Renewable Tax-Credit Investment Heading Up or Down?

The collapse of several once-mighty Wall Street investment firms – and the massive losses sustained by those that remain – has put a crimp on financing for green energy projects (see Energy Financing Gone With the Wind, Lehman's Fall to Create Greentech Woes and VCs to Solar Startups: A Deal You Can't Refuse).

So the multi-billion-dollar question on the first day of the Renewable Energy Finance Forum in Seattle on Monday was: Can utilities jump into that financing gap?

Weighed against all the bad financial news has been Congress' passage earlier this month of an $18 billion renewable-energy incentive package that included a first-ever eight-year investment tax credit for solar power, as well as new incentives for other forms of renewable energy, and a provision that opened up those credits to utilities previously barred from participating in the tax breaks.

Meanwhile, businesses that paid enough in taxes to benefit from extra credits could buy stakes in renewable-energy projects to take advantage of the tax breaks that came with them – helping to finance those projects.

But those investment tax credits might look a lot less attractive to investors swimming in losses that they already can write off for tax purposes, several executives noted.

"Access to tax credit equity is limiting growth in the marketplace," Susan Nickey, CFO of renewable energy project developer Acciona Energy North American Corp. said in a Monday morning panel discussion.

"The amount of capital we need [in 2009] surpasses the current tax-credit equity model, in our opinion," she said.

Ben Lackey, general counsel for Iberdrola Renewables Inc.'s North American renewables unit, agreed that tax equity investments will be "tighter, more expensive and more difficult to place" in the future.

But Mac Irvin, managing director of structured finance for SunPower Corp. (NSDQ: SPWRA and SPWRB) suggested that another part of Congress' renewable energy bill – the part that allows utilities to take advantage of the incentives – could help ease that crunch.

"The recent doom and gloom conversation around tax credit investment... is greatly overblown," he said. "The entrance of utilities into this space, in my view, will increase the availability of tax equity."

Irvin's not the first to wonder how the entrance of utilities could impact renewables, especially solar power (see Utilities to Hit Solar Scene). As of yet, renewable-energy executives don't have a clear answer to that question.

Using what he warned were rough calculations, Irvin said that the 30 largest U.S. utilities could find the appetite for up to $5.4 billion in tax-credit equity investment in 2009, roughly equivalent to the amount invested in wind-power projects in 2007.

"Utilities may take us up on that suggestion, they may not," Irvin said in an interview after the panel discussion, noting that he hadn't calculated what the potential loss of tax-credit investment from the financial crisis might be.

When it comes to solar power specifically, the certainty that comes with the eight-year investment tax-credit extension could also draw in utilities that have until now been "standing on the sidelines," he said.

Kevin Walsh, managing director of renewable energy for GE Energy Financial Services, noted that despite "significant capital constraints" facing renewable energy projects, "This is not an issue where there have been massive losses in wind or solar portfolios. These are good solid assets."

Given the limitations of tax equity financing that the financial crisis has exposed, however, Walsh suggested that using tax credits as a primary incentive for renewable energy in the United States "doesn't make sense long term."

Instead, he noted, Congress should look at new forms of incentives, such as a national renewable portfolio standard, a carbon tax, a feed-in tariff similar to those in place in Europe, or "some combination of the above."

Eric M. Markell, executive vice president and CFO of utility Puget Sound Energy, agreed that new forms of incentives could better serve American renewable-energy growth.

"We think the production tax credit and investment tax credit have been an OK way to jumpstart the industry, but we're not sure that going forward it's the best way to lay a sustainable business model," he said.

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