U.S. financing for renewable energy will drop next year after the expiration of a grant program that backed at least $32.9 billion in projects, one of President Barack Obama’s most ambitious efforts to support the industry.
The program, which ends Dec. 31, encouraged companies including Google Inc. and Citigroup Inc. to take equity stakes in wind and solar projects. It paid out $3.3 billion last year, about a 10th of the $34 billion invested in clean energy in the U.S., and provided $9.6 billion since 2009.
Congressional leaders have given no indication they’re weighing renewal of the grants as the government faces budget cuts and lawmakers probe clean-energy subsidies, including a $535 million loan guarantee for failed solar manufacturer Solyndra LLC. The U.S. aid supported projects by developers such as NRG Energy Inc. and Noble Environmental Power Inc.
“There’s just no way we can compensate for the cash grants if they go away,” Marshal Salant, managing director of Citigroup Global Markets Inc., said in an interview.
Renewable-energy projects will remain eligible for a federal tax credit worth 30 percent of equity investments after the Treasury Department’s 1603 grant program expires.
The 1603 program began in 2009 allows sponsoring companies to get cash from their investments after construction is complete instead of waiting for an offset applied to the next year’s tax bill. Solyndra didn’t receive money under the 1603 program.
Selling Equity Stakes
Many developers don’t have enough taxable income to use the full credit and sell equity stakes to large backers that can apply a portion to their own tax bills. The grants made this arrangement, known as tax-equity financing, more appealing to potential backers.
“There’s more demand for tax equity to finance renewable energy projects than we will ever have in the way of supply,” Salant said.
Renewable-energy developers will be seeking about $10 billion in tax-equity financing for projects next year, said Arno Harris, chief executive officer of Recurrent Energy Inc., the solar development unit of Sharp Corp.
“The Treasury grant program has been very successful at closing the gap and keeping renewables momentum moving forward,” Harris said in an interview.
The grant program, intended to spur clean energy and create jobs, funded 22,747 projects to date, according to Treasury Department data released Oct. 31. Recipients range from property owners who install rooftop photovoltaic panels to developers such as First Wind Holdings Inc. and solar leasing companies such as SunRun Inc. The grants contribute as much as 30 percent of development and construction costs.
‘How Do You Pay?’
While the grant program has broad support in Congress, the difficulty of finding the money in the budget makes chances for an extension “extraordinarily low,” Christine Tezak, a Robert W. Baird & Co. analyst in McLean, Virginia, said in an interview. “How do you pay for it? Where do we come up with the $3 billion?”
More than 760 energy companies and trade groups said they planned to send a letter to Congress today asking for a one-year extension of the grant program. Signers include First Solar Inc., the world’s largest maker of thin-film solar panels, Duke Energy Corp., the Charlotte, North Carolina-based utility owner, and the U.S. unit of China’s Suntech Power Holdings Co., the largest maker of solar panels.
“Extension of this program will create jobs, spur economic growth and promote private sector development of energy technologies,” the companies wrote.
There were 15 companies, mostly banks, actively involved in renewable energy tax-equity investing as of July 2011, according to the U.S. Partnership for Renewable Energy Finance, an industry group comprising law firms, financiers and project developers. Those investors are forecast to provide about $3.6 billion in tax-equity funding next year, the group estimated.
Many tax-equity investors support renewable energy only because of the Treasury Department grants, said Edwin Feo, managing director at USRG Renewable Finance LLC, a Los Angeles-based investing company.
Without the program, “there’s a number of participants who don’t play anymore,” he said.
Seeking ‘More Googles’
Investment banks have been trying to educate large, profitable corporations about tax-equity financing for renewable energy “in the hopes of identifying more Googles,” said Martin Klepper, a partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP in Washington.
Google, operator of the world’s largest search engine, and PG&E Corp., which operates California’s biggest utility, were the only non-financial companies providing tax-equity financing last year, according to Partnership for Renewable Energy Finance.
Google has invested more than $820 million in renewable energy projects and companies. Rick Needham, its director of green business operations, said in July that the company uses tax-equity financing to lower its tax burden and also wants to set an example for other large companies.
The 500 largest U.S. public companies paid $137 billion in taxes in the past year, payments that could be offset with tax-equity financing, according to a Nov. 21 report from Bloomberg New Energy Finance.
Tax-equity financing is a hard sell even for the biggest companies involved, Citigroup’s Salant said. “We’re all under pressure not to make less liquid, long-term investments,” he said. “It’s not something we can do a whole lot of.”
Some companies, including Wells Fargo & Co., say they intend to continue tax-equity investing if the grant program expires. The bank has done at least $2.1 billion of tax-equity deals since 2006, said Barry Neal, head of Wells Fargo’s environmental finance group
“We were active pre-cash grant and we will remain active regardless of what happens with the cash grant,” Neal said in an interview. “We certainly have the ability to monetize tax credits and expect to do so into the future,” he said.
The grant program was initially set to end at the end of last year. It was extended for a year as part of a December 2010 compromise linked to renewing a package of tax cuts enacted by President George W. Bush. Salant said he doubts another last-minute reprieve will happen.
“In a year like this, where everyone is so focused on the budget, we worry that it unfortunately will be difficult for 1603 to get extended,” Salant said.