M

Paul Dickerson, J.D., CPA, leadsHaynes and Boone LLP’s Cleantech

Practice Group representing venturecapital and private equity firms along

The (Too Short) Extension ofSection 1603 Renewable EnergyCash Grants

If section 1603’s planned 2010 expiration was atime bomb, its recent extension has merely replaced ashort fuse with an even shorter one. The one-yearextension will limit section 1603’s effectiveness atencouraging investment and development. Section 1603deserves to be renewed for the long term, or even madepermanent.

Paul Dickerson

with their portfolio companies.Dickerson spent three years as Chief

Operating Officer at the UnitedStates Department of Energy’s Officeof Energy Efficiency and RenewableEnergy, a time that witnessed one of

the greatest growth spurts in theshort history of cleantech.

The author offers special thanks toWolf McGavran, an associate in thebusiness litigation section of Haynes

and Boone, in Houston, and LizKlingensmith, also an associate in thebusiness litigation section at Haynes

and Boone, in Houston.

arch 2011, Vol. 24, Issue 2 1040-6190/$–se

A small provision tucked

away in the 2010 tax bill

has the renewable energy

industry exhaling a big—albeit

temporary—sigh of relief. The

provision extends a Treasury

Department program, the

much-applauded ‘‘section 1603.’’

Section 1603 gives renewable

energy ventures the option to

take a cash grant instead of

certain tax credits. Section 1603

has proven effective at

encouraging renewable energy

in terms of investment, capacity,

and jobs.

e front matter # 2011 Elsevier Inc. All rights r

Lamentably, the extension

only continues section 1603

through 2011. This defect is

typical of our nation’s short-

sighted energy policy. The short

extension limits section 1603’s

impact because capital-intensive

projects like wind, solar,

biomass, and geothermal

facilities demand long-term

policy stability. Long-term

policies are crucial to restoring

American preeminence in

renewable energy.

This article examines the tax

credits to which section 1603

eserved., doi:/10.1016/j.tej.2011.01.010 27

How toactually takeadvantage of

the PTCand ITC

becamethe problem.

28

provides alternative cash grants.

It explains how the financial

crisis spurred the government to

devise section 1603, and the key

role that the provision has

played since its enactment. Then,

this article examines the renewal

of section 1603 in 2010 before

discussing the shortcomings of a

one-year extension and why a

long-term, or even permanent,

extension would be preferable

for the renewable energy

industry—and the United States

itself.

I. Background

To properly contextualize

section 1603’s extension and

impact, it is necessary to outline

the tax credits to which section

1603 provides a cash grant

alternative, how renewable

energy developers can use

those credits, and why the

financial crisis demanded an

alternative.

A. Renewable energy tax

credits: The PTC and

the ITC

The production tax credit (PTC)

and investment tax credit (ITC)

predate section 1603. The PTC

and ITC determine credit

amounts according to different

metrics and have different

requirements.

T he PTC grants a qualified

entity a tax credit based on

the number of kilowatt-hours of

electricity produced from certain

renewable resources for a set

1040-6190/$–see front matter # 2011 Els

period.1 The taxpayer must own

the generating asset and sell

electricity to a third party. The

amount of the PTC is adjusted

yearly for inflation and varies by

energy type. In 2010, for instance,

eligible wind, closed-loop

biomass, and geothermal projects

received $22/MWh.2 Other

eligible resources such as open-

loop biomass and qualified

hydroelectric received $11/

MWh.3

I n contrast, the ITC determines

the amount of the tax credit

based not on electricity generated,

but on amount invested in

qualifying assets. Generally, the

taxpayer must own the

generating asset when it is placed

in service.4 Both public and

private utilities are currently

eligible.5 As with the PTC, the

amount of the ITC depends on the

asset type. For example, the credit

is equal to 30 percent of qualified

capital expenditures for solar,

wind, and fuel cell property, and

10 percent for micro turbines and

combined heat and power

property.6 Certain taxpayers that

qualify for the PTC may instead

evier Inc. All rights reserved., doi:/10.1016/j.

elect to take the ITC, but are then

foreclosed from claiming the

PTC.7

B. Tax equity partnerships

needed to realize tax credit

value

How to actually take advantage

of the PTC and ITC became the

problem. Because the tax credits

reduce the income tax of a

taxpayer, they presuppose a

profit. The short-term profits of

renewable energy projects may

not be high enough for the tax

credits to produce a significant

benefit. Or, if an entity has

sufficient net operating losses

then it may not have any federal

income tax liability to offset at all.

