August 24, 2011
The Answer to Obama’s Jobs Problem
FORTUNE — The White House announced that President Obama will address the nation on jobs after Labor Day. I have a suggestion for where the President could find part of the answer: by setting loose the 30-gigawatt (GW) buildup of U.S. solar projects bogged down in late stage development. Here’s the amazing part: he could do it without committing to spend a single additional federal dollar and the result would be net savings to the government through massive job creation and a wave of private investment in our nation’s infrastructure.
Let me first describe the situation on the ground. Over the past few years, rapidly declining solar costs and state Renewable Portfolio Standards (RPS) programs, which require utilities to generate a percentage of power from renewable energy sources, have combined to create 30GW of solar projects in the later stages of development. That’s enough solar to power about 6 million homes. To put that in perspective relative to other sources of electricity, solar has more megawatts in development than wind, coal, gas, or nuclear according to analysis by the American Public Power Association.
All those solar projects represent many tens of thousands of new construction jobs, plus a whole lot of engineering, finance, and service jobs as well. The only reason those projects and jobs aren’t happening now is because they’re held up by a gauntlet of permitting, interconnection and financing challenges. To set those jobs free, we need to do just three things:
1. Streamline environmental permitting,
2. Align interconnection policies with utility procurement plans, and
3. Expand the pool of eligible investors in solar projects
Environmental permitting is inefficient, rife with redundancy, agency overlap, and jurisdictional issues. Don’t get me wrong. We absolutely need strong rules to protect our environment and critical species. However, we can still have strong protection for our environment while streamlining rules and guidelines to make permitting more efficient. Net impact of reducing regulation: less government waste, less industry waste, more jobs.
Interconnection is a pretty technical issue but what’s needed is straightforward to understand. Interconnection refers to the process of connecting a generator to the electrical grid. Under the current system, interconnection is overseen by “independent system operators” who coordinate grid planning and decide who gets connected and when. Procurement – how utilities buy power – is overseen by utility commissions who determine whether the purchase complies with regulatory requirements. We need our political leaders to make it clear that interconnection should ‘follow’ utility procurement. Right now they’re treated as two separate processes, which is kind of silly when you think about it. This results in ridiculous situations where interconnection is granted to a generating resource utilities don’t want or interconnection is denied to a resource that the market deems important. Net impact of fixing interconnection: less government waste, less industry waste, more jobs.
The easiest thing President Obama can do is expand the pool of eligible investors in solar projects. None of the 30GW solar pipeline will be built if investment capital isn’t allowed to flow into projects. To be clear, I’m talking about good projects with proven technology, strong credit, and attractive returns. These kinds of projects should be easy to finance, but they’re not.
Let me try to explain the very complicated topic of tax oriented financing. Solar projects in the U.S. qualify for the Investment Tax Credit (ITC). But, neither the projects nor developers typically have big enough tax bills to make use of the credits on their returns. So, developers enter into a financial arrangement with an investor who does have a large tax bill. The investor puts money into the project and receives a combination of project cash flow and tax credits in return. The problem is that we have a shortage of investors eligible to participate in tax-oriented financings because the rules are overly restrictive. This problem was temporarily fixed by the 1603 Treasury Grant Program (TGP), which provides developers with the option to receive a cash grant in lieu of the tax credits. The TGP is scheduled to expire at the end of this year, leaving solar projects high and dry.
The fix is an adjustment to the rules that allow more private investors to participate in solar projects. There are three options for the President to accomplish this goal: 1) extend the Treasury Grant Program, 2) make the Investment Tax Credit refundable, or 3) allow Master Limited Partnerships (MLPs) structures (commonly used to finance real estate and oil/gas projects) for Investment Tax Credit Projects. Net Impact: no additional cost because the Investment Tax Credit is already on the books through 2016 and none of the above fixes would amount to a government spending increase.
Here’s what’s even more compelling. There’s strong logic that says the changes above would result in a net savings to government. A study from EuPD Research found that any cost of extending the 1603 TGP is more than offset by the avoided unemployment costs and additional income tax revenue generated by new jobs resulting from the extension. Read that again: the revenue and savings for the government from creating all those solar jobs would exceed the costs of the grant extension.
What are we waiting for, Mr. President?
Arno Harris is the CEO of Recurrent Energy, a leading developer of solar power projects, and an energy industry veteran. As the primary solar development company for Sharp Corporation worldwide, Recurrent Energy combines the technical capabilities and access to capital necessary to deliver utility solar at just about any scale. Arno also shares his views on renewable energy on his blog Clean Energy Future.
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