Last week was a bit of a nail-biter for us at Recurrent Energy and everyone else in the solar industry, but it ended well. Late Friday the Senate passed the American Recovery and Reinvestment Act. We hear that it will go to President Obama for signing Tuesday. The final version of the Act contains several provisions that address the financing chokehold on renewable energy projects in the US that resulted from the economic crisis. Those provisions are critical to achieving the portion of the President's stimulus plan that relies on renewable energy projects to create jobs, re-establish US leadership in clean technology, and achieve greater energy independence.
I've blogged before about the challenges the crisis poses for the US solar industry. But, it's probably worth a quick refresher discussion here. Solar projects (like wind and many other energy projects) have benefited from federal tax credits and accelerated depreciation. However, most project developers don't have large tax bills, so they can't use the credits or the depreciation benefits themselves.
In order to use the tax benefits (and thereby reduce the cost of solar power delivered to a customer), a developer had to partner with a profitable bank or corporation with a large tax bill. In a typical financing arrangement, the developer would borrow cash from the partner and pay them back with the tax benefits from the completed project. The partner would in turn use the tax benefits to reduce the amount of cash taxes they owed to the government.
While somewhat complicated, these types of tax-oriented financings have been behind most solar and wind projects in the US. However, the financial crisis brought the industry to almost a dead stop late last year. As a result of large losses in the banking industry, many of the banks that had been active in tax finance either disappeared or pulled back from the market. Those that remained were very cautious because of huge uncertainties about how big their own tax bills would be in the coming year. If you don't have a tax bill, you can't use a tax credit--so banks were very cautious about "buying" more tax credits than they were likely to use.
The great irony last Fall was that while President-elect Obama was building support for his vision of renewable energy as a part of the economic recovery, the wheels were coming off the tax financings that were key to actually making it happen! The President's goals would have required tax financings to double in 2009, triple in 2010, and increase 5x by 2011--while in reality those same financial markets had almost completely collapsed.
Two provisions of the Act are the key to getting solar projects going again:
- Renewable Energy Grants - Solves the tax equity shortage by creating a new program through the Department of Treasury that provides grants directly to developers. The grants are equal in value to the tax credits. Developers can use the grants instead of tax credits, thereby eliminating the need to find a tax investor partner.
- Renewable Energy Loan Guarantee Program - Creates a temporary DOE loan guarantee program for renewable energy projects, renewable energy manufacturing facilities and electric power transmission projects. This program solves the secondary challenges of getting lenders to provide debt for projects by putting US government credit behind them while credit markets recover in 2009.
We're extraordinarily excited to roll up our sleeves and make use of the new programs to get US solar back on track to meet the goals set by President Obama. We owe a deep debt of gratitude to the industry advocates and policymakers who showed tremendous interest and willingness to understand a complicated financial problem and came up with a very effective solution quickly.
Links of interest: