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Renewable Energy Groups Seek 1603 Extension; Analysts Offer Hope for Life After the Grant

This week more than 750 large companies, small businesses and organizations sent a letter to Congress calling for a one-year extension of the Department of Treasury's Section 1603 Program.

The 1603 grant program, which ends Dec 31, 2011, was originally enacted to address the shortage of available tax equity as a result of the 2008 financial crisis. While the tax equity market has shown improvements since then, it still has not recovered to the pre-recession days.  In addition, there is now even greater demand for clean energy projects.

A July 2011 survey of the major tax equity investors by the U.S. Partnership for Renewable Energy Finance estimates expiration of the program would shrink the total financing available for energy projects by 52 percent in 2012. In dollars, that’s a shortage of about $3.6 billion according to Bloomberg New Energy Finance and the Reznick group, who said that the total need for tax equity financing next year could be more than $7 billion and we’re likely to see an investment gap in the $3.6 billion range.

Without the grant, that’s $3.6 billion of economic activity that could be lost forever. This would stifle job creation and restrict the market’s ability to use private sector capital to finance new domestic energy projects, said the Solar Energy Industries Association (SEIA).
SEIA said the 1603 grant leveraged nearly $23 billion in private sector investment to support over 22,000 projects utilizing a wide range of energy technologies in all 50 states, resulting in tens of thousands of new American jobs.

“The 1603 program was the single biggest driver of renewable energy deployment over the last two years,” said Rhone Resch, president and CEO of SEIA. “Allowing it to expire at the end of the year, while tax equity markets remain limited, would have a severe impact on the few industries actually creating new American jobs in this economy.”

The letter with all the signatories is available here.

If the program is allowed to expire, at least Bloomberg New Energy Finance and The Reznick group have some ideas about how to get the traditional tax equity finance market back on track, which they lay out in their new report: “The Return – and Returns – of Tax Equity for US Renewable Projects.” 

The report has two major findings about tax credits: first, that the economics of “tax equity” — the part of a renewable project’s financing structure used to take advantage of tax credits — can still provide attractive returns for parties involved in these transactions; second, that the U.S. renewable sector will require new sources of tax equity if it is to meet market demand for project finance.

According to the report, there is a vast pool of potential incremental tax equity supply. The 500 largest public companies in the U.S. alone paid $137 billion in taxes over the past year, it said. The participation of even a small percentage of these firms in the tax equity market for renewable energy could help with project financing.

Examples of non-financial companies that have participated in recent tax equity deals are Google and Pacific Gas & Electric. Other public or private U.S. companies could follow their lead. The report authors also point out that tax equity is not unique to the renewable energy sector; U.S. corporations have historically made use of these kinds of incentives in the low-income housing sector, for example. 

“This analysis shows that tax equity economics can be made to work for the right projects,” said Michel Di Capua, head of analysis, North America, at Bloomberg New Energy Finance in New York.

“There is life after expiry of the Treasury cash grant program. Financing for the U.S. renewable sector will look quite different in 2012 compared to the past three years once the cash grant is gone, but different does not mean dead,” he said.

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