Bipartisan Policy Center: Grants for Wind, Solar More Effective Than Tax Credits

As chief executives of 34 renewable energy companies urged congressional Republican and Democratic leaders to support the Department of Energy’s loan guarantee program, a study released by the Bipartisan Policy Center (BPC) suggests grants are a simpler and more effective way to help finance projects than tax credits.

The new study, released on Friday by the BPC, reveals that there are significant opportunities to improve the efficiency of existing renewable energy tax incentives through the use of the Treasury’s 1603 Cash Grant Program, which simplifies project financing by delivering money directly to developers in an upfront grant rather than through the tax credits.

“This study shows that solar and wind subsidies distributed through cash grants are approximately twice as effective as tax incentives,” said the think tank’s energy research director, Sasha Mackler. “In other words, one dollar in cash has nearly double the value of a dollar in tax credits to a project developer.”

The study found that as the economic recession began to unfold in late 2008, and financial markets collapsed, project financing for renewable energy—which relies on specialized “tax equity” markets—virtually ground to a halt. A recovery for renewable energy growth occurred, however, largely due to a policy fix called the Treasury’s 1603 Cash Grant Program, initially funded under the American Recovery and Reinvestment Act of 2009. The Cash Grant Program received a one-year extension under the tax extension package passed by Congress and signed by the president late last year.

The BPC commissioned Bloomberg’s New Energy Finance (BNEF) to compare the financing costs of cash grants and tax credits and to assess just how effectively the tax-based system was leveraging taxpayer resources. BNEF found that, in most circumstances, cash grants are significantly more effective than the tax credits because they simplify the project financing structure and lower the cost of capital. To monetize tax credits without cash grants, project developers must pay tax equity providers a significant premium, meaning that much of the grants’ value goes to banks rather than project developers.

More broadly, the BPC study found that although federal tax policies have been extremely important in growing the renewable energy industry, these policies are inadequate to support the renewable energy industry as it scales, for two reasons. First, the stop-start cycle of investment attributable to extensions and expirations of tax incentives and cash grant programs undermines certainty for investors. Second, the structural deficiencies of tax-based incentives—including a limited capital pool and expensive financing costs—are inefficient compared to cash grants.

“Going forward, in a new era of fiscal austerity, it is paramount that we reassess our federal renewable energy program to ensure that federal resources are being leveraged as effectively as possible,” Mackler said. This study lays out a number of options to improve the current renewable incentive program to instill greater efficiencies and more accountability. However, more broadly, this assessment suggests that there may be large opportunities to improve energy subsidies across the board for all energy resources—not just for renewables.”

The study comes as the Senate is considering a continuing resolution to fund the government for the remainder of the 2011 fiscal year. The Republican-controlled House last month passed a bill that would cut $61 billion in spending—including most of the funding for the DOE’s renewable energy loan guarantee program.

The CEOs from solar, wind, geothermal, biomass, and biofuel companies in a letter addressed to Senate Majority Leader Harry Reid (D-Nev.), Senate Minority Leader Mitch McConnell (R-Ky.), Speaker of the House John Boehner (R-Ohio) and Minority Leader Nancy Pelosi (D-Calif.) said the loan guarantee program is a “win-win” for taxpayers.

“As chief executive officers of 34 companies, we are investing in projects with pending loan guarantee applications based on the good faith notion that the DOE programs would function as stipulated in law and as Congress intended,” they said. “We are deeply concerned that eliminating funding for this critical program will not only destroy thousands of pending jobs and hinder the growth of critically-needed U.S. domestic energy production, but also defeat America’s effort to compete with China, Germany and others in the clean technology marketplace.”

The CEOs noted that projects for which the companies had applied were all ready to be constructed between now and Sept. 30. They represented “more than $13.3 billion of investment in 28 states.”

Sources: POWERnews, POWER, BPC