Almost 98% of the Treasury Grants were below $30 Million and financed the long tail of projects with less than 27% of the funds.
Efforts in the US Congress to extend the payroll tax cut and unemployment insurance benefits through 2012 before the holidays provide a small crack for also extending the 1603 Treasury Grant Program (TGP) another year. Last week, the SEIA (Solar Energy Industries Association) joined 764 signatories of The 1603 Coalition letter to the US Congress calling for the extension of the Section 1603 Treasury Program. The signatories included 34 associations and trade groups (lobbyists) with the balance being individual companies.
All the arguments from my 2010 post, Extend the Treasury Grant Program for Solar and Renewables through 2016, still apply. In a one-pager, The 1603 Coalition highlights how “the Section 1603 Program has leveraged over $22.8 billion in private sector investment to support over 22,000 projects utilizing a wide range of energy technologies in all 50 states” and created “tens of thousands of new American jobs.”
The TGP is a more efficient renewable energy project financing mechanism with lower transaction costs than the ITC (Investment Tax Credit) while maximizing renewable energy capacity deployments dollar for dollar. The 1603 Coalition also cites a Tax Equity Market investor survey by the U.S. Partnership for Renewable Energy Finance (US PREF) estimating the available financing for energy projects will shrink by 52 percent in 2012 without the Section 1603 Program. US PREF members include GE Energy Financial Services, a General Electric Company (NYSE:GE) business unit, and NRG Energy, Inc. (NYSE:NRG). Competition for limited tax equity in 2012 may also drive up the premiums charged by tax equity investors.
Profiling the 1603 Treasury Grant Program
I downloaded the US Treasury Section 1603 – Payments for Specified Renewable Energy Property in Lieu of Tax Credits Awardees as of November 11, 2011, spreadsheet and sorted the grants by size. Here are the results of my quick and dirty award analysis.
|Section 1603 Treasury Grant Amount ($)||Number of Awards||Total Awards ($)|
|>$10M and ≤$30M||67||$1,275,174,799.00|
|>$1M and ≤$10M||296||$888,722,257.00|
|>$100K and ≤$1M||1226||$373,140,295.00|
|>$30K and ≤$100K||1328||$76,933,948.00|
Following the money, 94 or 2.21% of the 4254 approved awards ranging from about $30.1 Million to $543 Million accounted for almost 73.1% of the $9.78 Billion awarded since the inception of the Section 1603 Program. Although 85 of these awards were for wind projects, a number of large solar projects have already or will qualify for Treasury Grants by “having begun construction by satisfying either the “physical work” or “5% of costs” method or both” by the end of 2011.
At a time when the Occupy movement is grabbing headlines, is it so surprising to find just over 2% of awards garnered over 73% of Section 1603 Program funds?
Long Live the ITC
“Renewable Energy Groups Seek 1603 Extension; Analysts Offer Hope for Life After the Grant” by Jennifer Runyon for RenewableEnergyWorld.com cites a new report, “The Return – and Returns – of Tax Equity for U.S. Renewable Projects”, prepared by Bloomberg New Energy Finance (BNEF) for the Reznick Group offering hope for tax equity finance in 2012.
Summarizing the thirty (30) page BNEF report, Ms. Runyon said:
The report has two major findings about tax credits: first, that the economics of “tax equity” — the part of a renewable project’s financing structure used to take advantage of tax credits — can still provide attractive returns for parties involved in these transactions; second, that the U.S. renewable sector will require new sources of tax equity if it is to meet market demand for project finance.
From the BNEF discussion of results, I found the first two bullets of particular interest:
- Tax equity works. For relatively good projects (eg, 30% capacity factor and $1.73m/MW capex for wind, 15% capacity factor and $3.03m/MW capex for solar), returns from tax equity projects can be attractive for both developers and investors.
- Size matters. An important concern about tax equity is its limitations for small projects (eg, solar assets under 5MW). The fixed costs of employing tax equity are relatively large (compared to structures such as cash grant or feed-in tariff models) and require economies of scale; many banks usually do not even consider applying tax equity below some threshold on the order of $30m. However, there have been some developments in the US financing arena that may fill this gap – for example, the bundling of small projects to create a sizable enough ‘portfolio’ to attract investor interest.
Section 1603 Program Observations
Utility scale solar projects with system capacities greater than 20 MW (MegaWatt) have the best prospects for attracting tax equity investors in the absence of the Section 1603 Program. However, the extension of the Treasury Grant Program is crucial for the vast majority of building and property owners (~96.2% of 1603 Awards) interested in investing and owning PV systems smaller than 5 MW. Without the TGP extension, these building and property owners will either not invest in solar, enter into PPAs (Power Purchase Agreements) as lessees, or realize marginal returns by renting their roofs or land to developers.
