Wednesday, January 28, 2009

Policy to Unclog the Renewable Energy Development Pipeline

Across the cleantech industry in 2008, the pain was evident. Commercial-scale renewable energy developers suffered as most tax equity players suffered financial losses, thereby losing their “tax appetite”. Seed-stage cleantech suffered as Venture Capitalist’s tightened their purse strings and shifted focus to keeping existing portfolio companies alive. Public equity, both IPOs and follow-on offerings also dried up, forcing many cleantech firms to delay much needed manufacturing scale-up strategies. The nail in the coffin was a massive sell-off in energy commodities due to the downturn in global consumption. Lower demand for coal and natural gas used for electricity generation caused a sell-off to ripple through power markets and the global carbon and emissions markets - dropping carbon allowance prices in the EU-ETS, RGGI, and offset credit prices in the CCX, CCAR, and CDM markets. Renewable Energy Credits (RECs) also sold-off in many U.S. states making electricity produced from renewable energy generation assets less competitive in the market.

According to New Energy Finance, the newly elected Obama administration is looking to appropriate about $78 billion of the still-in-the-works $825 billion economic stimulus package to clean energy, energy efficiency, and smart grid technologies. This impressive amount of funding illustrates the new administrations long-term commitment to energy security and desire to rejuvenate the clean energy industry after a very challenging 2008.

The remaining challenge is to see how effectively new policy out of the House and Senate can deploy this capital. Unfortunately, a critical element to the bill given the current economic conditions has already been tossed out of the Senate’s version.

In the House version, project developers may forgo the benefit of the Production Tax Credit (PTC/ITC) altogether and instead receive the equivalent benefit in the form of a cash grant from a program administered by the US Department of Energy. This component was aggressively lobbied by the wind and solar industry just before Obama’s inauguration.

But in the Senate version, these DOE grants were tossed out. “Appropriating $78 billion dollars to clean energy without the DOE grants is the equivalent of turning the water tap on but not unkinking the hose”, industry lobbyists argue (New Energy Finance, Week in Review, 1/27/2009). This is because the economic downturn has dried up the tax equity that developers need to complete the bottom layers of the capital structure in renewable energy projects. Without sufficient equity capital, the project financing stalls before debt capital can be raised. The option to receive the DOE grants instead of federal tax credits is a quick-thinking patch to the bill that solves for the lack of tax appetite in the market today.

Many industry fingers are crossed that the Senate will recognize the current and foreseeable tax equity shortfall and agree to an alternative incentive structure.

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