Monday, February 2, 2009

The U.S. House last week passed the largest stimulus package yet, sparking cheers from renewable power producers who say it contains some obscure provisions essential to their survival.

The $819 billion piece of legislation, unveiled by House Democratic Party leadership last month, contains billions for new investments in energy, including $8 billion in loans for clean technology projects, $6.7 billion for retrofits of federal buildings to make them more energy efficient and $11 billion for development of a new national electricity grid.

While these high-dollar direct investments have stolen the spotlight, one of the most welcome provisions for renewable industry leaders lies in two passages of the American Recovery and Reinvestment Tax Act, a bill that will be combined with the stimulus, which tweak existing incentive programs.

The Investment Tax Credit provides a 30 percent tax credit for residential and commercial solar installations, and Congress extended the incentive for another eight years as part of last fall’s $700 billion stimulus package. Lawmakers also extended the life of its sister program, the Production Tax Credit, which provides 1.9 cents per kilowatt-hour for wind, geothermal and a few other technologies.

Now, the House wants to make those credits refundable.

In other words, instead of saving money on taxes, investors in renewable energy would get a direct payment within 60 days of application equivalent to the tax credit through a grant program at the Department of Energy. The refundable status of the credits would last for two years, through 2010, with no cap on the amount of funds available for distribution.

With credit drying up quickly, this represents a lifeline for the industry, said Greg Riddle, a tax partner at Orrick, Herrington & Sutcliffe LLP, a multinational law firm that’s active in renewable energy policy.

“These changes are absolutely essential,” Mr. Riddle said. “I wouldn’t say the industry has ground to a halt, but it has significantly slowed down because of the lack of tax equity which has affected investments (in renewable energy).”

Altering the program to make the credits refundable is essential to its success, industry representatives argue, because without the provision, the ITC and PTC become worthless in today’s troubled economic climate.

That’s because many companies that used to invest in renewable energy aren’t making profits anymore, and businesses that don’t make a profit don’t pay taxes, making the credit worthless for them. That spells serious trouble for the renewable sector, which means other efforts by the stimulus package to boost clean power could be meaningless, said Lyndon Rive, CEO of SolarCity, the largest residential solar installer in the United States.

“If they don’t fix the ITC program, the solar industry will have to lay off workers,” Mr. Rive said. “So having a job training budget (for clean technology workers) in the stimulus makes no sense if they don’t fix the ITC because they won’t have anywhere to work.”

The Senate version of the stimulus does not set up a grant program.

Both the House and Senate versions have other, indirect benefits for renewable energy, though, because they allow taxpayers to apply current losses to tax returns they filed up to five years ago. If the provision passes, a business that didn’t make money this year could take the tax credits they received for investing in clean energy and apply them to the taxes they paid in a previous year when they did make a profit. The IRS would then send a refund their way, so the business owners would still get a return for their renewable energy investment.

Mr. Rive said that’s a good idea, but as it’s written, it won’t end up helping renewable energy much because the provision excludes banks that received money from the Troubled Assets Relief Fund, established in October’s stimulus package.

“The majority of banks that invest in solar energy have received TARP money,” Mr. Rive said. “We need to bring the big banks back into the game.”

Whatever Congress eventually passes, it needs to be a consistent, long-term strategy, or it won’t end up helping the renewable industry, said Elias Hinckley, leader for alternative energy tax practice at Deloitte LLP, a global law firm.

The ITC and PTC have both been characterized by uncertainty in the past. The PTC, for instance, expired three times between 1999 and 2004, and Congress has usually given short-term extensions whenever it has renewed the tax credits. Mr. Hinckley said Congress’s waffling makes it difficult for industry to take advantage of the credits.

“The on-again, off-again nature of the existing programs lacks any consistency,” he said. “Unless industry can plan for incentives beyond 12 or 18 months, it is severely hampered in the kinds of alternative energy projects it can support.”

Geothermal electricity production provides an example of this problem, Mr. Hinckley said.

“You haven’t been able to finance a (geothermal) project based on the credit or factor it into the project economics during planning because a project takes three or more years to build, and there’s never been a long enough window of credit certainty,” he said.

But enabling projects that can’t survive without government tax incentives will hurt the economy in the end, said Ben Lieberman, a senior policy analyst for energy and the environment at the Heritage Foundation, a conservative think tank.

“The only reason the government needs to invest in renewable energy is because it can’t compete on its own,” he said. “Essentially it’s the government picking more expensive energy sources and forcing them on the public.”

Congressional leaders hope to pass a final version of the stimulus, which will be a compromise of the House and Senate versions, by mid-February.

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