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Wednesday, October 20, 2010

Critics of Clean Energy Stimulus Program Miss the Point

Originally Published at the Breakthrough Institute

A stimulus program to boost the deployment of clean energy technology has come under criticism for contributing funds to projects that had started construction before the stimulus bill was passed. A long and in depth Greenwire story notes that 64 percent of the 50 highest dollar grants went to such projects.

While the hastily-constructed stimulus programs for clean energy could have been better optimized, those arguing that the Section 1603 clean energy grant program somehow created a boondoggle are completely off base. Any projects already under construction would have received an equivalent benefit in a better economy, and the stimulus-funded clean energy grant program has been a successful job creator in an industry that was once near collapse.

Clean Energy Industry on the Brink

For decades, the main policy instruments to drive the deployment of clean energy have been the production tax credit (PTC) for wind and the investment tax credit (ITC) for most other technologies. The ITC for example subsidized 30% of the capital costs of new clean energy projects, while the PTC provided a comparable production incentive for renewable energy generation (projects only claim one or the other credit, not both). To obtain the credits, renewable energy providers generally partnered with investment banks or insurance companies who have the tax appetite to finance capital-intensive renewable energy projects and claim the credit.

However, as a result of the financial crisis of 2007, the tax equity market dried up, and traditional clean energy investors either sat on their money or invested in less risky projects. Back in February 2008, Aaron Lubowitz, a clean energy investor at Morgan Stanley, put it this way:

"Right now with the stock market not being its healthiest, the sort of plain vanilla non-emerging technologies -- those are the projects that are going to get financed."

As a result, clean energy projects came to a halt. Clean energy jobs were in peril, and barring other forms of financial support, would likely be lost, perhaps permanently.

Stimulus-funded Clean Energy Grants: Industry Savior or Government Boondoggle?

Enter the stimulus-funded Section 1603 clean energy cash grant program. Instead of claiming the normal tax credits, companies could receive a grant when projects are placed in service, obviating the need to find a tax equity investor. Companies would receive the same benefit, but they would have more assurance it the incentives would be there when the project was completed. Even for those projects that were already under construction before the stimulus, they simply received a grant in lieu of a tax credit that they would have otherwise received from the federal government, at essentially the same cost.

The argument that providing grants to clean energy projects already under construction when the stimulus program began is some kind of boondoggle misses the point at both the level of an individual project, and the clean energy sector as a whole.

When it comes to individual projects, two cases are possible. In the first case, despite the recession's impact on financial markets, the project developer could have found tax equity partners to claim the normal tax credits. In this case, the cash grant was unnecessary, but the cost to the government would have been the same, since the developer would have cashed in the equivalent tax credits anyway. So no boondoggle there.

If, on the other hand, the recession forced a tax equity partner to withdraw from a project already under construction, the project developer would be saddled with a major financial problem, with construction costs already committed to the project but a key financial backer now absent. In this case, the cash grant would have been absolutely essential to keeping the project financially viable and construction (and the associated jobs) underway. In other words, the grant program would have worked exactly as planned, even though the project began construction before the stimulus was enacted.

At the scale of the clean energy sector as a whole the effects of the cash grant program have been substantial and positive. A study by the Lawrence Berkeley National Lab estimates that the grant supported more than 50,000 short-term job-years and 4,000 long-term job-years. And as Breakthrough's Jesse Jenkins and Yael Borofsky reported a year ago, the investment from the cash grant program has leveraged much greater private investment in the sector, leveraging $2.33 in private investment for every dollar of federal funds.

The program also contributed to a major expansion of new wind power capacity in 2009, despite the economic crisis underway. 10,000 MW of new wind power capacity, more than double the capacity forecast at the start that year, came online in 2009. Iberdrola Renewables, a Spanish wind energy company with a presence in the United States, told Greenwire that were it not for the cash grant program, it would have invested outside of the United States. Even more solar and other renewable energy facilities came online with help from the cash grant program, creating jobs and spurring financial investment at a critical juncture in the recession.

In short, the cash grant program was successful at what it was intended to do--revitalize the clean energy industry at a time of near-collapse.

Now, with the program's expiration imminent, and credit markets still largely frozen, clean energy developers are rightly worried that clean energy investment will soon dry up once again. With other nations redoubling their efforts to create competitive clean tech industries, moving away from a clean energy economy would be shortsighted, to say the least.

Towards a Smarter, Long-term Deployment Strategy

While the cash grant program helped forestall the collapse of the U.S. clean tech industry, the United States needs a smarter deployment strategy if it hopes to build a competitive domestic clean energy economy and take advantage of new export opportunities around the world.

The current clean energy deployment model in the United States is not optimized to drive innovation. The PTC, ITC, and the cash grant all subsidize the deployment of existing and higher-cost clean energy technologies without encouraging the continual innovation that can reduce the unsubsidized costs of those technologies over time.

While the short-term calculus of economic stimulus may prioritize getting steel in the ground today, any long-term strategy to build competitive American clean energy industries will need to see U.S. firms become the most innovative, cost-competitive companies in the world. The end goal must be building robust, competitive industries that do not require permanent subsidies to thrive in global or domestic markets.

Getting there will require deployment policies that reward companies who continuously improve designs and cut costs over time, rather than those that just build more of the same product.

Furthermore, if the United States hopes to build a robust and competitive clean tech industry, deployment is only one piece of the pie. More substantial efforts are needed to spur the creation of domestic clean energy manufacturing capacity, and to invest directly in energy innovation through a major scale-up in federal funding for clean energy research and development.

With little time left to achieve any victories on clean energy, Congress should make extending and optimizing clean energy deployment incentive programs like the Section 1603 program a priority.

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