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Thursday, December 09, 2010

The Importance of Extending the 1603 Treasury Grant Program

Written by Lon Huber with contributions from Alex Christensen

Anyone working in renewable energy will tell you that when it comes to getting a project off the ground, financing is key. Treasury Grant 1603, found in the American Recovery and Reinvestment Act, was designed to address the front loaded costs to entrepreneurs of installing renewable energy. Otherwise known as the Treasury cash grant, this program has been a lifeline for an industry that has had to depend on a complicated tax code and the likes of Lehmann Brothers and AIG for financing. At midnight on December 31st of this year, the 1603 Treasury Grant Program is set to expire, and unless Congress renews it, the young renewable energy industries will be forced compete in a tax system designed to the advantage of fossil fuels.

Without Treasury Grant 1603 the clean energy industry would not be enjoying the success it is today. To effectively compete against a fossil fuel industry that is heavily subsidized by the federal government, the renewable energy industry has needed federal help to level the playing field.

Unfortunately, the lack of a strong national energy policy has required the renewable energy industry to become cost effective through tax credits. The problem with trying to stimulate an emerging industry with tax credits is that it fails to eliminate two central problems facing small businesses, large up front costs and lower initial profits meaning lower initial tax credits. Many new clean energy businesses did not have enough income to fully utilize these tax credits, forcing them to turn to large financial institutions like Lehmann Brothers for assistance in realizing the advantages of such credits. After the financial meltdown and the resulting lack of finance, it became next to impossible to take advantage of the tax credits in the same way.

The Treasury cash grant program provided a lifeline by transitioning the unfavorable tax credits to upfront payments not tied to a particular company's income. This was huge help to renewable energy developers and did not cost taxpayers any additional money – since it merely shifted the tax credit to an upfront subsidy.

The effect of the Treasury grant program was a rapid growth in clean energy deployment and thus job creation:
  • According to the American Wind Energy Association, the grant program enabled the construction of 10,000 MW of new wind capacity in 2009 - more than double the 4,000 MW that would have been installed without the program

  • 10,000 new construction jobs and 2,000 new permanent jobs were created in 44 states across the country. The American Wind Energy Association credits the cash grants with saving 40,000 jobs in construction, manufacturing, and research and development.

  • Solar grew by 37% in 2009 and is projected to grow 100% over that this year or 55% even in the midst of a anemic economy and falling fossil fuel prices.
With great help from the 1603 program, clean energy has started to pick up momentum, gain economies of scale, and attract venture capital. In fact, over the past two years, the price of solar modules have declined by roughly 25% and wind turbines by nearly 15%. As of October 26th, the program leveraged $5.4 billion in federal funds to attract over $12.7 billion of outside investment.

Regrettably, the US is on the verge of taking a step backwards and jeopardizing future gains of this magnitude. On a purely economic basis, the US cannot afford to move renewable energy back to a boutique industry with correspondingly high prices. Even the possibility of Congress failing to renew the 1603 Treasury Grant program has caused a 70% decline in wind installations. Conversely, if the cash grants are extended by just one year, through 2011, the recipient companies in the clean energy industry would create more than 100,000 new jobs, according to a U.S. Partnership for Renewable Energy Finance report written by clean energy specialists at GE and Deutsche Bank. Furthermore, renewing the grant program indefinitely will create over 58,000 additional permanent jobs in the solar industry and the installation of over 1,600 MW of solar electricity by 2016.

Most importantly, the 1603 program allows small businesses and community investors to participate in this emerging industry by lowering the upfront capital required for renewable energy projects. The flexibility of the 1603 program also allows nonprofits to partner with leasing companies to create small, community based wind or solar energy systems, an act prohibited under the tax credit system.

If the US seeks to become a leader in clean energy technology and reduce its consumption of fossil fuels in a cost effective fashion, an extension of the 1603 program is critical. With a properly designed and stable policy framework, the budding renewable energy industry can finally have the opportunity to compete head to head with fossil fuels. After witnessing increases in cost competitiveness and capacity in renewables over the past two years, it is obvious why the fossil fuel industry wants renewable energy to return to fighting with one arm tied behind the back. Creating certainty in the market is necessary for clean energy entrepreneurs, and the extension of the 1603 Treasury Grant program is critical to a vibrant American renewable energy industry.

The current negotiations surrounding the Bush era tax cuts and unemployment benefits provide a unique opportunity for extending the 1603 tax credits, and it looks like there is a major push under way to do so. Today Reps. Earl Blumenauer (D-OR), Mike Thompson (D-CA), Rush Holt (D-NJ) joined with representatives from the Solar Energy Industries Association (SEIA), American Wind Energy Association (AWEA), Environment America, and the Blue Green Alliance to announce a letter from 80 members of in support of extending the program. Additionally, the Hill’s Energy and Environment blog is reporting that Senator Ben Nelson is optimistic about the chances for a deal, “I hope that they will be in there and I believe they probably will be based on what I am hearing.” Because of the importance of this issue, we would like to urge everyone to contact their representatives to show support for a program which has an will continue to create jobs, make America more energy independent, and help abate climate change. You can very easily send your representatives an email here by simply typing in your home address and personalizing a pre-prepared letter.


Lon Huber is a Policy Fellow in AEL’s New Energy Leaders Project and will be a regular contributor to the website. Lon is currently pursuing a master’s degree in business administration at the University of Arizona – where he serves on the President’s Campus Sustainability Advisory Board and as the chair of the UA Green Fund. Lon has worked in Washington D.C. as a congressional solar energy fellow and as a policy advisor for candidates seeking public office in Arizona. After working in energy policy research for two years at the Arizona Research Institute for Solar Energy, Lon became the governmental affairs liaison for Technicians for Sustainability, an Arizona based solar energy integrator. Outside of policy, Lon works in renewable energy finance.

Alex Christensen is a Contributor in AEL’s New Energy Leaders Project and his work will be regularly featured on the website. Alex is a senior at Washington University in St. Louis studying economics, political science, and institutional social analysis. He is currently conducting research on comparative energy policy in the Center for New Institutional Social Sciences, focusing on the interaction of government institutions and wind energy in Denmark and Ireland.

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