Therefore, the tax benefit may

be diminutive compared to the

high costs of a renewable energy

project. For example, a solar

thermal power plant that is set to

begin construction in Arizona will

require $2 billion in financing.8 A

161 MW wind farm in Texas is to

cost $190 million.9

Renewable energy enterprises

were able to realize some of the

value from the tax credits through

partnering with financiers in the

form of tax equity partnerships.

Under these arrangements, an

investor joins the developer in a

partnership to create renewable

energy project. As a joint partner

in the resulting project, the

investor may claim the tax credits

earned by the partnership.

Flip partnerships allow the

investor to be treated as the

majority partner for purposes of

claiming tax credits during the

tej.2011.01.010 The Electricity Journal

Section 1603succeeded inencouragingrenewable energydevelopment in themidst of thefinancial crisis.

M

period that the investor is being

paid back. Normally, this is

during the early years of the

project. Afterwards, the

partnership ‘‘flips’’ and the

investor becomes the minority

partner and the developer

becomes the majority partner.

The developer has received

financing, in part, from the tax

credits that it would not have

been able to use, and the investor

has received the benefit of the tax

credits.

C. The financial crisis impacts

renewable energy financing

The financial crisis severely

limited the availability of

credit to renewable energy

developers. The decline in tax

equity partnerships was

especially precipitous because

fewer investors had the

confidence that they themselves

would have taxable income

to offset with tax credits

acquired through tax equity

partnerships.

I n 2007, 20 financial institutions

provided $6.1 billion in

renewable tax equity financing.10

By 2009 only 11 financial

institutions remained in the

business of providing tax equity

and their total contribution had

declined to $1.2 billion.11 Some of

the exits from the tax equity

market were permanent, as in the

case of Lehmann Brothers.

Furthermore, the crisis meant that

fewer renewable energy

developers had taxable income of

their own—increasing the need

for tax equity partnerships at the

arch 2011, Vol. 24, Issue 2 1040-6190/$–se

same time that type of financing

was becoming an endangered

species.

D. The genesis of section 1603

In February 2009, President

Obama signed The American

Recovery and Reinvestment Act

of 2009 (‘‘Recovery Act’’).

Included in the $787 billion

stimulus bill were measures

aimed at making tax credits more

suitable for renewable energy

developers in the post-crisis

economy. The Recovery Act’s

drafters recognized that tax

credits are not especially effective

when few renewable energy

developers have taxable income,

and the tax equity market is

defunct.

Their solution, section 1603,

gave renewable energy

developers the option to take

an ITC credit ‘‘up front’’ in

the form of a cash grant.

Furthermore, the Recovery Act

allowed PTC-eligible projects

to elect the ITC instead.

Therefore, generally speaking,

both ITC- and PTC-eligible

e front matter # 2011 Elsevier Inc. All rights r

projects may opt to take a section

1603 cash grant in lieu of their

respective tax credits.12

Similar in design to the ITC,

section 1603 requires the Treasury

Department to provide cash

grants to renewable energy

developers based on the cost basis

of the qualifying property.

Generally, the amount of the

grant equals 30 percent of the cost

basis for wind, biomass, landfill

gas, trash, qualified hydropower,

marine and hydrokinetic, solar,

and fuel cell properties. In the

case of micro turbines,

geothermal heat pumps, and

combined heat and power

properties, the grant generally

equals 10 percent of the cost basis.

