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Since 2002, the U.S. Department of Agriculture (USDA) has funded programs to incentivize renewable energy projects on rural lands. Although most of the programs focus on biofuels, the USDA’s Rural Energy for America Program (REAP) provides important financial assistance to other renewables, including solar energy.

REAP has three components. The first, and largest, component goes by the cumbersome name Renewable Energy System and Energy Efficiency Improvement Guaranteed Loan and Grant Program. It provides grants and loan guarantees in rural America to install renewable generation facilities, make energy efficiency improvements and use renewable technologies to reduce energy consumption.

The other two components provide grants to complete energy audits and assist with project development and to fund feasibility studies often required by the USDA and other federal energy programs. The latter two programs are not discussed further in this article, except to note that solar projects are eligible for both types of grant and grants are capped at $100,000.

Solar projects are also eligible under the guaranteed loan and grant program. The program differentiates between large and small solar projects, with small projects defined as generation facilities of 10 kW or less, or thermal projects with rated storage of 240 gallons or less. The distinction means little, except that the USDA has an expressed policy preference for smaller facilities.

To be eligible for a REAP grant or loan guarantee, the applicant must be either an agricultural producer or a rural small business. An agricultural producer is a person or business receiving at least 50% of gross income from agriculture; nurseries and dairies qualify.

A small rural business must have fewer than 500 employees and revenue of less than $6.5 million, and the project site must be located outside of a Census-defined Metropolitan Statistical Area. The siting requirement does not apply to agricultural producers. In both cases, preference is given to very small businesses with fewer than 15 employees and less than $1 million in annual receipts. Nonprofits and public entities are not eligible.

At the time of application, proposed electricity generation projects must have an executed agreement or letter of intent for interconnection and the sale of power. Applicants are required to own the project during both construction and operation, with “ownership” meaning that the applicant controls the revenues, expenses, operation and maintenance of the project. Site control need not be fee ownership; a lease for the term of any financing is sufficient.

 

Program rules

REAP grants are limited to 25% of eligible project costs and capped at $500,000, although requests for grants of $20,000 or less receive preference.

Grants are awarded yearly on a competitive basis, but applications may be submitted year-round. The application deadline for 2012 funding was in June 2012, so a June 2013 deadline should be anticipated for projects seeking grants this year.

Loan guarantees are capped at $25 million, and the underlying loan must be from a USDA-approved lender. The portion of the loan that the USDA will guarantee is calculated on a sliding scale, from up to 85% of a loan of $600,000 or less to 60% of a loan greater than $10 million. A single project cannot receive grants and loan guarantees that in the aggregate exceed 75% of total eligible project costs.

As mentioned earlier, REAP applies express policy preferences for smaller projects done by smaller businesses or individuals. Also, the program prefers commercially proven technologies, such as PV panels or solar thermal heating. Pre-commercial technologies may be eligible if there is some demonstrable potential for commercial viability, but truly experimental technologies will not qualify.

Projects using commercially available technologies seeking a grant of $50,000 or less - and with an overall project cost of $200,000 or less - can benefit from a simplified application process. REAP-funded solar projects are still eligible for the federal investment tax credit, as well as accelerated and bonus depreciation.

 

Funding uncertainty

USDA authorization to promote renewable energy in rural America began with the Farm Security and Rural Investment Act of 2002, commonly known as the 2002 Farm Bill. The USDA renewable energy programs were renewed in the 2008 Farm Bill with total funding of $1.1 billion for renewable energy programs. Because farm bills have historically been reauthorized on five-year cycles, the 2008 Farm Bill was retroactive to 2007 and expired on Sept. 30, 2012.

In April 2012, the Senate Agriculture Committee took up a bill to reauthorize the 2008 Farm Bill, which contained no mandatory funding for USDA energy programs. However, an amendment to reinstitute much of the funding was supported by 11 committee members - six Democrats and five Republicans - showing strong bipartisan support for economic development initiatives in rural areas.

Ultimately, the committee passed a reauthorization of the farm bill that kept mandatory funding for USDA energy programs, although it eliminated a few programs and reduced funding for the remaining programs by about 38%.

REAP specifically was to receive $255 million to be spent over the ensuing five-year period. The bill passed the full Senate in June 2012 without further changes to its energy programs.

Meanwhile, the House Agriculture Committee approved a bill that Speaker John Boehner judged could not pass the full House, and it was not brought up for a vote. While the Senate bill provided mostly mandatory funding for energy programs (including REAP), such funding was only discretionary under the House Agriculture Committee version.

Mandatory funding exists unless taken away in the annual congressional appropriations process, where discretionary funding must be awarded annually by the respective appropriations committees. In this case, discretionary funding is largely illusory, as no farm bill energy programs with only discretionary funding under either the 2002 or 2008 farm bills have ever received any actual money.

With the House Agriculture Committee’s bill declared dead on arrival and farm politics receiving attention during the presidential campaign, Boehner promised a vote on the Senate bill in the lame-duck session after the elections. No vote was held. Instead, an interim extension of the 2008 Farm Bill was included in the last-minute fiscal cliff legislation.

The fiscal cliff bill, formally known as the American Taxpayer Relief Act of 2012, passed Congress on Jan. 1, 2013. President Obama signed the bill into law on Jan. 2. The law extends all USDA energy programs, including REAP, to Sept. 30, 2013, and allocates $25 million in funding to REAP for fiscal-year 2013. Funding beyond Sept. 30, 2013, remains uncertain.

 

Long-term prospects

The agriculture community has wholeheartedly embraced renewable energy through REAP. In fiscal-year 2011, the program awarded $90 million in loan guarantees and grants to 280 renewable energy and energy efficiency projects, including $20.3 million for solar.

Collectively, these projects have significantly lowered energy usage and reduced carbon emissions by 2 million metric tons. In Oregon alone, 36 projects - 19 of which were solar projects - received funding in fiscal-year 2011. State-by-state information on projects completed with REAP funding can be found at the USDA’s website.

Despite these achievements, the continued viability of REAP is uncertain. USDA energy programs in the farm bill occupy a unique position on the political spectrum.

On one hand, federal support for agriculture is a long-standing fixture of domestic spending, with influential support in the private sector. Many Republicans otherwise skeptical of federal spending come from rural states where their constituents strongly support the farm bill and its programs.

This gives farm bill politics a somewhat more bipartisan flavor as compared to the typical partisan spending-versus-cutting debate that seems to characterize our national political discussion.

On the other hand, energy programs in general - and renewable energy programs in particular - are a favorite target of deficit hawks in the Republican Party. REAP may also suffer from continued controversy surrounding biofuels, which receive the lion’s share of farm bill energy project funding.

Thus, although a long-term failure to reauthorize the farm bill as a whole is probably not in the cards, renewable energy advocates need to be vigilant about horse-trading that strips the USDA’s energy programs from the farm bill or makes them functionally useless by receiving only discretionary funding.

Overall, 2013 promises to be a roller-coaster year in Washington, with deadlines constantly looming and (usually) pushed back, only to rise again in a few months. Reauthorization of the farm bill and the USDA energy programs contained within it may very well ride the same roller coaster, with the next deadline approaching in September.

This outcome would not be good for solar energy, which requires long-term policy certainty to thrive. Consequently, renewable energy advocates, including the solar community, would be well served to shout from the rooftops about the significant accomplishments of REAP to date and its enormous potential to contribute to energy independence, a clean environment and continued economic strength in our rural communities. S

 

David J. Petersen is a partner at Tonkon Torp LLP in Portland, Ore. He can be contacted at (503) 802-2054 or david.petersen@tonkon.com.