As the wind and solar industries struggle amid the economic crisis, the new Congress is busy trying to find a solution.
The core of the problem, experts say, lies in the tax structure for these industries.
Banks invest large amounts of money in renewable energy through “tax equity” structures. What does that mean? In a nutshell, the huge tax credits that the wind and solar industries have received come with a catch: investors need adequate profits to take advantage of them, because the credit is used to offset tax liability.
Developers generally don’t have large enough profits to take full advantage, so they turn to banks, which have, until recently, invested heavily in both the wind and solar energy industries. Among other things, that means the fate of renewables like solar and wind can be closely tied to the fate of investment banks — which explains why the collapse of Lehman Brothers caused problems at a Vermont wind farm.
Details are different between solar and wind, but “the effects on the two industries are the same,” said Keith Martin, a tax and project finance specialist at the law firm Chadbourne & Parke. “Both are having a hard time raising tax equity.”
According to an analysis by Mr. Martin and two others at Chadbourne & Parke, the number of large institutional investors who used “tax equity” to invest in renewable energy projects has fallen from 18 to 4 or 5 in the past two years.
Congress, meanwhile, is trying to restart wind and solar development. The industries insist that the best way forward is to make the tax credit “refundable,” so that the money from the tax credit would be available directly, and investors would not need big profits to invest.
A House bill (PDF) is expected to be marked up Thursday. It “would do nothing to bring back any tax equity investors who exited the market,” the Chadbourne & Parke analysis finds, although its provisions might attract a few new investors, like regional banks, to wind, biomass and geothermal projects that will be finished relatively soon. The bill would also potentially allow some new financing structures. (UPDATE 1:56pm: Mr. Martin e-mailed to add that while the House bill might not bring back departed tax-equity investors, developers like the bill. “It will let them get the cash value for about half the tax subsidy on their projects from the government during 2009 and 2010 when the tax equity market is expected to remain weak,” he said.)
A bill out of the Senate Finance Committee has yet to be seen.
There is a caveat to refundability, the Chadbourne & Parke team writes: “There is some wariness in the market about relying on the Department of Energy to make refunds after the length of time it has taken D.O.E. to get a federal loan guarantee program for energy projects off the ground.”
