Challenges Remain for Financing Renewable Energy

by | Sep 22, 2011

At the National Clean Energy Summit in Las Vegas, U.S. Vice President Joe Biden recently stated that the United States is at risk of making the “biggest mistake in its entire history” if political battles force the government to reduce investment in clean energy.

Indeed, despite growth in the wind energy market in recent years, significant financing challenges remain for renewable energy projects in the U.S., driven by the trend of decreasing support from government entities.

As an industry that is highly dependent on government subsidy for tax incentives, research funding and direct spending, wind and solar projects are now at risk as incentives from the 2009 stimulus bill expire and deficit-reduction initiatives threaten future support for such renewable energy projects. All this may happen before the still-emerging renewable energy industry has a chance to compete on its own with established fossil energy providers.

Government Subsidies Set to Expire

Currently, clean technology transactions have access to certain tax advantages, such as accelerated depreciation and production tax credits (PTC’s). Sponsors of these types of projects can monetize these tax shields by allocating them to tax equity investors. In lieu of PTC’s, the project can seek an investment tax credit (ITC), a federal program which provides a tax credit to offset a significant portion of the cost of developing the project.  However, the PTC program is set to expire in 2012 while the ITC ends in 2016.

The government attempted to fill the void left by investors leaving the tax equity market in 2008 by creating a cash grant program to help supplement funding for renewable energy projects. Since then, developers have been utilizing the U.S. government’s Section 1603 Treasury cash grant program, allowing them to opt for a cash payment instead of a tax break. Unfortunately, this program is also set to expire in the near future (at the end of 2011) and an extension seems highly unlikely at this time. If this program is allowed to expire, it will force developers to rely more heavily on the tax equity market which may not have the capacity to support the increased demand. Historically, the number of institutions which are active in providing tax equity is quite limited and is impacted by their tax appetites which have waned during the economic downturn.

As the PTC and cash grant programs come to an end without any clear alternatives identified to replace them, many industry experts expect 2012 to be a very tough year. In fact, analysts predict that by mid-year, the U.S. will have spent all of the $65 billion in funding for clean energy provided from the 2009 stimulus bill, including loan guarantees and the treasury grant program.

Coupled with the recent debt-reduction agreement made in Congress, the renewable energy market may be significantly impacted by a shift in policy at both the federal and state levels. According to the White House Office of Management and Budget, subsidies are expected to decline beginning this year and will fall 77% by 2016 from a record high in 2010.

Debt Deal Hinders Federal Support

In order to avoid a U.S. default, Congress and President Obama agreed to a debt deal which could result in at least $2.1 trillion in spending cuts, according to the Congressional Budget Office. Since subsidies for energy are expensive, Congress may target these as they look for ways to further reduce debt. Therefore, the industry is concerned that this may lead the U.S. and other countries, facing economic hardship, to seek to reduce the support promised to existing projects, impacting returns for equity investors and lenders.

However, some in Washington, such as Energy Secretary Steven Chu, have voiced their support for the role government can play in developing new technologies, such as renewable energy through R&D, education and a clean energy standard. “Government has played an incredibly intimate role in all the technologies that led to prosperity in the United States and we must not lose sight of that fact,” Chu said recently. Despite facing a period of uncertainty, Chu urges the government to take action to reduce the deficit while continuing to make investments in clean energy. Until this happens, the renewables industry must contend with the uncertainty, as well the additional global political, regulatory and economic challenges, hindering growth and investor support.

Other Challenges Emerging

Natural gas prices have remained below peak level, giving U.S. developers more incentive to build gas-fired power stations. This negatively affects the terms of power purchase agreements (PPA’s) provided to renewable energy projects, making them less attractive to developers, investors and lenders.

Even though progress has been made this year towards emissions reduction targets, clean energy has languished on government agendas, possibly due to outside criticism. Moreover, the under-performing stock market has impacted the market value of renewable energy companies and has highlighted certain investor skepticism regarding the future of this sector. This is true not only in the United States but also for internationally-based renewable energy companies as well.

So, is the United States about to make the “biggest mistake in its entire history” as suggested by Vice President Biden? All of these challenges underscore how renewable energy is still regarded by many investors as a niche market while fossil fuel-based generation – oil & gas and coal – are where the majority of investments are made. In order to sway public and policymaker opinions, renewable energy needs to continue to become more cost-competitive with conventional power sources. Until that time, the industry will continue to be subject to outside factors that affect its growth.

Kirk H. Edelman was named president and CEO of Siemens Financial Services, Inc. (SFS Inc.) on May 1, 2010.  Based in Iselin, New Jersey, he is responsible for leading Siemens’ commercial finance and leasing business across North America.  

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