Given that President Obama signed the Stimulus bill in Colorado yesterday (after touring a solar facility), I thought it might be useful to discuss some of the major renewable energy provisions within the Stimulus package, and provide some detail as to their impact and potential usefulness.
A helpful summary can be found at the House Appropriations Committee site, while two detailed summaries of the compromise appropriations and tax measures are also available. Other perspectives on various aspects can be found here, here, here, here and here (last one subs. required). This post will only focus on the renewable energy provisions in the Stimulus bill that I worked on. My colleagues are commenting on other energy relevant sections here.
The bottom line: this is an excellent bill for the renewable energy industry, and would be considered momentous were it not for the immense economic challenges we face. Major barriers were addressed and funding was increased dramatically for several important technologies. While no policy is perfect, considering the alternatives, and the recent past, this is a big step forward into a new clean energy future.
Grants in lieu of renewable energy tax credits: (see here for my previous post on this topic) This provision allows project developers (or associated parties) to receive a upfront grant (equal to the 30% ITC) in place of current production or investment tax credits. With the tax equity market for renewable tax credits essentially frozen, and an increasing number of developers and funders pulling out of projects, the renewable energy industry was desperate for a short-term approach that kept capital flowing (or at least drifting). By expanding the potential investor pool, and providing a mechanism to bypass the tax equity freeze, this should free up capital for some of the shovel-ready projects sitting on the sidelines.
There are a few points worth expanding on here. This grants program should reduce the cost of development somewhat as the monetization of tax credits required a high rate of return, whereas monetizing grants among a much larger pool of investors should theoretically reduce those rates. However, there may be a learning curve required in reaching new investors, and in devising new capital structures to take advantage of these grants – which could limit the near term impact of this bill. Interestingly, management of this program switched from the Department of Energy (which has been criticized for its management of the Loan Guarantee program) to the Treasury Department, which it would appear is much more familiar with quickly pushing money out the door. Of course, crafting the guidelines for this new program, staffing up and then administering the grants could be extremely challenging – especially given the 60 day time limit from receipt of an application of a grant to its processing.
Another interesting modification involves the timing. The Conference version of the Stimulus bill changed the timing of this program from the requirement that the project had to be “in service” by the end of 2010, to “construction must begin” by the end of 2010, and “be completed” by end of 2012 (wind) and 2013 (for section 45 technologies) and 2016 (for section 48 technologies). This timing delay had been pushed as a necessary requirement for projects with longer lead times (e.g. concentrating solar power), but it seems to open the door for a much longer program than expected or perhaps required. Also, a lot of projects may start construction to position to take advantage of this program, but may find it difficult to actually reach completion.
Extension of Production Tax Credit for 3 or 4 years: There had been a prominent push by the wind industry (which receives 97% of the total PTC allocation) to extend the PTC for several years. The PTC has provided a valuable production incentive in the past decade, but historically, fights over its extension had muted its year-to-year impact. With over 8 gigawatts of wind capacity added last year alone, maintaining momentum was important. Although, the PTC isn’t effective in today’s economic climate, providing things turn around, the extended PTC will give investors security, and continue to drive extensive development. The PTC will now be available for wind through the end of 2012, while other Section 45 technologies (e.g. biomass, geothermal, landfill gas, waste-to-energy, and marine renewable) can utilize the PTC through 2013. This provision is expected to be cost $13 billion over the next 10 years.
Temporary election to claim ITC in lieu of PTC: This allows developers to claim an ITC instead of a PTC and was an additional measure passed to help boost short-term funding availability for the renewable energy industry. The argument was that some tax equity investors might be more willing to utilize an upfront investment tax credit, instead of a long-term production tax credit. While this is to some extent true, most investors I’ve spoken with were cautious as to this provision’s impact. The investment tax credit market has tended to require a higher rate of return, and has also been experiencing some of the same conditions as in the PTC market. Further, the ITC market has fewer, smaller investors than the PTC market, and may at first not efficiently manage the influx of tax credits from new developers of other projects. Additionally, for more mature technologies or large-scale projects, an upfront ITC can be less economical than a 10 year PTC. Therefore, while we can expect some benefits from this provision, the grants provision remains much more important to future renewable funding.
Removal of caps in residential ITC for qualified technologies: dollar caps for tax credits on residential installations of small wind, solar water heating, and geothermal heat pump technologies were removed. These technologies now join solar electricity as qualifying for a 30% residential credit without dollar caps. Previously these dollar caps were $4000, $2000 and $2000 for wind, solar heating and geothermal respectively. To date, these technologies have seen mostly limited growth, due to cost, resource availability and limited consumer interest. Coupled with other incentives, the removal of caps may kickstart demand for these technologies.
A separate provision in the Stimulus bill eliminates the cap on small wind for the 10% business energy credit, and eliminates a rule that reduced the value of the business ITC credit if the project was developed with subsidized financing.
Additional $1.6 billion in CREBs funding: Public utilities, munis and co-ops can finance Section 45 renewable projects through special bonds (Clean Renewable Energy Bonds) that are subsidized by the government to provide tax credits in lieu of interest. The bill authorizes an additional $1.6 billion of new clean renewable energy bonds to finance new renewable facilities, which would triple the amount of available CREBs funding. Historically, applications for CREBs have been heavily oversubscribed, so this increase is welcome, although given the current challenges in locating tax equity investors, investor response to take advantage of this additional funding may be delayed.
$6 billion for renewable energy project loan guarantees: In addition to removing the $50 billion in loan guarantees for clean energy projects that could have been utilized by mature technologies such as nuclear, the conference version of the Stimulus bill also provides $6 billion for renewable, biofuels and electricity transmission projects. As aforementioned, the existing DOE loan guarantee has been criticized for not distributing funds quickly. This new provision could face similar challenges. Further, to be most effective, it will be important to ensure that early-stage, higher-risk projects can access this funding. Providing subsidizing financing to maturing technologies that have already demonstrated their value and risk profile to the investment community is not an effective use of funds.
30% tax credit for manufacturing advanced energy property: A new 30% tax credit has been established that will assist facilities seeking to manufacture “advanced energy property” (which includes renewable energy, energy storage, energy conservation, renewable fuels, efficient electricity transmission and distribution, and CCS. $2.3 billion was allocated for this program. It is hoped that this allows manufacturers, facing difficult economic headwinds, to supply new clean technologies for growing U.S. demand. This would preserve American manufacturing jobs, leverage American ingenuity and innovation, ensure domestic access to new technologies, and take advantage of global trends towards clean energy.
Billions for new R&D investment: Among our Cap 2.0 policies, NRDC has advocated for significant new federal investment in energy RD&D. It is exciting to see that a number of the measures we call for in our policy brief have occurred in this stimulus, including increased funding for EERE across several technologies, for DOE Office of Science, for NSF and for ARPA-E. Basic science research (via the Office of Science and ARPA-E) received $2 billion, while EERE received $2.5 billion (with special focus on geothermal and biomass). DOE Office of Fossil Energy received $3.2 billion, which was mostly allocated for CCS innovation.
In addition to the above, tens of billions of dollars were provided for efficiency measures and greening buildings, batteries, vehicles, transit and other transportation-related technologies, smart grids and transmission, and various state energy programs. Again, my colleagues are commenting on these provisions here.
The new Stimulus bill represents a sizable down payment in a clean energy future. While not perfect, it offers enough incentivizes, provided the economy cooperates, to encourage an abundance of clean energy innovation and deployment.