Renewable recovery

Despite a tough year, the future is bright for green energy, says Mike Eckhart of the American Council on Renewable Energy.

“The US Senate will be taking up the energy and climate legislation this fall”
-Mike Eckhart

The outlook for the renewable energy market in the United States remains positive, despite lagging levels of new investment in 2009 compared to the boom years of 2007 and 2008. Particularly, the American Recovery and Reinvestment Act (ARRA) of 2009 contains a number of provisions widely expected to stimulate investment and contribute to a major scale-up of the industry in the US, beginning anew in 2010.

Investment in renewable energy relies on two primary factors: the availability of capital to finance projects - which have high upfront costs - and commodity prices of electricity and fossil fuels. Throughout late 2007 and the first half of 2008, commodity prices were high, giving renewable energy projects comparatively high returns, and money flowed into the sector, especially where state governments provided incentives.

After the financial market crisis of late 2008 and early 2009, however, commodity prices declined. Simultaneously, the credit market became constrained as lenders sought to increase earnings and reduce and avoid risk.

As a result, renewable energy investment in the first half of 2009 dropped substantially compared to the first half of 2008. This inability to finance renewable energy projects and companies can have serious consequences for continued growth of the industry and the economy in general.

"This year, the rate of renewable energy installations has fallen by about half, largely due to an inability to secure financing," says Sanjay Wagle, a Renewable Energy Advisor at the Department of Energy. "In addition to lost construction jobs, renewables manufacturers too are suffering a sudden loss in demand for their products."

Federal leadership

Recognizing the potential for renewable energy to jump-start the economy ­ in addition to mitigating the effects of climate change - President Obama called for a doubling of renewable energy in three years.

"To finally spark the creation of a clean-energy economy, we will double the production of alternative energy in the next three years," said then-President-elect Obama in his January 2009 speech. "In the process, we will put Americans to work in new jobs that pay well and can't be outsourced - jobs building solar panels and wind turbines, constructing fuel-efficient cars and buildings, and developing the new energy technologies that will lead to even more jobs, more savings, and a cleaner, safer planet in the bargain."

President Obama made renewable energy a key aspect of his legislative agenda - giving hope to the industry despite the harsh investment environment. In addition to proposals for a renewable electricity standard and a cap-and-trade system, President Obama incorporated renewable energy as a major feature of ARRA, which became law in February 2009.

2010 and beyond

Renewable energy investment in the third quarter of 2009 is showing signs of resurgence. As of mid-September, third-quarter venture capital and private equity investment has far surpassed second quarter investment levels, suggesting that the market is recovering.

Experts predict that although 2009 investment levels will continue to rise, they will still be below 2008 levels. In 2010, however, ACORE anticipates that the industry will experience strong growth, continuing in the years to come, as long as long-term policy frameworks - including cap and trade, a national Renewable Energy Standard, and a federal financing authority - are implemented. Provisions in current proposed legislation in both the House and Senate would establish all three of these long-term policy frameworks.

One of the most influential policies to promote long-term growth in the sector is the proposed Clean Energy Deployment Administration (CEDA), or Green Bank, that would provide affordable financing for the accelerated deployment of clean energy, energy infrastructure, and manufacturing technologies. Current proposals in Congress would allocate up to $10 billion for the creation of an independent government corporation that could provide loans, loan guarantees, and other financing for clean energy technologies.

Combined with the Recovery Act provisions - which will successfully bolster short-term growth in the industry, these policies are necessary to ensure long-term growth and investment in the US renewable energy sector.

However, there is already debate in the administration and in the Congress about why the federal government (hence, the taxpayers) should continue to have a direct role in renewable energy financing. They are asking: "Can't the private sector do this without government being involved?"

The answer is in the magnitude of the capital needed to achieve two percent renewable energy by 2020. According to the Hudson Clean Energy Partners, the US will need $350 billion to $500 billion of project finance to achieve the goal, or about $30 billion per year. The highest level of investment was less than $20 billion in 2008.

Some experts believe the federal government will be needed to help establish a stable policy environment to attract the $30 billion per year in private capital, and it might be needed to help finance the new technologies as they come with the market.

The US Senate will be taking up the energy and climate legislation this fall. The schedule recently slipped because of the healthcare debate and the urgency of passing re-regulation of the financial sector, but we remain optimistic that the energy and climate bill will be passed this year or next, giving us a national Renewable Electricity Standard and a CEDA/Green Bank initiative. If so, renewable energy will get back on a rapid growth path and stay on it through at least 2020.

Mike Eckhart is Executive Director for the American Council on Renewable Energy.

A helping hand

To mitigate the high cost of financing renewable energy projects, ARRA created and enhanced a number of mechanisms to finance projects and boost markets.

Cash Grant In-Lieu of Investment Tax Credit

To help eliminate the challenges associated with tax credit financing, ARRA offers eligible projects the option of receiving a cash grant instead of the 30 percent Investment Tax Credit. The cash grant offers immediate funding for renewable energy projects placed in service before 2011 and is intended to address the lack of readily available project finance during the recession.

"This new program directly addresses the problem, by turning existing tax credits for renewable energy projects into upfront capital, enabling companies and firms to secure financing and begin construction again," says Sanjay Wagle, Renewable Energy Advisor at the Department of Energy.

The Department of Energy expects the grant program to support the construction of up to 5000 renewable energy projects, supported by over $3 billion in cash grants.

According to Wagle, "The $3 billion in grants could enable between $10-14 billion of capital investment in projects that would not be financed without this program - projects that are ready to be built but are waiting to close financing and start construction."

Section 1705 Loan Guarantee Program

In addition, ARRA expanded the Loan Guarantee Program, which was originally established under Title XVII of the Energy Policy Act of 2005 to help pre-commercial energy technologies bridge the 'Valley of Death' between technology development and the commercialization.

The Recovery Act creates the Section 1705 Loan Guarantee Program, intended to facilitate rapid deployment of renewable energy and transmission projects by strengthening investor confidence in the ability of borrowers to repay loans. Section 1705 aims to promote commercially ready technologies, whereas 1703 was established to advance pre-commercial, cutting edge technologies.

In late July, the DOE released two funding solicitations for the Loan Guarantee program, which are expected to provide up to $30 billion in loan guarantees for renewable energy and transmission infrastructure projects by the end of 2011.

Manufacturing Tax Credit

On August 13, the Department of Energy released guidelines for the implementation of another Recovery Act program-the Qualified Advanced Energy Project (QAEP) tax credit for renewable energy manufacturers. ARRA included $2.3 billion in tax credits for companies that "re-equip, expand, or establish" facilities that manufacture renewable energy property. Intended to increase both energy independence and economic development, the credit provides up to 30 percent of the cost of investment in qualifying facilities.