Sense. NorthWestern Energy does not provide funding for systems under construction or already in operation. Funding is dependent on the amount of money available, number of proposals, and the nature of the request. Selection criteria includes geographic diversity within NorthWestern Energy’s Montana service territory, a unique educational component for the technology or system, public versus private benefits, and considerations for low- income customers. In certain cases, the cost/benefit ratio of the project may be a consideration. Renewable energy research and development (R&D) projects are not considered for funding. grant and loan terminology. . . One of the basic, but sometimes misunderstood funding questions, is the difference between a grant and a loan. Grants consist of funding that doesn’t have to be repaid if the terms of the contract are satisfied, while loans are paid back to the lender, usually with interest. Loans can be categorized into two types – secured and unsecured. Secured loans are issued and protected by an asset or type of collateral. The purchased item, such as a home, car or equipment, is used as collateral and the lending agency places a lien on the collateral. The lender will hold the deed or title until the lien is paid in full. Secured loans have longer terms (up to 30 years) and relatively lower interest rates, depending in part on the strength of the collateral. Home secured loans are popular because in most cases the mortgage interest can be deducted from income taxes. Unsecured loans are not secured by collateral and usually demand higher interest rates and shorter payback schedules than secured loans. These types of loans are also called signature loans. The Fannie Mae Energy Loan is one example of an unsecured energy loan, the terms of which include a ten year payback schedule. Guaranty loans, which are secured, usually offer special terms and rates. These loans are offered by traditional lenders to consumers including low-income, minorities and veterans. They come with a “guaranty” by a state or federal agency as the form of security. tax credits versus deductions . . . Although tax credits and tax deductions both reduce the amount of total taxes paid, there are specific distinctions between the two. Consumers are allowed certain deductions (like those for dependent children) which reduce the amount of income that is considered taxable. Tax deductions are figured at the onset of preparing a tax statement. Conversely, tax credits are taken after the initial tax statement is prepared and the consumer has determined how much tax must actually be paid. Tax credits are deducted directly from the amount owed to the government. In some cases and jurisdictions, tax credits may be carried over to future years. This is true in a number of renewable energy tax incentive programs. Some types of renewable energy systems may qualify the homeowner for a property tax exemption. This is meant to stimulate renewable energy activity and is based on providing relief on RE equipment and systems that will increase the assessed value of a property. The exemption is intended to offset the increased value of the property as a result of the RE system. There is a specific time limit that the system can be subject to no or reduced taxes. federal renewable energy tax credit . . . United States residents may claim a personal tax credit of 30% for qualified expenditures on a renewable energy system that serves as a “dwelling unit” for the taxpayer. The acceptable expenditures include system components, assembly and installation, labor and on site preparation costs, and necessary wiring and/or plumbing. For existing homes, the credit is valid when the system is completed. For new homes, the occupancy date is used. Tax credits that exceed liability may be carried forward to future years. Homeowners should consult their tax professional before purchase and installation of a system. Reputable RE dealers and installers will also have a thorough understanding of tax incentives. The 30% tax credit has specific requirements for different technologies, including equipment specifications and ratings for solar heating and heat pumps. The 30% federal tax credit is valid until December 31, 2016. The latest revision removed the former maximum credit amount for all eligible technologies except fuel cells; however systems purchased and installed before January 1, 2009 are still subject to the appropriate capped tax amounts which were in place prior to the increase to 30%. montana alternative energy tax credit . . . The State of Montana offers homeowners a maximum $500 tax credit for qualified renewable energy systems installed after December 31, 2001. Married couples my receive credit up to $1,000 if filing joint returns. This tax credit is valid for the component and installation costs. Systems must be new and installed with required performance and safety standards. The Montana Tax Credit can be carried over for a period of four years. Most renewable technologies are acceptable, with the exception being hydroelectric systems over one megawatt or hydroelectric systems placed on impoundments over 20 acres in surface area. The State of Montana Alternative Energy Tax Credit incorporates crossover technologies popular in Montana. Both low-emission wood stoves and passive solar space heating are eligible for the credit. Solar space and solar water heat are also covered by the incentive. More information is available at http://www.energizemontana.com under the “Tax and Other Incentives” header of the Renewable Energy section, or by contacting the Department of Revenue at (406) 