The US federal government has long had a hand in guiding development of the country’s energy sector. In some cases, such as the Department of Energy’s role in the early stages of research and development that helped usher in the shale boom, this has been hailed as a success. In others, such as the highly-publicized failure of solar manufacturer Solyndra, it has been widely criticized as market-distorting intervention.
The Senate Committee on Energy and Natural Resources held a hearing last week to discuss clean energy financing, and what the federal government’s role should be in its deployment. Most panelists at the hearing stressed the importance of federal government support to the expansion of non-fossil fuel segments of the energy sector – particularly for access to long-term financing – but called for amendments to existing tax structures and incentive programs to better suit the needs of project developers and the industry as a whole.
The DOE Loan Program
Peter Davidson, Executive Director of the DOE’s Loan Programs Office – which provides loan guarantees to clean energy projects – defended the program’s importance to clean energy financing, noting that uncertain access to debt financing severely limits development and deployment of clean energy technology.
Davidson also defended the program’s performance, pointing out that it was the largest single source of debt financing for US clean energy in 2011, and losses have been modest. “Our losses to date represent about 2% of the $35 billion portfolio of closed and committed loans and guarantees—and less than 10 percent of the roughly $10 billion in loan loss reserves that Congress set aside for the program.”
Cutting Soft Costs
Other panelists , such as Chairman of the New York State Research and Development Authority Richard Kauffman, looked at options beyond loan guarantees, such as amendments to the tax code, as ways the federal government could support expanded deployment of clean energy.
Kauffman noted that clean energy projects are afflicted with high “soft costs”, such as installation, permitting and financing. “As little as a third of the total cost of a residential solar system are the panels themselves,” he said.
Kauffman argued that scaling up deployment of renewables will be key to reducing soft costs, and lowering the high cost of financing is key to scaling up deployment. Clean energy technologies have limited access to bank debt and to stock and bond markets and rely heavily on tax equity, meaning that “the clean energy industry…does not take advantage of the competitive strengths of [US] capital markets”, Kauffman said. He recommended permitting refunds and transferable tax benefits as means of reducing overreliance on tax equity, and allowing renewable projects to form master limited partnerships (MLPs) or real estate investment trusts (REITs) as ways to provide greater access to larger pools of capital.
Setting Incentive Thresholds
Will Coleman, a partner in venture capital firm OnRamp Capital, focused on the federal government’s role in supporting energy projects’ transition through the “valley of death” from research and development to commercialization. “Venture capital has historically been able to bridge financing gaps in many sectors,” but “in energy, the magnitude of capital requires many other investment partners”, he said.
And Coleman stressed the importance of a stable financing environment. “Almost all of the credits for alternative technologies have been temporary and continually threatened, which in turn creates a dual impediment to financing these new technologies,” he said. Coleman argued against making such incentives permanent, as that would create permanent dependence, but instead called on the federal government to establish a permanent tax credit that is available only to individual companies, and only up to a pre-determined threshold of commercial scale.
For more on policy stability, see Renewables Hold Promise, But Predictable Policy is Critical
Stoking Demand
Ethan Zindler, Head of Policy Analysis for Bloomberg New Energy Finance, said that there is no shortage of funding available for “projects being developed by reputable companies, with relevant permits in hand and, most importantly, firm long-term agreements signed to sell their electricity at a reasonable price to a credit-worthy buyer such as a major utility”. There is, however, a shortage of projects that meet those requirements, he said.
Finding power purchase agreements at acceptable prices has become more difficult as low gas prices have undermined renewables’ competitiveness and states have approached Renewable Portfolio Standard mandates, dampening demand for more renewable capacity. Policy solutions must both seek to reinvigorate demand for renewables and expand access to larger pools of capital, such as those offered by stock and bond markets, according to Zindler.
Leave the Investing to the Private Sector
Nicholas Loris, senior policy analyst for the Heritage Foundation, was the panel’s sole opponent of government intervention in clean energy financing. “Through a multitude of policies, the federal government has attempted to build a clean energy economy with the help of the American taxpayer and by doing so is skewing risk and reward of energy investments,” Loris said.
“Full or partial government investments reward special interests over market viability; those technologies that are truly marketable should not need financial support from the taxpayer.,” Loris said. “Investment decisions are best left for the private sector.”
