The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Renewable Energy Faces Financing Challenges with End of Federal 1603 Grant Program

The expiration of a federal grant program at the end of 2011 may make it more difficult and expensive for developers of certain kinds of renewable power projects to access private capital, a new report suggests.

That, in turn, may lead to fewer projects coming on-line.

"Our interviews with financial executives active in the renewable energy market suggest that the end of the Section 1603 Program of the American Recovery and Reinvestment Act means that financing renewable power projects is about to become more difficult," said Michael Mendelsohn, an NREL analyst who co-wrote the report "1603 Treasury Grant Expiration: Industry Insight on Financing and Market Implications," with John Harper of Birch Tree Capital, LLC.

In the United States, the renewable power sector has benefitted from federal tax incentives and the availability of institutional-scale tax equity investors able to use the tax incentives. The incentives include income tax credits — production tax credits or investment tax credits — that can reduce taxes owed by a project investor as well as reduced tax obligations resulting from accelerated depreciation of project assets.

These tax benefits can represent a powerful incentive for private investment, but realization of these benefits is hampered by the complexity of monetizing their value, the illiquid nature of the investments and uncertainty about how long tax policies will last.

Most renewable energy developers lack sufficient tax liabilities to benefit directly from the tax incentives. Instead, the developers have created partnerships and other financial structures with large financial and other companies that can make use of these incentives.

During the 2008-2009 financial crisis, tax equity investors largely withdrew from the renewable energy project financing market. The number of tax equity investors willing to make new investments decreased from about 20 to five.

"Industry experts told us that tax equity was almost unavailable for all but the largest and highest quality projects," said co-author Harper. In response, Congress enacted the Section 1603 Program.

The Section 1603 Program, which expired December 31, 2011, offered project investors a cash payment equal to and in lieu of the 30 percent federal investment tax credit. The program freed many developers from having to rely on third-party tax equity investors to monetize the tax credits.

Interviews with industry participants led the authors to conclude that the Section 1603 Program provided multiple benefits to renewable energy projects, including: 

  • Increased speed and flexibility of project finance arrangements
  • Lower transaction and financing costs 
  • Stretched supply of traditional tax equity 
  • Support for smaller and new-to-market project developers and projects using innovative energy technologies, both of which previously found it more difficult to tap tax equity markets
  • Lower developer or project cost of capital as a result of the ability to use more debt

While impacts associated with the expiration of the Section 1603 Program are uncertain, the report says industry experts predict renewable power projects again will have to rely more heavily on external tax equity investors to obtain a portion of their financing. Several potential outcomes:

  • Less-established renewable power developers, especially those with smaller projects, could have more difficulty attracting needed financial capital and completing their projects. Tax equity investors are likely to focus on established relationships with proven developers and on larger projects.
  • Development of projects relying on newer or innovative technologies that lack extensive operational track records may be slowed because many tax equity investors are seen as highly averse to technology risk. 
  • Projects relying on tax equity financing likely will be more expensive to develop because of the transaction costs and potentially higher yields required to attract tax equity capital.

Section 1603 awards made to projects in all 50 states

Through May 2012, the Section 1603 Program had awarded $11.6 billion to almost 38,000 projects that added almost 17 gigawatts (GW) of new renewable electricity capacity. Since the awards are for 30% of the projects' eligible costs, the total value of the projects supported is about $38.6 billion. Section 1603 Program awards have been made to projects in all 50 states, Puerto Rico, and Washington, D.C. These projects have used a wide range of renewable generation technologies, including geothermal (92 projects), biomass (63 projects), and hydropower, fuel cell, and other technologies (176 projects combined).

Below is a U.S. map that shows the value of Section 1603 Program awards by state.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Untitled Document

Get All the Renewable Energy World News Delivered to Your Inbox

Subscribe to Renewable Energy World or email newsletter today at no cost and receive the latest news and information.

 Subscribe Now


Aviation and Greenhouse Gas Reductions: A Role for Renewable Jet Fuels

Tom Ewing In a July 1 Federal Register notice, the U.S. Environmental Protection Agency (EPA) presented plans to control greenh...

PHG Energy Preparing Environmental Permit Application for TN Biomass Gasification Plant

Jennifer Delony PHG Energy (PHGE) is preparing to file with the Tennessee Department of Environment and Conservation an environmental...

The Future of California Utilities: AEE Convenes Stakeholders

Charles Thurston What will be the 2050 business model for utilities in California that are being forced by the state to adopt massive ...

DOE Selects Two Biofuel Development Projects for Funding

Renewable Energy World Editors The U.S. Department of Energy (DOE) on Aug. 27 selected two new projects to receive up to $4 million to develop next-...


US Solar Hosts Sierra Club Solar Meeting

This past Monday, US Solar welcomed a new group to its solar training classroom – The S...

US Solar Invited to Speak at Intersolar North America

Intersolar, the largest solar conference and expo in North America is right around the ...

US Solar - Green Planet Festival Highlights Solar Energy and Solar Training This Weekend

US Solar Institute (USSI) is excited to announce that they are the educational sponsor ...

Yaskawa – Solectria Solar Provides Inverters for One of the Largest Professional Sport Stadium PV Systems in North America

Yaskawa - Solectria Solar, a leading U.S. PV inverter manufacturer, announced today tha...


Solar Decathlon 2015 Opens to the Public in California

Today, Oct. 8, the biennial Solar Decathlon opened up to the public at Orange County Great Park in Irvine, ...

ENER-G CHP technology selected for major London housing scheme

ENER-G has been selected to supply combined heat and power (CHP) technology for phase two of the Leopold Estate housi...


Necessity is the mother of innovation. Our planet is going through major changes in climate. This of course will affe...

Georgia Legislature Approves PPA’s, Florida Hoping to Follow

Ah, the sunny south, the land of peaches, oranges and solar potential. I’m talking about Georgia and Florida he...



Volume 18, Issue 4


To register for our free
e-Newsletters, subscribe today:


Tweet the Editors! @jennrunyon



Successfully Integrating Solar: A Proactive Approach

•      What does the increasing solar penetrati...

Doing Business in Europe – in partnership with GWEC, the Global Win...

There is now 128.8 GW of installed wind energy capacity in the EU (appro...

Doing Business in South Africa – in partnership with GWEC, the Glob...

Wind Energy in South Africa has been expanding dramatically, growing fro...


Sell Through Hypothesis

You first learned to hypothesize, or make educated guesses, in grade sch...

Final Program Now Available for GRC Annual Meeting & GEA Geothermal...

GRC Annual Meeting & GEA Geothermal Energy Expo - Final Program f...

Vacancy? No Problem!

Have you ever tried to sell an efficiency product or service to a prospe...


Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now