Report Sees Need for Major Private Clean Energy Investments in 2012

With stimulus initiatives in the form of soft loans, cash incentives, tax credits  and grants expiring, the U.S. energy sector must find new investors and new tax-based equity financing structures over the next 18 months or risk a sharp decline in new project builds, according to a report by the specialist research firm Bloomberg New Energy Finance.

The 30-page report was commissioned by the Reznick Group, a major national accounting, tax and business advisory firm.

“Tax credits are likely to again become the most important subsidies supporting renewable project development in the US, as the Treasury cash grant is on the verge of expiring,” the report says. The total need for tax equity financing next year could be more than $7 billion, but the report says an investment gap in the $3.6 billion range is likely.

The clean energy industry in the US has benefitted from the American Recovery and Reinvestment Act in the form of more than $65 billion in tax credits, grants, and soft loans. But nearly all of those stimulus funds have been deployed. So unless the private sector steps up with substantial new investment, project development will slow.

The report has two major findings regarding tax credits: First, the economics of ‘tax equity’ – the part of a renewable project’s financing structure used to take advantage of tax credits – “can provide attractive returns for parties involved in these transactions;” and second, the US renewable energy sector “will require new sources of tax equity if it is to meet market demand for project finance.”

The report also found that:

- Growth in the US renewable sector has been largely driven by the availability of tax equity or its temporary substitute in the aftermath of the financial crisis, the cash grant. The wind energy sector is especially susceptible: Since 1999, the production tax credit has been allowed to lapse by Congress on three occasions, with each lapse resulting in a sharp drop in new wind installations.

- Expiration of the cash grant should not be expected to result in collapse of the US renewable sector. “Tax equity is undoubtedly more complex than a cash-based incentive,” the report says. “Nevertheless, tax equity economics can deliver meaningful returns to developers and investors, and there remains political support for this policy. However, significant uncertainty will remain until Congress reaches a decision about whether or not to extend the production tax credit, currently set to expire at the end of 2012.”

“This analysis shows that tax equity economics can be made to work for the right projects,” says Michel Di Capua, Head of Analysis, North America, at Bloomberg New Energy Finance in New York. “There is life after expiry of the Treasury cash grant program. Financing for the US renewable sector will look quite different in 2012 compared to the past three years once the cash grant is gone, but different does not mean dead.”

The report shows a possible pathway as ARRA expires and Congress does what it does (or doesn’t do) regarding the PTC. Renewable energy projects should not be buffeted by the windy political whims of Congress, but it looks like that will be the case once again, and in an election year.

[Image Credit: Wind Energy by matthiasjung; matthiasjung’s photostream via Flickr Creative Commons]