Post-Stimulus Transition for Renewable Energy

One of the largest uncertainties affecting the US renewable energy sector is how it will make the transition from the special subsidies provided under last year's stimulus bill (American Recovery and Reinvestment Act of 2009) back to the "normal" incentives available prior to the financial crisis and recession. The key element of this concerns the Treasury renewable energy grant program, which has stood in for the "tax equity" market that stalled around the time Lehman Brothers went under. Eligibility for the grants expires at the end of this year, and companies that have benefited from them are calling for an extension into 2011 or beyond. That looks like a long-shot at this point. However, another proposal not specifically aimed at renewable energy could provide exactly the sort of transition support the industry requires, while also beginning the necessary task of treating this sector more like others.

As of the Treasury Department's most recent update, renewable energy projects have received a total of $5.2 billion under the "1603" grant program, with more than 85% going to large-scale wind farms. Solar electric and thermal projects received $330 million, or about 6%, trailed by geothermal, biomass power, and small-scale wind. With the financial markets that developers had previously relied on to exchange future tax credits for current cash in disarray last year, the 1603 grants were a crucial stop-gap. However, with electricity demand still lagging and renewables facing strong competition from cheap natural gas, the US wind industry has gone into a slump that might deepen further, once developers' new projects are no longer eligible for up-front cash grants, forcing them to wait for tax credits that accrue as power is generated.

Several proposals to extend the 1603 grants are floating around the Congress, including one from Senator Cantwell (D-WA), but the mid-term elections are looming and the mood in the country is turning away from direct economic stimulus, so an extension is far from a sure thing. Nor does the argument that the grants are deficit-neutral, because they merely accelerate payments, entirely wash. Once the incentive for wind power reverts to the Production Tax Credit (PTC) or substitute Investment Tax Credit (ITC) on 1/1/11, companies would again need substantial taxable earnings to claim it, and not all would qualify. That's one of the main reasons that cash up front was such a powerful incentive for developers. It's also never been clear how the tax equity market was expected to revive fully as long as firms could get cash from the Treasury instead, without any transaction fees beyond filling out the paperwork. Whatever we do about the expiring stimulus grants, we need to get this market on a trajectory back to normal.

The best solution for bridging this transition might involve a measure that doesn't seem to have been aimed at the renewable energy sector at all. Last week President Obama proposed allowing businesses to expense 100% of capital investments in 2011. This would kick in just as eligibility for the 1603 grants ends, and at the 35% tax rate that most corporations are subject to, it could actually be worth more than the 30% renewable energy ITC upon which the grants were based. That would help compensate for the difference between receiving these funds up front and waiting to file a tax return. The new benefit would also be calculated on the amount invested, like the grants, rather than the quantity of power produced, as under the PTC.

There's an additional advantage to this approach, which would put the decision for capital investment and allocation entirely back in the hands of corporate managers and boards--who are accountable for their results--rather than government bureaucrats with little experience at running a business or gauging which projects make sense and which don't. And if it means that companies that can't wait until they file taxes to collect the benefit must convince a banker or other investor of the merits of the project, that's an extra layer of market discipline that might winnow out some projects now, but would help ensure that those that survive are more viable.

In the long run, renewable energy must stand on its own feet, without incentives that are orders of magnitude larger, per unit of energy produced, than those for conventional energy. Most renewable electricity technologies aren't ready to make that leap, but forcing them to rely on the same 100% investment expensing that other businesses would be given next year (if enacted into law) looks like a good first step, instead of extending a stimulus program that must end sooner or later.