The stimulus bill currently moving through the Senate is designed to increase confidence in the markets and speed up spending in the economy. Republicans and Democrats, however, split on how that intention should be realized. The final bill that is passed will most likely be a combination of a federal loan guarantee and a grant program, both designed to allow investors and businesses to receive funds in order to continue projects currently on hold due to the financial crisis.
The question of who will qualify for these low-interest loans or grants and who will benefit involves some complex legal understanding in order to be answered. The bill continues to change as it moves through Congress with lobbyists and lawyers all jockeying for influence. Over the course of the next week, it will be debated on the floor of the Senate and amendments most likely will be added.
Chadbourne and Parke LLP, a full service law firm specializing in all aspects of corporate, commercial, financial, bankruptcy, tax, insurance, litigation, and intellectual property matters, held a briefing on Jan. 30, 2009 on the economic stimulus bill moving through Congress. In the briefing, the panel of speakers tried to address the question of how certain measures in the stimulus package will affect energy projects on the ground.
According to Chadbourne and Parke analysts, the Senate bill differs from the one that recently passed in the House in that it is currently designed to help revive investor confidence by building up the investor tax credit (ITC) market more than the production tax credit (PTC), which analysts speculate will ultimately provide more incentive for investors to start lending to renewable energy companies so they can start new projects. Critics of expanding the ITC program want to see incentives go toward projects that increase renewable energy electrical output, so as to bring about more spending on the production side. PTCs allow for producers of renewable energy to directly reduce the amount of taxes a firm owes, thus bringing down the overall cost of each kW-h.
Whether the tax credits go to the producers or the investors, objecting Republicans say the bill is still full of ‘pork’. Many Republicans do not want to see the renewable energy industry receiving subsidies in any form, and a significant portion of the House and Senate bill sets up a loan guarantee program, at the very minimum, for new energy projects, with a heavy focus on developing renewable energy.
Renewable energy markets continue to stagger in the current economic climate, and many industry experts are consulting with congressional leaders in order to design a bill that can help stimulate these industries so that they come out of 2009-2010 on a path toward maturity where the green economy will be able to work without direct subsidies handed out in their industries.
In essence, providing economic stimulus in this industry is an indication that the federal government is making bets ahead of the commercial market that the renewable energy economy will work. Some analysts argue that once the economy rebounds and oil prices increase back to summer ’08 prices, these types of investments in renewable energy, transmission, and energy efficiency projects will seem brilliant in their inception, but for the time being, congressional leaders seem happy to argue about how and to whom the money will be doled out.
The stimulus bill seeks to expand the federal loan guarantee program up to $80 billion that will be made available for project financing to the renewable energy industry, according to Chadbourne and Parke; when considering Exxon Mobil’s profits of $45 billion for 2008, this figure seems small to stimulate an entire industry.
The program as it stands now has several stipulations in order to receive some of that $80 billion that projects must meet in order to receive the low interest loans. First, the projects must be commercial ready; this means that they have gone through their pilot project phase and are established in their respective markets, ready to go commercial. No money is allotted for developing projects; for example, many corn ethanol projects may qualify, but not many cellulosic projects are currently ready to operate on a commercial scale. Second, projects applying for a low interest loan cannot have any federal fingerprints imprinted on them; for example, a solar project on BLM land cannot qualify for these types of loans. Analysts argue that these types of limitations indicate backwards thinking. By only funding commercial projects, we risk allowing some of the country’s most innovative projects to circle the drain over the course of the next two years.
Currently, the renewable energy market is funded primarily through tax relief programs like the one contained in the stimulus bill; subsidies account for somewhere around 65% of the cost of most renewable energy projects, according to Chadbourne and Parke. Investment in the renewable energy sector has depended upon tax equity markets of the PTC or ITC variety in order to make them attractive, and because of the current financial situation, there are less investors willing to take risk in this sector. Right now, a biofuel, wind, solar, or geothermal company does no have the luxury of depending upon the federal government handing out a lump sum of cash to them individually in order to keep them afloat. Instead, the renewable energy industry, in general, depends upon tax credits to be put in place in order to encourage investors or producers to take the risks associated with energy conservation; and these credits usually expire in a given timeframe, exacerbating investor liability if they are not renewed. The stimulus package seeks to extend the sunset dates for these credits so as to encourage longer-term investment in the industry
The stimulus bill is setting up to be a battle drawn along ideological lines between Democrats and Republicans, and one thing is for sure, America’s energy policy is becoming so complicated that teams of lawyers and lobbyists are the ones now determining America’s our energy future.
The stimulus bill will have reverberating effects that ripple through the economy for years to come, but America’s overall energy policy is still under the influence of Cheney and Bush. Not until late spring or early summer will the debate over America’s energy future happen in Congress when they begin designing the Obama Administration’s Energy Policy. If the stimulus package is any indication of where the lines will be drawn in that future battle, we are in for an ideological fight of monumental proportions in only a few months time.
