Restoring the Effectiveness of Clean Energy Tax Incentives through the Economic Recovery Bill

One can be forgiven for fearing the demise of our clean energy industry.  Recent headlines spell out the rather dour mood in the clean energy sector: “Will Green Energy Wilt from Lack of Funds?” asks BusinessWeek while the NY Times predicts “Dark Days for Green Energy”.  But a solution may be at hand if the House and Senate can both agree to include a House “grants” provision in the final stimulus bill. NRDC’s factsheet on this critical proposal can be found here. Read below for more detail

The main constraint to current development (aptly spelled out in the articles above, but also elaborated on in much wonkier detail in two excellent interviews here, and in this Hudson Clean Energy presentation) is that much of the funding for renewable energy has dried up, which is causing renewable energy development to plummet, and already leading to layoffs in the sector. 

The reason for the sudden disappearance of capital investment is complicated, but a direct result of our recessionary economy.  Essentially:

  • Prior to our current economic crisis, federal tax credits were the key drivers of renewable energy development, by providing cost-reductions through either upfront investment credits or long-term production credits (depending upon the technology).
  • In order to get projects built, renewable developers would monetize these tax credits by exchanging them for upfront funding from tax equity investors. In turn, they used this funding (and various debt/equity structures) to build their projects. 
  • Unfortunately, in the current economic climate, mounting business losses, especially among traditional tax equity investors such as financial institutions, have eliminated current tax liabilities.  This, in turn, has greatly reduced the appetite for clean energy tax credits.

According to the Hudson Clean Energy presentation referenced above, from $5.4 billion in transaction volume in 2007 among 20 investors, the current tax equity universe now has only a few investors and has shrunk dramatically. Without the ability to monetize those tax credits, most renewable energy developments simply won’t get built. 

The timing is unfortunate, to say the least.  After decades of underachievement, renewable electricity was falling in cost and coming on-line in ever larger amounts.  Last year, the wind industry installed over 8,000 megawatts, accounting for 42% of all new installed capacity last year, while adding 35,000 jobs.  PV solar, while smaller in aggregate than wind, had increased installed capacity at an over 50% annual growth rate for several years running.  Meanwhile, geothermal energy has around 4,000 MW and CSP up to 6,000 MW in various stages of development. 

To try to overcome these new capital constraints, the renewable industry had until recently been pushing Congress to make these energy tax credits refundable in the short-term, which would avoid the need for tax equity investors entirely.  Concerns over precedent, and inappropriate use of the tax code scuttled that proposal, but a solid and rather ingenious compromise had seemed close at hand.  In its version of the stimulus bill, the House had proposed a renewable energy grants program which would provide grants to renewable energy projects put in service in 2009 or 2010, in place of the authorized tax credits. 

However, the Senate stimulus bill does not contain this renewable energy grants program, but instead relies on other proposals already in the House bill, such as extending the production tax credit, investment tax credit electability and an increase in funding for CREBs (subsidized renewable energy bonds).   While each of the latter proposals is good policy, none will provide the necessary kickstart in funding that the renewable energy industry so desperately needs. 

This leaves the renewable energy industry is a difficult position, as the fate of this grants program depends entirely upon what comes out of the final stimulus bill (currently being negotiated by the House and Senate). 

I’ve co-authored a fact sheet that lays out in much greater detail our argument for the grants program.  In short – grants could expand the potential investor pool, and provide immediate results by freeing up capital for many shovel-ready projects currently on the sidelines. Moreover, the cost of the grant program is actually minimal because the cost of the tax credits has already been incorporated into the federal budget.

Given the recent success of the renewable energy industries, after decades of struggle and investment, it would be a grossly inefficient waste to allow this industry to succumb to current economic pressures.  The House grant program builds on our existing tax-based financing mechanisms, and will go far in maintaining the health and future growth prospects of our clean energy economy.