This week, Rep. Sean Casten of Illinois introduced a bill that would revive the 1603 grant program created in the 2009 American Recovery and Reinvestment Act. The 1603 program–a nearly $800 billion clean energy grant initiative Congress approved in the aftermath of the Great Recession–allowed renewable energy projects to receive up to 30 percent of a project’s capital cost in the form of a cash payment. This in turn freed up developers from having to rely on tax equity markets to monetize the production and investment tax credits offered to renewables. Rep. Casten’s bill would reinstate the cash-grant program for the PTC and ITC through the end of 2021 and 2022, respectively, for projects starting Jan 1st, 2020. A wide variety of technologies would be eligible for the cash-grant program including wind, solar, geothermal, biomass, hydropower, and some more innovative forms of renewable energy production.
As happened in the 2009 financial crisis, the current global economic downturn will limit the availability of tax equity financing. This could contribute to a stagnation of new renewable energy power projects. Still, the renewable energy industry is, from an investor’s perspective, a much more mature, and safer market to invest in, compared to oil and gas. The combination of these two considerations create a fragmented outlook for the renewables industry as a result of the COVID-19 pandemic, whereby larger renewable project developers take advantage of their access to tax equity markets, while smaller developers are left behind.
A number of the largest tax-equity providers for U.S. renewables, such as Bank of America or JPMorgan, seem to be going ahead with financing renewable projects. Engie, a retail electricity provider in the U.S, announced in April that it had received a $1.6 billion tax-equity package from two major banks to cover 2 gigawatts of renewables. Similarly, sPower, a utility-scale energy developer, announced it has received $350 million of tax-equity from Wells Fargo for a 620 MW solar project in VA, the largest solar project east of the Rockies. However, the reduced appetite of tax-equity financing will disproportionately affect smaller renewable energy developers and could lead to project cancellations.
In risk-averse financing markets, such as the one we are experiencing today, tax equity investors are less likely to be open to working with new renewable energy developers and sponsors. Instead, they will focus on proven industry players. Additionally, because of lower interest rates, tax-equity investors will seek higher returns making financing more expensive, meaning many smaller developers who work with thin profit margins will find it harder to compete. The CEO of NextERa, the largest renewable energy developer in the U.S., acknowledged that smaller renewable energy developers are struggling with securing finance as the appetite for tax-equity investors shrinks. This could lead to large amounts of consolidation of the industry.
Cash-grants initiatives, such as the 1603 program, have a critical advantage over traditional tax-equity financing models because of their ability to incentivize innovative technologies. The original 1603 cash-grant program reduced barriers to entry for first-time developers, as tax equity investors are unwilling to take on the risk of more innovative technologies, thereby increasing competition in the marketplace. Considering that subsidies, structured as cash-grants or tax credits, are primarily about pushing technologies down the learning cost curve, as opposed to being efficient emission reductions policies, then we should be prioritizing subsidies that promote innovation. Reinstating the 1603 program could help smaller and innovative renewable energy developers remain competitive in this tumultuous time.
A preliminary analysis of the original 1603 program found that it was particularly beneficial to smaller developers and manufacturers of innovative technologies, with the program awarding $18.9 million to small hydro and marine projects, and $54.4 million to fuel cell projects.
It also stimulated a significant amount of employment, creating up to 75,000 direct and indirect jobs from 2009-2011. Additionally, the program benefited a wide variety of awardees. The grant money supported 110,000 projects across all 50 states, with a majority of grants awarded to residential solar projects (which are taking a serious hit during the pandemic).
While the renewable energy industry has matured tremendously since 2009–as evidenced by the large renewable energy developers still attracting project financing despite the COVID-19 fueled economic downturn–the drying up of tax-equity markets disproportionately burdens small and more innovative project developers. Reimplementing the 1603 cash grant program could help smaller and more innovative renewable energy project developers remain competitive. It would provide an alternative route to finance their projects, and will help stabilize a significant source of employment and economic opportunity for manufacturing hubs that have been particularly affected by COVID-19.