BD Zones and BDO Zones: Weaponizing Biomass to support a Bio-Fueled Economic Recovery

May 20, 2020 |

BDO Zones De-risk and Drive Investment

BDO Zones will not only de-risk investment in bioenergy by focussing development on validated, dependable, and resilient biomass feedstock areas, but the higher return on investment in BDO Zones through tax incentives can enable development of biomass-based projects where it was previously impossible. The OZone program tax benefits — capital gains tax deferral, partial forgiveness of tax on capital gains, and forgiveness of additional gains on investments in OZones — make it easier to finance bio-based projects because the projects can deliver higher returns and be structured with simpler capital stacks that lower costs.

In addition, sponsors of alternative fuel, renewable chemical, bio-based product and sustainable aviation fuel projects may be able to rely on Opportunity Fund investors so that traditional renewable tax credit investors are not required. Here’s why: in a typical renewable project deal, a developer partners with a tax equity investor in a joint venture, holding a project eligible for renewable electricity production tax credits (“PTCs”) or energy investment tax credits (“ITCs”). In the early stages of the project, the profits and losses (including the PTCs and ITCs) are allocated predominantly to the tax equity investor, allowing for the use of PTCs and ITCs to offset its other tax liabilities.

However, the relatively small pool of investors with tax liabilities to offset pales in comparison to the enormous size of the pool of investors with capital gains to offset. What’s more, these investors may be willing to accept lower pre-tax economic return, since the potential for a tax-free exit will enhance the after-tax return considerably. Capital invested in BDO Zones therefore not only reduces transaction costs, but also expands the investor base for bioenergy projects.[viii]

For a growing bio-economy, equity investment is key. For equity investors or venture firms, which tend to make many small, risky bets with the hope that a few will be blockbusters, investing in BDO Zones can carry unbelievable gains. If Facebook, for example, could have chosen to locate in an Opportunity Zone, the investors would have paid no capital gains on their equity.  Couple that potential gain with the low biomass feedstock risk of an ‘A’ rated BDO Zone, and you have a compelling proposition to unlock equity investment into bioenergy.

Part of the compelling potential of the BDO Zone Program derives from the fact that the structure of the OZone program fits very nicely with the requirements for successful investment into bioenergy: investment in biomass supply chains requires meaningful and flexible engagement in local communities and markets. The OZone program does not function as a bureaucratic agency directing subsidies to applicants that meet government-based criteria. Rather, it removes from government the liability of “picking winners and losers” which leads inevitably to accusations of “government failure”, and instead places it on the market which is in the business of taking those risks. At its base, then, the OZone program functions as a flexible, market-driven model that harnesses the power of financial intermediaries such as private equity firms, banks, investment banks and venture capitalists, thereby minimizing the dangerous and high-risk role for the government in selecting and capitalizing projects.

The growth of bio sectors has suffered greatly from lack of investment capital. The scale of tax incentives for development in BDO Zones that would accrue from clear guidance from Treasury on the matter would enable biomass to be an engine of job creation and economic growth for the recovery as well as a pillar for ongoing economic stability.

Click on the next page to see why The Time to Move is Now.

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