Why Refundable Tax Credits Are Important for Clean Power

Now that President-elect Barack Obama has presented his economic stimulus plan — and set a goal of doubling clean energy output within three years — it’s time to delve into what wind and solar industry insiders say will be the most crucial incentive for boosting production: refundable tax credits.

In October, industry officials applauded extensions of the investment tax credit for solar and the production tax credit for wind. But with turmoil in the financial sector have come calls to revise the incentive programs. Last week, the Solar Energy Industries Association and the American Wind Energy Association joined forces to push for refundable tax credits in an economic stimulus package. We’re likely to hear a lot more about it as Congress mulls Obama’s plan.

Why does this bit of tax policy matter so much to wind and solar? The recent investment banking shakeup has left energy companies competing for financing from a shrinking pool of tax-equity investors. These investors, which not too long ago counted among their top ranks AIG, Lehman Brothers, Wachovia and Morgan Stanley, basically buy tax credits from solar energy companies and wind turbine manufacturers. As the San Francisco Business Times explains, the firms then use the credits, or tax equity, to shelter otherwise taxable income.

Why don’t clean energy companies take advantage of tax credits directly? Non-refundable tax credits can reduce a company’s tax liability to zero — but not below. (Negative tax liability essentially means you get a check from the U.S. Treasury.) So solar and wind startups, many of which take years to become profitable, may not have enough taxable income to take full advantage of credits.

Refundable tax credits, on the other hand, can drop a company’s tax liability to less than zero. That means a startup can count on a check from the government to help them get going when clean power projects come online. In boom years, the Lehman Brothers of the world have typically provided that early investment. But many of today’s remaining investment banks have acquired troubled rivals. Since 2007, the number of active tax-equity investors has dropped to just five (down from around 20 in 2007),┬áSEIA president and CEO Rhone Resch told reporters in a call on Friday. And recent acquisitions have brought big losses onto the books of major players like JP Morgan, which captured half of all U.S. wind deals in 2007, spurring them to rethink tax plans — and turn away from clean energy projects.

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