The Obama Administration and Congress should be praised for their desire to expand clean technology, but many of their efforts have been largely wasted on ineffective government programs. Right now, they have a unique opportunity to apply valuable lessons of the 2009 stimulus bill to a jobs bill. The stimulus bill allocated approximately $100 billion to 40 different cleantech programs, and one year later, it is very clear which funds had the most impact on the sector. Given the benefit of hindsight, it is disturbing that Congress is attempting to throw more money at the least successful programs.
One example of a struggling stimulus bill program is the Department of Energy Loan Guarantees. It was originally established by the Energy bill of 2005, but the stimulus bill dramatically increased its budget for renewable energy projects. In theory, the program is a solution to the current financing bottleneck; the government should be able to improve tight lending conditions by backing the borrowers. As a political bonus, the Administration can claim credit for the total value of the loans while Congress only has to approve a small fraction for defaults.
While the loan guarantee program addresses a critical problem tempering cleantech growth forecasts, the government’s execution is lagging its ambition. The DOE has issued several press releases recently highlighting progress, but the only actions have been “conditional” approval of pre-stimulus bill applications. Since 2005, only one company has ever received a loan. The stimulus bill gave the DOE $6 billion to support $60 billion in loans, though $2 billion was later redirected to the popular cash for clunkers program. The remaining $4 billion is still untouched and no company appears close to ending the drought because of a slow and burdensome application process.
Securing a loan guarantee involves high application fees, credit requirements, and mandatory environmental studies that move at a snail’s pace. These conditions discourage companies that need financing most. As a result, the program may end up making only a small number of loans to well connected companies that probably can get financing elsewhere, albeit at a higher rate. The program is disturbingly reminiscent of President Carter’s Synfuels Corporation which was canceled by President Reagan for failing to make a substantial impact on the alterative fuel sector.
Cleantech stimulus programs that have made the most awards to date are generally those with the smallest government roles. For manufacturers of wind turbines and solar panels, there is the new Advanced Energy Manufacturer’s Tax Credit (MTC) which provides a 30% tax credit on the cost of new or retrofitted facilities in the US. This program recently awarded its entire $2.3 billion stimulus bill funding in just one round of solicitations to 183 projects. For renewable energy project developers, the stimulus bill extended a similar 30% tax credit through 2012 and made them convertible to cash grants through 2010. Since the grant program was launched in August 2009, it has given out over $2.5 billion to 324 projects.
The difference between the tax credits and loan guarantees is the role of government. Allowing companies to claim tax credits is not considered a “major government action,” and therefore they are exempt from the most burdensome environmental reviews. In contrast, the loan guarantees trigger a wide range of environmental regulations, and also financial due diligence that is conducted at a slower pace than comparable private sector processes.
The House of Representatives is ignoring the lessons of the stimulus bill by doubling down on cleantech programs with large government roles. The jobs bill it passed last December adds $2 billion to the loan guarantee programs and attempts to streamline its application process. There is nothing allocated for the MTC which is out of funding, the grant programs expiring this year, the wind tax credits expiring in 2012, or the bioenergy tax credits which expired in 2009.
The Senate proposals ignore the cleantech sector almost entirely, but their energy bill demonstrates that this chamber has also missed the lessons of the stimulus bill. The bill it passed at the committee level in July 2009 would create a new “Green Bank” within the DOE, which appears largely the same as the loan guarantee program and Synfuels Corporation.
If Congress is serious about job creation and energy independence, it should make long-term extensions to the tax credit and grant programs. This would give banks confidence in their expected returns, spur lending and increase growth expectations for the sector.
The stimulus bill clearly demonstrates that these programs inject money at a fast pace to a wide pool of applicants. Because of technology advances and favorable tax policies, the cost of renewable energy has dropped considerably in the last several years and it is closing the gap with fossil fuels. However, the sector is still reliant on subsidies until it sees further economies of scale which will be necessary to achieve price parity with traditional energy sources. Bank lending is the key bottleneck right now, and it would be served best by a more silent partner in the government.
Robert Lahey is the Senior Legislative Analyst at Ardour Capital Investments LLC, and can be reached at [email protected] Founded in 2002, Ardour Capital is the leading research and investment-banking firm exclusively focused on energy technology, alternative energy and power, and clean & renewable technologies. Ardour Capital publishes in-depth company coverage and industry specific research. Ardour Capital offers private and public companies a full range of corporate finance, investment banking and capital market services. Ardour Global Indexes is a family of pure play alternative energy indexes that is the primary measure of cleantech equity performance.