Grants for Renewable Energy Running Out
- Dec 09, 2010
Included in the American Recovery and Reinvestment Act of 2009 (more commonly known as the Stimulus) was a Treasury grant for renewable energy projects. The grant was made available to those eligible in lieu of federal tax credits, allowing developers to receive a 30 percent cash grant up front instead of recouping the costs through tax credits after the project is completed. In essence, the Treasury grants make renewable energy projects easier and cheaper to finance. The problem is, the grants are expiring at the end of this year.
A group of bipartisan lawmakers are pushing to get the grant program extended for another two years, but election season and congressional gridlock makes passage difficult. In the meantime, state and federal officials have been working to fast-track permits that are close to approval, especially in California where numerous solar projects are being expedited for approval. Bankers funding renewable energy projects have their hands full closing funding before the end of the year, with some bankers poised to close on upwards of $1 billion dollars of wind and solar funding.
The program has been a tremendous success, green-lighting developments that would have not been possible in the post-crash credit market. Before the financial crisis, investors would put up the cash for projects in return for the investment tax credits (ITC) they would generate, but purses have since closed and large-scale projects require more tax equity than investors can afford. The grant program got money flowing again and bypassed high transaction costs.
A report by the Lawrence Berkeley National Lab estimated that, by way of the Treasury grants, 55,000 jobs were created in 2009 by wind projects and another 15,000 in the solar sector. As of September, $5.2 billion had been directed to more than 1,100 projects through the program. Proponents of a two-year extension assert that the grant could spark billions more in investment, create thousands of jobs and of course make a big difference for America’s green energy future.
The Treasury grant “has worked beautifully,” says Jeffrey Eckel, president and CEO of Hannon Armstrong. “Of all the federal programs I’ve seen, this one has absolutely done what it said it was going to do, been administratively easy to work with, transparent.” Without the grant, “it is a lot more time for guys like us to go find that kind of money. … Fewer projects will get done.”
Bill Bush, CFO of Borrego Solar, says that, in the short term, his company won’t be terribly affected by the grants expiring because his team planned ahead for what they knew was coming. But “in the medium term it’s going to have a fairly significant impact,” Bush says. “There’s a lot of confusion in the market about how solar deals are going to get funded, so I think that there’s going to be some amount of slowdown that you won’t see for a while because the deals take a while to go from development to actually put in the ground and built, which is ultimately one of the real weaknesses of the program—that it was very short term.”
If the program is extended for an additional two years, it will most likely come through in a different form, such as a tax refund, which would still cover up to 30 percent of a project’s costs but would be refunded a year after a project is operational. For companies like Hannon Armstrong and Borrego Solar, a refundable tax credit would serve as a welcome alternative to the Treasury grant. However, for people like David Hedison, executive director of Chelmsford Housing Authority, the end of the grants bears a grimmer reality.
The Chelmsford Housing Authority provides affordable housing for the elderly, disabled and families in need. In developing a new 37-unit rental campus for seniors, Chelmsford designed it with solar panels in mind. “We went with a flat roof. We positioned the building perfectly with southern exposure,” Hedison says. The cost of the solar system would have been out of their price range, but they teamed up with Borrego, which “put together a package that showed us we could save about $10,000 a year on our annual electric bill if we did go with this system.” The Treasury grant made it possible.
This means more than just saving Chelmsford’s money. “If we’re allowed to save $10,000 a year on electricity,” Hedison says, “we can invest more in our delivery of supportive services to our seniors, keeping more seniors out of nursing homes.” Since low-income residents in long-term care are normally paid for by the state through Medicaid, “even if it keeps one senior out of a nursing home, we’re saving the state about $180,000 a year.” Because of these multi-faceted benefits—to the environment, the state, the seniors, Chelmsford’s bottom line—Hedison and his team were planning for solar installation on two of their other existing buildings.
The problem? Of the two buildings, one is owned by Chelmsford’s non-profit arm, and the other is state public housing. Neither files tax returns. Therefore, if the Treasury grant is replaced by a refundable tax credit, they have nothing to fall back on to finance the projects.
No matter what the government ends up doing—whether it extends the grants, replaces them with refundable tax credits or reverts back to ITC—Bush asserts that a decision has to be made. “My point would be, in some ways it doesn’t really matter what you decide; you just have to decide. The worst thing that can be is a level of uncertainty about what’s going to be there or not going to be there. … People are waiting.” Although the government created a great program with the grants, “the problem is, they didn’t really recognize … what the cycles to invest are, and you can’t turn on a dime or create a project on a dime.”
While the government figures out what to do, the United States has meanwhile fallen behind China as the top investor in alternative energy. Eckel says, “You know how many high-speed rail systems the U.S. has? Zero. You know how many China has? A hundred. They’re killing us. They have hundreds of solar manufacturers and wind companies.” Of course, China takes a shortcut in this department by sidestepping democracy, but other countries are close behind.
Since neither a price on carbon nor a climate bill can be expected to pass politically, other alternatives are necessary to make the United States internationally competitive. The Department of Energy’s loan guarantee program helps spur investment in innovative renewable energy sources, and energy credits are in place that incentivize green alternatives, but there is a consensus across the industry that more can and should be done on the federal level.