January 5, 2012
Expiry of US grant programme to spur innovative renewables financing, say experts
Competition for financing for US renewable energy projects will become fiercer following the expiration of the cash grant programme, but its absence will see alternative financing mechanisms take hold and new tax equity investors courted, financing experts said.
The Section 1603 Treasury grant programme expired on 31 December after an effort to include an extension in must-pass legislation failed.
“A lot of people would prefer to have the 1603, but it’s not the end of the world,” Nancy Pfund, managing director of San Francisco-based venture capital firm DBL Investors, told Environmental Finance. “There’s a very compelling Plan B.”
Private finance can now start to engage in all the alternative financing structures that have been discussed, but not pursued because of the presence of the cash grant programme, said Dan Adler, president of the California Clean Energy Fund (CalCEF), a non-profit venture capital fund in San Francisco.
The Treasury Department had dispersed $9.9 billion in cash grants to renewable energy developers, as of 8 December.
The renewable energy sector should push Congress for legislative changes that would facilitate investments in their projects by master limited partnerships and real estate investment trusts, experts said, while acknowledging that would be difficult in the current political environment.
“In the grand scheme of legislative challenges … they’re not insurmountable,” Pfund said. “Over the next 12 to 24 months, you’ll see more financing instruments that will disseminate wind and solar in ways that are more efficient and lower the cost of capital.”
Sector to seek new investors
The expiration of the 1603 programme could also propel the sector to seek new investors, experts said. Prior to the programme, US renewable energy projects were typically supported with tax credits, which require investors to have US taxable income against which the credits can be used.
A survey of tax equity investors conducted in July by the US Partnership for Renewable Energy Finance found that only $3.6 billion of financing would be available for renewable energy projects from tax equity in 2012 in the absence of the cash grant programme. This is almost 50% less than the projected amount of combined tax equity and 1603 financing available in 2011.
“It’s going to be increasingly competitive because developers who were using 1603 will be scrambling to develop relationships or get capital from banks with tax capacity,” said Paul Detering, CEO of San Francisco-based solar power systems operator Tioga Energy. “For developers who don’t have relationships, it’s going to be tough.”
“Good deals can always find financing,” Principal Solar CEO Michael Gorton said, noting that the Addison, Texas-based company, which seeks to acquire solar assets, recently closed a $15 million reserve equity financing.
However, a November report by Bloomberg New Energy Finance found that there is a vast pool of potential incremental tax equity supply: the 500 largest public companies in the US alone paid $137 billion in taxes over the past year.
“There’s no reason we couldn’t have more tax equity investors in this industry,” Adler said.
The Solar Energy Industries Association vowed to continue fighting for a retroactive extension of the 1603 programme, although its chances are slim in an election year.
“It’s a pretty heavy lift,” said Richard Caperton, policy analyst for progressive think tank the Center for American Progress, in Washington, DC. “The election year makes it tough to do big energy legislation. But in some ways an election year makes it easier to protect Americans from tax increases. I can see a slight window.”
Seeking a safe harbour
A number of developers acted to “safe harbour” projects, meaning they spent 5% of the capital costs by the end of 2011 to remain eligible for the grant even if their project is not installed until this year. These moves could cushion the blow of the expiration for the next six to nine months, experts said.
Tioga Energy chose the safe harbour approach and purchased panels for several of its New Jersey-based distributed generation projects because the state’s Go Solar loan programme worked well with 1603 from a financing perspective, Detering said.
“While we were hoping for [an extension], we weren’t counting on it,” he said. “But beyond that, we have sources of financial capital that do not require 1603.”
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