444-6900. montana geothermal systems tax credit . . . Geothermal heat pump systems, which can be used for both heating and cooling a dwelling, are eligible for up to a maximum $1,500 personal tax credit. The system must be installed in a resident’s personal dwelling and covers the installed cost. The tax credit may be carried forward for up to seven years. Builders of “spec” homes may also take the tax credit prior to the sale of the home. The new homeowner is not eligible to claim the credit again. montana re property tax exemption . . . Montana residents can claim a 100% property tax exemption on the assessed value of eligible renewable energy systems. This is available for both residential and multi-family residential properties. It is capped for single-family renewable energy systems up to $20,000 and multi- family units up to $100,000. Low-emission and biomass combustion systems may qualify for this exemption. Renewable energy systems are classified as Class 4 property and are currently taxed at slightly over three percent of assessed value. The tax exemption may be taken for 10 years. montana re investment tax credit . . . Personal investments of over $5,000 may be eligible for up to a 35% tax credit against individual or corporate tax on investment generated income. It is important to remember that eligible facilities and activities are subjective and professional tax consultation is recommended before the investment is made. Eligible facilities can include plants developing renewable energy equipment. The tax credit can be carried over and applied against state tax liability for up to seven years. Investments in generation facilities or on a reservation can be carried over for a period of 15 years. This exemption may not be used in conjunction with other Montana State investment or energy tax benefits or with the property tax exemption for renewable energy systems. It is available to both new facility construction and for the purchase of an existing facility. state of montana alternative energy revolving loan (aerlp) program . . . The State of Montana has a loan program that awards loans to individuals, small businesses, local governments, university system units, and nonprofit entities. The requirements include that the loan be used to generate energy for the applicant’s own use. The Montana Department of Environmental Quality (DEQ) administers the program and the majority of funding for the program is provided from air quality penalties levied by the DEQ. Additional funds from the American Recovery and Reinvestment Act have led to an increase in available loan amounts, as well as some additional requirements regarding such things as project verification and reporting. One of the unique qualities of AERLP loans is that energy conservation measures can be included in the loan when combined with an acceptable renewable energy technology. The DEQ has staff professionals who review and approve both renewable system and conservation/renewable combination submissions. Loans can be given for up to $60,000. The loan terms are written for up to 15 years at a fixed interest rate (4.0% in 2010). This rate is determined on an annual basis by the DEQ. Funds are limited and projects are ranked according to criteria including return on investment, system performance and reliability, and avoided fossil fuel consumption. Once a loan is approved, money is disbursed when funds become available. fannie mae and freddie mac re loans . . . The Federal National Mortgage Association (FNMA), commonly called Fannie Mae, is the largest home mortgage funding source in the United States. The company funds both consumer loans for renewable energy and efficiency and works with energy based mortgages on the secondary level. Fannie Mae’s “Showing America a New Way Home” program, launched in 1994, is meant to provide up to one trillion dollars for minorities and special housing needs. As part of this, the company is working with utility companies to finance energy efficiency improvements. Both solar heat and solar PV are eligible for funding under Fannie Mae’s Residential Energy Efficiency Improvement Loan Program. This program provides below market interest rate financing and focuses on a bundled approach to energy improvements. The loans are done in partnership with utility companies and are unsecured. Fannie Mae energy loans are typically granted for amounts up to $15,000. Payment terms are usually 10 years. Freddie Mac is the common name for the Federal Home Loan Mortgage Corporation (FHLMC). Freddie Mac is different than Fannie Mae in that it is a secondary mortgage lender that purchases mortgages from lenders, packages them, and sells them as investments. Mortgage lenders use Freddie Mac proceeds to fund new mortgages. To promote energy efficiency and both solar thermal and solar PV, the institution has specific criteria for Energy Efficient Mortgages (EEM’s) which they will purchase on the secondary market. Freddie Mac will purchase EEMs up to 10% above the base loan on mortgages up to $240,000. The loan terms are traditional 15,20, and 30 year plans and also include 30 year balloon type loans. Freddie Mac EEM’s are fixed at market rates and are secured at 95% loan to value. veterans affairs (va) loans . . . Veterans and service persons can obtain home loans guaranteed by the U.S. Department of Veterans Affairs (VA). The guarantee typically allows military personnel to acquire loans with favorable rates and no down payment. Although there is no maximum loan amount, banks typically will not exceed $203,000 for a home loan. Terms and amounts are also dependant on property value