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The Sequester and Its Impact on US Government Funding for Renewable Energy Projects

Mandatory spending cuts triggered by the March 1st sequester (automatic spending cuts) in the U.S. are being felt across the renewable energy sector sparking fears that reduced federal investment could curtail research, development and commercialization of new renewable energy technologies.

Government grants have historically been a key driver of innovation in fields such as science, health and health care, medicine, technology, energy, renewable energy and others. Through 26 different agencies, each year the U.S. federal government provides billions of dollars in grants to universities, clinics, research organizations and private sector companies around the country to fund a broad range of research projects that private, for-profit firms would not undertake because they do not offer immediate financial gain. 

Government-funded research has supported the development of countless technological innovations including super computers, the Internet and a broad array of renewable energy technologies. Federal government spending on grants peaked in 2009 at $665.2 billion, declining to $614.4 billion in 2010 before dropping to $538.8 billion in 2012. 

Federal government funding to support renewable energy research, development and commercialization projects primarily comes from the Department of Energy (DOE), United States Department of Agriculture (USDA) or National Science Foundation (NSF). Small grants and technical assistance are available through other agencies such as the Environmental Protection Agency (EPA) and the U.S. Forestry Service. Through 2012 the U.S. Treasury also supported clean energy projects through the 1603 program, which provides payments in lieu of future tax payments. Congress did not renew the program and it ceased accepting new applications on October 1, 2012. 

The DOE awarded $1.9 billion in grants in 2012 with the NSF awarding $6.3 billion and the USDA $30.9 billion. But due to spending cuts triggered by the sequester all three agencies will be awarding fewer dollars to support renewable energy research, development and commercialization in 2013 and beyond.

The history of the sequester goes back to the Balanced Budget and Emergency Deficit Control Act of 1985. The term sequester refers to across-the-board federal government spending cuts that are equal to the difference between the cap set in the Budget Resolution and the amount actually appropriated by the United States Treasury. It was developed to curb unbridled federal spending and to deter annual budget deficits. Before 2013, sequestration last happened in 1991. 

In its current iteration, the sequester was passed as part of the Budget Control Act of 2011 (BCA), which is also known as the debt ceiling compromise. The intent was to push the Joint Select Committee on Deficit Reduction to trim $1.2 trillion from the federal budget over ten years. Because the committee failed to reach a deal, on March 1, 2013 President Obama signed the order to begin sequester cuts.

As a result of his signature, under the 2011 BCA as amended by the American Taxpayer Relief Act (ATRA) in January 2013, both defense and non-defense program budgets were cut, or sequestered, by a total of $85 billion. Many mandatory programs such as Medicaid, Social Security and others were exempt from the sequester. According to the Center for Budget and Policy Priorities, 2013 sequester cuts total $85.4 billion and include: 

  • $42.7 billion in defense cuts (a 7.9 percent cut).
  • $28.7 billion in domestic discretionary cuts (a 5.3 percent cut).
  • $9.9 billion in Medicare cuts (a 2 percent cut).
  • $4 billion in other mandatory cuts (a 5.8 percent cut to nondefense programs, and a 7.8 percent cut to mandatory defense programs).

Additional cuts will be made in 2014 as well as in subsequent years. A review of the funding status of the primary federal agencies that provide grant funding to support renewable energy projects, shows the sequester has impacted both current and future funding levels. 

  • Department of Energy: The DOE operates a number of different energy-focused grant programs including the Small Business Innovation Research (SBIR) program and Advanced Research Projects Agency – Energy (ARPA-E). Overall, the DOE has not indicated any specific sequester-related cuts to its funding programs. However, the DOE did state that sequester cuts would force the agency to scale back scientific research and delay several clean energy technology programs and projects. At this point there is no clear indication how the sequester will impact clean energy grant funding for fiscal year 2014 and beyond.
  • USDA: The USDA has a number of funding programs that support renewable energy projects, all of which have been impacted by the sequester. No programs have been cut but funding levels have been reduced and due to staff cuts, the proposal review and selection process is taking longer to complete. The Rural Energy for America Program (REAP) program was reduced by about $1.4 million and the Advanced Biofuel Payment Program was reduced by about $3.3 million.  The impact of these reductions are fewer projects will be able to be funded under REAP and all 260 producers who have applied under the Advanced Biofuel Payment Program will see a proportional reduction. The USDA says that in recent years it has taken steps to mitigate the impact of funding cuts through its Blueprint for Stronger Service cost avoidance initiative, which has helped the agency to save more than $828 million.
  • NSF: The NSF says that due to the sequestration, its budget resources were reduced by $356 million but that it received its full-year appropriations for fiscal year 2013. The FY 2013 funding level is $6.88 billion, which represents a 2.1 percent decrease from 2012. NSF expects to make fewer awards in FY 2014 and says that it will most likely cancel some funding competitions and solicitations but these decisions will be made at a later date.
  • U.S. Treasury 1603 Program: Payments issued under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for specified energy property in lieu of tax credits, are subject to sequestration. As such, awards made on or after March 1, 2013 through September 30, 2013 will be reduced by 8.7 percent. The reduction rate is subject to change as of October 1, 2013.

These cuts are in sharp contrast to the renewable energy research “boom time” that was spawned with the passage of the American Recovery and Reinvestment Act of 2009, which made $275 billion available for federal contracts, grants and loans. Of this total, more than $90 billion in grants, investments and incentives was directed towards clean energy projects with $16.8 billion being allocated to the Office of Energy Efficiency and Renewable Energy (EERE). These funds supported EERE’s core initiatives comprised of seven programs listed under the umbrella of "renewable energy projects” that include: biomass; geothermal technologies; fuel cells; solar energy; water power; wind energy; and crosscutting (combined projects). 

Sheila Mcdonald Kyger, CFO of Applied Gaia, a Houston-based manufacturer of pyrolytic technology machines and biochar-based products, expressed concern about the negative impact the sequester could have on innovation in the renewable energy sector. Ms. Kyger said, "I am particularly concerned about the impact the sequester will have on availability of government grants to support small-scale renewable energy projects.  In my experience, it is easier for the big players in the sector to get funding for larger projects.  But in terms of innovative renewable energy technologies, I see some of the greatest leaps forward coming from small firms and start-ups, both of which have very limited options to fund research, development and commercialization activities.  Government grants supply those funds."

With Congress unable to agree on a federal budget, the clean energy grant funding outlook is unlikely to change any time soon, despite the Obama Administration’s indication that it is committed to expanding funding for clean energy projects and programs. Unless Congressional leaders are able to agree upon and pass a new budget, we should expect to see smaller funding awards and fewer clean energy funding programs in the next fiscal year.

Lead image: Spending cuts via Shutterstock

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