KISS (Keep It Simple, Stupid!) and extend the 1603 Treasury Grant program through 2016 to match the 30% ITC (Investment Tax Credit) term.
As the lame duck session of the US Congress turns their attention to the extension of the Bush-era tax cuts, lawmakers should also extend the popular and successful 1603 Treasury Grant program (TGP). With indications President Obama and Congressional Democrats are ready to give in on a temporary extension of the Bush tax cuts perhaps even for wealthy individuals, the Treasury Grant program extension should be included as an amendment to any compromise.
Why =must= the Treasury Grant program be extended?
US Solar and Photovoltaic (PV) market growth and the associated jobs creation engine are in jeopardy if the TGP is allowed to lapse on projects not meeting the “Begun Construction” eligibility requirement by December 31, 2010. The tax equity market remains insufficient to grow or even maintain renewable energy (Solar electric, Wind, Biomass, and Geothermal) capacity installations at 2010 levels per “A Chicken in Every Pot? Is there Enough Tax Equity to Sustain the RE Market?” by Michael Mendelsohn at the Renewable Energy Project Finance Blogs of NREL (National Renewable Energy Laboratory).
The TGP has lower transaction costs than the ITC and is therefore more efficient dollar for dollar in getting renewable energy capacity deployed. In another Blog post titled “So, why are Treasury Grants so popular? Two words: Transaction Costs.”, Mr. Mendelsohn said:
Sheldon Kimber, chief financial officer (CFO) of Recurrent Energy, explained that monetizing the ITC via a tax equity investor can eat up 15%–40% of the ITC benefit.
Without the TGP, that means around 15 to 40 cents of every ITC dollar benefits tax equity investors instead of increasing renewable energy capacity.
However, the TGP does not eliminate a renewable energy project’s need for tax equity. For example, solar PV projects require bridge financing, “often furnished by equity investors”, to complete construction until the Treasury Grant covering 30% of installation costs is awarded 60 days after the project is operational and the completed application has been submitted. Tax equity is also required for solar PV projects to leverage the Modified Accelerated Cost Reduction System (MACRS) + Bonus Depreciation incentive.
Per “A Solar Installation Spree as the Deadline for Federal Grants Approaches” by Alison Gregor for the NYTimes (via @SolarFred):
“Prior to the cash grant coming out, about 70 percent of large-scale commercial solar projects were owned by third-party investors,” he said. “The cash grant made it feasible for actual building owners and companies themselves to own the solar assets.”
Whoever owns the system gets the most benefit, Mr. Hahn said. With federal, state and local subsidies, he said, the investment in a solar system can be extremely attractive. It can even generate income for the business, while locking in or providing free electricity for the 25 years the systems are typically under warranty.
Besides shifting renewable project power from tax equity investors and banks to project developers, the TGP has enabled commercial building and property owners to directly invest and own solar PV systems.
On the Treasury Grant program, the SEIA (Solar Energy Industries Association) said:
Congress needs to extend the TGP “commence construction deadline” to December 31, 2012 (2-yr extension)
favoring a two (2) year extension over calling for a permanent extension through 2016.
“Senate Dems press for lame duck action on renewable power grants” by Ben Geman for The Hill’s E2-Wire said:
Sens. Maria Cantwell (D-Wash.), Dianne Feinstein (D-Calif.) and 24 other Democrats are asking for a two-year extension of the program – which sunsets at year’s end – in “any tax package the Senate considers during the current lame-duck session.”
Sen. George LeMieux (R-Fla.) joined 26 Democrats on the letter.
The letter notes the grants have been “widely credited with maintaining strong growth in the renewable energy sector in 2009 and 2010, despite the severe economic downturn” and helped create jobs.
The Cantwell-LeMieux Amendment to Extend the “Section 1603” Clean Energy Treasury Grant Program is a draft of the TGP extension along with provisions to expand TGP eligibility to non-profit power producers, the Tennessee Valley Authority (TVA), and real estate investment trusts (REITs), while exempting Investor Owned Utilities (IOUs) from normalization rules. The expanded program “will be offset by a provision stipulating that contributions to the Oil Spill Liability Trust Fund made by companies with annual revenues in excess of $100 million shall not be deductible as a business expense.” The Amendment also said:
The original program scored at only $5 million, because JCT assumed that TGP recipients would have otherwise utilized Section 45 production tax credits or Section 48 investment tax credits.
This is an assumption I will dispute based on the dearth of tax equity in the wake of the Great Recession and contributed to my negative post on the Grant program, Solar Grant: What is a Refundable Renewable Energy Tax Credit?, before it was hatched in the American Recovery and Reinvestment Act of 2009 (ARRA). I learned the true value of the TGP working with property owners trying to pencil out profitable solar PV project investments that were only feasible under the Treasury Grant program.
Senators, please change that extension from two (2) to six (6) years to prevent the recurrence of stop and go renewable energy incentive policies in 2012 as witnessed in 2010 with California Non-Residential Solar installs lag after an April application rush caused by the lapsing TGP.
To fund the TGP, the “Estimating U.S. Government Subsidies to Energy Sources: 2002-2008” study published by the Environmental Law Institute in September 2009 cites about $72 billion in fossil fuels subsidies over the seven years ripe for budget cuts.