If the Section 1603 Program is extended through 2012, I expect the changes will be as minimal as last year regardless of what other provisions are sought by The 1603 Coalition and its signatories.
From a solar perspective, I would propose the following changes to the Section 1603 Program:
- Extend the Section 1603 Program though 2016 to match the ITC term.
- Cap Treasury Grant Awards for solar installations at 20 MW or $30 Million to encourage distributed generation and new technologies. Larger solar projects are a natural fit for the ITC and require deep pocket investors to fund them anyway.
- Eliminate the eligibility of US Department of Energy Loan Guarantee Program projects for the Section 1603 Program. This is a blatant form of piggish, double dip incentive excess. Loopholes need to closed so market based incentive advocates won’t abuse them.
- As a Section 1603 Program TERMS AND CONDITIONS rule change, renewable energy projects awarded Treasury Grants should be required to generate power a minimum of 250 days per year for the first five (5) years the property is placed into service, otherwise the Treasury Grant must be repaid to the US Treasury on a prorated basis. While the Section 1603 Program does require the submission of annual project performance reports for five years, there does not appear to be any minimum generation criteria. The eSolar Sierra SunTower inspired this rule change proposal.
- All the changes would apply to projects qualifying under the Begun Construction criteria on January 1, 2012, or later.
The American Wind Energy Association (AWEA) did not join The 1603 Coalition and is instead pushing for the US Congress “to extend the renewable energy production tax credit (PTC) before the end of this calendar year.”
Here’s one other change to the TGP/ITC rules.
We need some way to put a cap on the installed costs of PV. Germany installs systems for $3/Watt. Ontario installs systems for around $4/Watt. Why are the costs in California and the US so high? Part of it is due to our poor permitting processes but even after accounting for about 50 cents/Watt in unnecessary permitting fees you can tell the industry is charging too much for this product. There’s nothing fundamental stopping this industry from installing solar rooftops for under $4/Watt. We know it’s doable because it’s being done everyday. In California only 10% of the residential installs are in the $4.5/Watt zone. We can do better. To solve this problem make the system price a qualifying element when it comes to getting state/federal subsidy credit. i.e. you’d have to submit a qualifying invoice to get the rebates. The Cap could be set country by county but $4.5/Watt would be a good target for higher volume markets like California, New Jersey, etc. A lot of installers will hate this idea and claim they’ll go out of business. They’ll say it will lead to slipshod work or dangerous shortcuts. Well, there’s already a lot of slipshod work and dangerous shortcuts – this is why we have inspectors. I don’t buy the arguments of the installers that say this can’t be done. If Ontario of all places can do it then California can too.
You make very valid ponts. There actually has been some “guidance” in the area of cost basis. By “guidance”, the treasury is basically saying they recommend you stick to the following prices or be extra scrutinized when you submit your 1603 application. Keep in mind these represent June 2011 prices which have fallen even further since then, but as far as I know, this is the last guidance on cost basis. The chart got reformatted, but you can google it.
The treasury actually released the following:
On June 30, 2011, the US Treasury Department (Treasury) posted guidance (Guidance) to assist applicants in determining their cost basis for certain solar photovoltaic (PV) properties for purposes of the Section 1603 grant (Grant).
As a first step in evaluating an applicant’s basis, Treasury will compare the claimed basis to certain benchmarks that are derived from data assembled by Treasury and predicated upon open market, arm’s-length transactions between unrelated parties. If the applicant’s basis is consistent with the benchmarks, Treasury will then review the line items provided in the detailed cost breakdown to ensure that only eligible items are included. Treasury recognizes that each system is different, and that cost may be affected by technology choice, regional market differences, and a system’s size. The applicant may submit a detailed and credible third-party appraisal to support its claimed basis. If the claimed basis reflects only items appropriately attributed to the property, and there is adequate documentation to support the costs, the basis is accepted.
If the basis is materially higher than the benchmarks, Treasury will exercise closer scrutiny, including a consideration of any unusual circumstances, and determine whether the claimed basis is consistent with the property’s fair market value. Based upon its determination, Treasury may adjust the basis to a level it believes reflects the actual cost.
As of the first quarter 2011, the benchmarks for the solar PV market are as follows:
Large Commercial/ Utility
Turnkey Price per Watt