As Congress returns to Washington to battle over the fiscal 2012 budget, the wind and solar lobbies are scrambling to preserve the tax breaks their industries depend on–just not the same breaks.
Solar advocates say a special provision to allow conversion of investment tax credits (ITC) into cash grants, enacted in the 2009 stimulus, must be extended or solar investment will be halved. While the ITC continues through 2016, the conversion option expires at the end of 2011.
Wind advocates are focused on getting a multi-year extension of their production tax credit (PTC) that’s slated to expire in 16 months – skipping the cash conversion fight. They say business needs PTC certainty to continue manufacturing investment.
Cash As King
Last December, the wind and solar lobbies fought successfully for extension of the cash conversion capability, called Section 1603. It lets wind developers convert future PTCs into ITCs, and gives all renewables developers the option of getting their ITCs, equaling 30% of project cost, in cash when a project starts operating.
That provision has kept private companies, including foreign firms like Spain’s Iberdrola which has received nearly $1 billion, investing in US renewables despite the recession. Claimants don’t have to be liable for any federal taxes, and cash now is worth more on company balance sheets than future tax credits.
The US Treasury says that, as of mid-June, nearly $7.8 billion in cash has been paid out under Section 1603. That’s nearly twice original estimates.
About 79% went to 376 wind projects building 10,324 megawatts, 15% to 14,595 solar projects providing 707 MW, and the balance to biomass, geothermal and other renewables.
From Credits To Cash
Federal law has provided a PTC for wind since 1993. It lets developers claim a 2.2-cent credit on their federal taxes for each kilowatt-hour produced over 10 years. That authority has been renewed for 1-3 year periods and is now set to expire in December 2012.
Solar developers have been able to claim the ITC for 30% of project costs, as can geothermal and some other renewable builders. Current ITC authority goes through 2016.
In practice, developers financed projects in part by selling these credits to large investors, in what is called the tax equity market. But that market collapsed in 2008. Investors were losing money and did not need tax credits because they had no taxes to pay. Section 1603 was billed as a fix until the economy made a comeback.
The Stimulus Backlash
But Rhone Resch, executive director of the Solar Energy Industries Association, said the option for conversion was already under discussion in Congress, and had bipartisan support, when it was attached to the stimulus bill as Section 1603.
Now, Resch said, its extension chances are being harmed by the Congressional backlash against anything “stimulus.”
“In reality, it costs very little and delivers huge resources,” Resch said, noting a Bipartisan Policy Center study that found Section 1603 made the ITC “twice as efficient as a tax credit alone.” Under the section, he said, solar projects in 45 states have leveraged more than $4 billion in private money. Solar manufacturing and construction supports some 45,000 jobs, he said.
Solar component costs have been dropping the last two years. Resch said solar installations doubled in 2010 and have continued strong growth this year. If Congress doesn’t renew the 1603 authority, Resch said, SEIA estimates solar investment in 2012 will fall to $3.6 billion; with extension, it’s expected to be $7.5 billion.
Seeking A Permanent Fix
Ellen Carey, Media Relations Manager with the American Wind Energy Association, said AWEA is focusing on extending the PTC long-term, not on the 1603 conversion fight. Section 1603 was a “temporary fix,” she noted, and wind is the only renewable facing loss of its tax credit next year.
“We are already seeing the effects on the supply chain,” she said. Wind turbines have 8,000 parts, and uncertainty about wind’s tax status, and orders, in 2013 are already complicating manufacturers’ plans for facilities and hiring, she said.
AWEA President Denise Bode recently testified in Congress that domestic content of wind turbines has reached a new high of 60%, but said manufacturing expansion may stall without the PTC extension.
The wind extension was endorsed in July by 24 governors in the bipartisan Governors’ Wind Energy Coalition. They called extension of the wind PTC “critical,” and didn’t mention Section 1603.
Kevin Book, managing director at ClearView Partners, rates the chances of 1603 extension at “none whatsoever.”
Book said it has been “expensive” and “makes marginal projects irresistible.” But he termed extension of the wind PTC “a reasonable expectation.”
Christine Tezak, senior energy and environment policy analyst with Robert W. Baird & Co., called the 1603 effort “tough sledding,” given its costs. Since the PTC and ITC continue, she noted, Republicans can oppose 1603 without supporting any tax increase.
As for the PTC, a recent Baird report said rather than extension of renewables tax credits, Congressional budget-cutters may seek to end them earlier than now scheduled.
Tax policy has been central to business planning at many renewable energy firms, but leaders at companies that have talked to Breaking Energy have largely argued on behalf of policy stability, in the expectation that the sector will have to compete over the long run, rather than generous handouts. For more, see Peter Duprey of Broadwind Energy’s conversation about the wind tax credits, and Russell Tencer’s discussion of his start-up firm’s place in the growing small-wind industry.