Washington, D.C. – A new study released today by the Bipartisan Policy Center (BPC) reveals that there are significant opportunities to improve the efficiency of existing renewable energy tax incentives through the use of the Treasury’s 1603 Cash Grant Program, which simplifies project financing by delivering money directly to developers in an upfront grant rather than through the tax credits.
“This study shows that solar and wind subsidies distributed through cash grants are approximately twice as effective as tax incentives,” said BPC Energy Research Director Sasha Mackler. “In other words, one dollar in cash has nearly double the value of a dollar in tax credits to a project developer. ”
The study found that as the economic recession began to unfold in late 2008, and financial markets collapsed, project financing for renewable energy—which relies on specialized “tax equity” markets—virtually ground to a halt. A recovery for renewable energy growth occurred, however, largely due to a policy fix called the Treasury’s 1603 Cash Grant Program, initially funded under the American Recovery and Reinvestment Act of 2009. The Cash Grant Program received a one-year extension under the tax extension package passed by Congress and signed by the President late last year.
The BPC commissioned Bloomberg’s New Energy Finance (BNEF) to compare the financing costs of cash grants compared to tax credits and to assess just how effectively the tax-based system was leveraging taxpayer resource. BNEF found, in most circumstances, cash grants are significantly more effective than the tax credits because they simplify the project financing structure and lower the cost of capital. To monetize tax credits without cash grants, project developers must pay tax equity providers a significant premium, meaning much of the value of the grants goes to banks rather than project developers.
More broadly, the BPC study found that although federal tax policies have been extremely important in growing the renewable energy industry, these policies are inadequate to support the renewable energy industry as it scales, for two reasons. First, the stop-start cycle of investment attributable to extensions and expirations of tax incentives and cash grant programs undermines certainty for investors. Second, the structural deficiencies of tax-based incentives—i.e. limited capital pool and expensive financing costs—are inefficient compared to cash grants.
“Going forward, in a new era of fiscal austerity, it is paramount that we reassess our federal renewable energy program to ensure that federal resources are being leveraged as effectively as possible,” Mackler said. This study lays out a number of options to improve the current renewable incentive program to instill greater efficiencies and more accountability. However, more broadly, this assessment suggests that there may be large opportunities to improve energy subsidies across the board for all energy resources—not just for renewables.”
Read the full study here.