and the borrower’s income and history. VA loans may be increased by up to $3,000 based on documented energy efficiency or renewable energy improvements, or up to $6,000 if the increase in the mortgage payment will be offset by decreased utility bills. These amounts are valid for both new home purchases and home improvement loans. A refinancing loan cannot exceed 90% of the home value plus the cost of the improvements. VA energy improvement and renewable loan specifics are determined and approved on an individual basis. In new construction, a solar PV or solar thermal system can be included in the appraised price of the home. VA loans are granted for either 15 or 30 years at fixed rates. First mortgages are funded at 100% loan to value, plus costs. energy star home loans . . . Currently, there is an emphasis on Energy Star homes that sometimes incorporate renewable energy technologies. Working in conjunction with national lenders, the Environmental Protection Agency’s (EPA) Energy Star Financing Program provides underwriting guidelines to home buyers which allows the homeowner to borrow from 10-24% higher than their qualification on a traditional, non-Energy Star rated home. In order to qualify, Energy Star homes have to be certified and are 30% more energy efficient than homes constructed to the model energy code. Renewable energy systems must be grid-tied and have a 10 year payback limit. First mortgages on Energy Star rated homes can be financed for up to 120% of the home’s cost. In addition, lenders often offer cash discounts at closing that reduce closing costs. Interest rates are competitive with conventional mortgages. private financing opportunities . . . In the past several years, there have been several solar PV and small-scale wind manufacturers who have teamed up with national lenders to provide financing on equipment and installations. At the time of this publication, there are several dealers in Montana providing financing packages. Consumers should be aware of financing options with high interest rates, fine print, and excessive penalties (similar to credit card financing). There have been reports of companies in more populated areas that promote “credit card” type financing on systems. Caution should also be used when purchasing financed systems with regard to tax credits and renewable energy credit (REC) assignments. A good rule-of-thumb to follow is that the financing package should come through the manufacturer rather than local sources. These loans usually have lower interest rates, are less punitive, and have a more favorable model based on volume and marketing of the specific system. residential renewable energy leases . . . One of the emerging financing options, especially with solar PV, is the residential solar lease option. RE leases can be compared to those common in the automobile industry, and while there are different types and lease specifics, the concept is fairly straightforward. Rather than purchasing a system outright, a homeowner enters into a timed lease agreement with a lessor (who is the actual owner of the RE system) and agrees to make monthly payments while benefiting from the electricity generated. In most agreements, the homeowner also enters into a contract with the local utility and receives the benefits of net metering. In a productive situation, the reduced monthly utility bill will offset the lease payment. Additionally, at the end of the lease agreement, the homeowner can usually extend the agreement for a reduced cost or purchase the system outright for the fair market value of the depreciated equipment. Homeowners should consult their tax professional when reviewing lease versus buy options for renewable energy systems. This issue has moved to the forefront based on the January 1, 2009 lifting of the cap on the residential investment tax credit (ITC). The lifting of the cap limit has impacted the residential solar PV leasing industry, as well as brought into question the validity of financing and taking the tax deduction through a home equity loan. Most companies that lease renewable energy systems (primarily solar PV) also include provisions for monitoring, maintenance and repair in the lease agreement. A minimum production value is also included with some systems. Both of these are attractive options for homeowners. In most cases, the renewable energy company providing the equipment and entering into the agreement with the homeowner is backed by a financial institution. The institution is the tax equity investor in the project and claims both the ITC and the depreciation benefits. The RE company and/or financial institution will typically claim the Renewable Energy Credits (REC’s) for the system, where applicable. They then will bundle credits from all homeowners and sell them. It is important for homeowners to consider that both leasing and company financing are relatively new to the RE market and are targeted at the present time for larger markets and states with aggressive renewable energy portfolios. However, some of the more progressive Montana RE companies are beginning to explore the potential of these options and the homeowner should inquire about all financing options. usda reap programs for agricultural producers and rural small business owners . . . The 2002 Federal Farm Bill introduced the Rural Energy for America (REAP) Program. REAP funds are intended to assist both agricultural producers and rural small businesses with purchasing renewable energy systems. Rural Montana consumers should recognize that the program is not intended to power rural homes (farm or ranch residences) and that a separate