Clean Power Grants Step In to Fill Tax Credit Gap, But Problems Remain

If it seems like it’s been twice as hard to raise money for renewable projects this year compared with 2007, that’s because it has been. At the Renewable Energy Finance Forum in San Francisco on Tuesday, John Eber, managing director at investment bank JP Morgan, said tax-equity financing for renewable energy is expected to total $2.5-$2.6 billion this year, down from $3.6 billion last year and $6 billion in 2007. Tax-equity financing is based on the exchange of tax credits, so it’s no wonder it has plummeted in a market where profits — and therefore taxes high enough to make use of tax credits for renewable-energy projects — are harder to come by.

However, federal cash grants, which will enable renewable projects to get money in lieu of tax credits and were approved back in February, could definitely help fill the tax-equity gap. Eber said, “The vast majority of projects are going to [want to] use the grant.” However, there have been a variety of complications that have kept many clean power projects from being eligible for the grants.

Among the biggest problems, Keith Martin, a partner at law firm Chadbourne & Parke, explained, is that four types of investors are disqualified from owning part of a project eligible for the grants. “Projects backed by private-equity funds will not receive cash grants unless there is a corporation between the…fund and the project,” he said. Another issue has been a lack of clarity about some of the requirements. For example, construction must begin, or projects must be completed, in 2009 or 2010, but some confusion remains about when projects can be considered to have begun construction, Martin said.

Even if the program is tweaked so that investors aren’t disqualified, the clock is ticking as the grants are set to expire in 2010. Martin thinks there’s a “decent chance” the program will be extended, but added that any such extension would be unlikely to happen before late 2010 — at the earliest — “because the government likes the stimulative effect of a deadline.” The drawback to having a short deadline and an uncertain extension is that it makes it difficult to plan for larger, longer-term projects.

So far, the majority of the projects that have been approved for grants are already up and running, according to Martin. The Treasury received 240 applications for cash grants as of Sept. 18, of which 178 were for projects already in service and 62 were for projects already under construction. The Treasury has authorized $1.05 billion for 40 projects so far. Most of that grant money — $970 million — has been allocated for wind projects, with less than 1 percent going into solar projects so far.

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