meter is required for the home to ensure this is adhered to. REAP grants will fund up to 25% of a RE project costs. In 2008, the program began including funding for feasibility studies, which are required for projects with a total cost of $200,000 or more. Funding for studies is also set at 25% of the cost of the study or $50,000, whichever comes first. Most RE technologies are suitable for REAP funding. The minimum grant award is $2,500 and the maximum amount is $500,000. On a nationwide basis, $70 million is allocated for fiscal years 2011 and 2012. According to the USDA, approximately 95% of the funds are dedicated directly to renewable energy and energy efficiency projects. The USDA also estimates that 20% of the funds are available for grants totaling $20,000 or less. These smaller grants do not require feasibility studies and are funded out of a special fund at the national level. Most of the grants that have been funded in Montana to date are in this category. The REAP funding also includes stand-alone guaranteed loans and grant/loan combination packages. Together, the loan and grant cannot exceed 75% of a project’s costs. The maximum guaranteed loan amount is $25 million. Applicants can only solicit one renewable energy and one energy efficiency grant at a time, and the yearly total awarded to an individual applicant cannot exceed $750,000. There has been some confusion about whether consumers who are awarded REAP funds are eligible for other government and private funding. This could potentially be an issue for awards at the majority of funding levels. The USDA guidelines suggest that other federal grants used in conjunction with a REAP grant will reduce an applicants allowable benefits. However, federal money that is considered “pass-through”, in that it is administered by state or local governments, would not decrease the benefit amount. Applicants applying for a project utilizing several government funding sources should clarify funding amounts and grant overlaps with the appropriate involved agencies. Private funding and grants received from private sources do not reduce REAP funding. funding summary overview . . . Name Type Overview Web Site Federal Renewable Energy Tax Federal Personal √ 30% maximum - can be carried over. www.irs.gov Credit Tax Credit √ Most RE technologies eligible (with restrictions). √ Credit available until December 31, 2016. Montana Alternative Energy Tax State Personal √ $500 -single, $1,000 married maximum - can be carried www.energizemontana.com Credit Tax Credit over for four years. √ Most RE technologies eligible (includes low-emission wood combustion devices). √ Systems need to be in compliance with statutes. Montana Geothermal Systems Tax State Personal √ $1,500 maximum - can be carried over seven years. www.energizemontana.com Credit Tax Credit √ Must be installed on a personal dwelling. √ Builders can use on “spec” houses but the credit can only be claimed once. Montana Renewable Energy Property Tax √ 10 year exemption up to $20,000 for single family and www.energizemontana.com Property Tax Exemption Exemption $100,00 for multi-family dwellings on assessed value of RE equipment. √ Includes low-emission wood and biomass combustors. Montana Renewable Energy State Personal √ 35% credit on RE investments over $5,000. In most cases, www.energizemontana.com Investment Tax Credit and Corporate credit may be carried over for seven years. Tax Credit √ Credit may only be claimed on net income generated by the RE equipment or by related business activities. Professional tax advice is suggested before investment. √ Credit may not be taken with other state energy or investment tax incentives. Name Type Overview Web Site Montana Alternative Energy State RE Loan √ Loan amounts up to $60,000. Loan terms up to 15 years. www.energizemontana.com Revolving Loan Program √ Energy conservation measures can be funded if included with the RE system. √ Interest rates are set annually and are fixed for the term of the loan. (Loan terms were 4.0% in 2010) Fannie Mae Energy Loan RE Home Loan √ Unsecured loans up to 10 years. Usually up to $15,000. www.fanniemae.com and Efficiency √ Loans for specific RE systems and energy efficiency Improvement upgrades. Loan. Freddie Mac Energy Loan RE Home Loan √ Funds solar PV and solar thermal to 10% above base loan www.freddiemac.com value. √ Varying loan terms and interest rates on EEMs. Veterans Affairs (VA) Energy Loan RE Home Loan √ Funds solar PV and solar thermal to 10% above base loan www.va.gov/vas/loan/ value. lenders.htm √ 15 and 30 year fixed rates. Total home/system financing up to $230,000. ENERGY STAR® Loan RE Home Loan √ Funds solar PV and solar thermal on homes 30% more www.epa.gov efficient than code. √ 30 year mortgage. Loan amount follows Fannie Mae and Freddie Mac guidelines. √ 10 year payback on systems is required. Private RE Financing RE System Loan √ Financing terms and rates highly variable. NA √ Consumers should understand tax and REC terms before financing. Residential Leasing Programs RE System Lease √ Similar as vehicle lease with buyout at fair market value NA usually offered. √ Consumers should understand tax and REC terms before financing. REAP Grants RE System √ Funds up to 25% of project costs. $2,500 - $500,000. www.rurdev.usda.gov Grant √ Intended for agriculture and rural small business. REAP Loans RE System Loan √ Funds up to 75% of eligible costs up to $25 million. www.rurdev.usda.gov √ Terms differ with specific loan items (i.e.. real estate, equipment, working capital). √ Can be used in conjunction with REAP Grant.
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