E. Section 1603 proves

successful

Section 1603 succeeded in

encouraging renewable energy

development in the midst of the

financial crisis. The program

filled the void left by the

shrinking of the tax equity

market, encouraged renewable

energy development, and

stimulated job growth.

Furthermore, section 1603 came

at a relatively low cost to the

government, and may actually

net the government a return on

investment in years ahead.

Section 1603 provided much-

needed financing to the

renewable energy industry. The

Treasury Department paid out

$1.9 billion in section 1603 grants

in 2009.13 That year, those grants

constituted over 60 percent of the

equity capital market available to

eserved., doi:/10.1016/j.tej.2011.01.010 29

Section 1603grants could

actuallynet the

governmentmoney in the

long term.

30

renewable energy developers.14

By the end of 2010, approximately

$5.79 billion in cash grants had

been extended by the Treasury

Department.15

T his capital has led to real

gains in renewable energy

capacity. For example, nearly

500 MW of new non-thermal solar

capacity was installed in 2009.16

Approximately 10 GW, or

10,000 MW, of new wind capacity

was also installed in that year.17

Thanks in no small part to section

1603, new wind and solar

installations in 2009 exceeded all

other years despite the generally

depressed economic

environment.18

In addition, section 1603 is

credited with significant job

creation in the renewable energy

industry. For example, the Solar

Energy Industries Association

cites section 1603 grants as the

primary driver behind the

doubling of solar jobs between

2009 and 2010, reaching 93,000

employed.19

F urthermore, section 1603 is

attractive from a fiscal point

of view. After all, section 1603

merely provides an alternative to

a preexisting tax credit—it is not a

new subsidy. Therefore, the cost

to the government for providing

the grants is moderated by the

higher, non-offset taxes that it will

collect in the future.

In fact, section 1603 grants

could actually net the government

money in the long term.

Renewable energy development

means more tax revenue from

businesses and their employees.

Each additional employee also

1040-6190/$–see front matter # 2011 Els

provides a decrease in the costs

associated with unemployment.

An analysis of the cost and

benefits of a two-year extension of

section 1603 on the solar industry

found that the government would

receive a $400 million return on

the investment by 2016.20

F. Planned expiration in 2010

As enacted in the Recovery

Act, section 1603 would have

expired on Dec. 31, 2010. The

Recovery Act provided that no

grant shall be issued for any

renewable energy project

unless the property subject to the

grant was either ‘‘placed in

service during 2009 or 2010, or

. . . construction began during

2009 or 2010.’’21 Because the

Recovery Act was adopted in

February 2009, section 1603

was to last nearly two years.

Various industry and

environmental groups called for

the program’s extension, citing

its success at stabilizing the

renewable energy industry and

forecasting disaster if the

program lapsed.

evier Inc. All rights reserved., doi:/10.1016/j.

II. Section 1603’s One-Year Extension andAnalysis

The Tax Relief, Unemployment

Insurance Reauthorization, and

Job Creation Act of 2010 (the ‘‘Tax

Bill’’) extended section 1603 for

one year; the program is now set

to expire on Dec. 31, 2011.22 The

extension will prevent an abrupt

drop in renewable energy

investment, development, and

employment. However, the short

extension will dampen section

1603’s positive impact. The U.S.

renewable energy industry needs

durable, long-term policies—not

a one-year stopgap measure.

A. Extended in compromise

tax bill

The Tax Bill extended section

1603 a mere 14 days before it was

set to expire. The extension

provides that qualifying

renewable energy property must

be either placed in service or have

construction begun on it by the

end of 2011, instead of 2010.23

B. Extension was preferable to

expiration

The extension of section 1603

through 2011 will benefit the

renewable energy industry in

terms of financing and jobs.

Financially, section 1603 will

continue to provide cash grants

that have become crucial to the

renewable energy industry. The

cash grants make it easier for

developers to attract capital.

Credit markets have not

tej.2011.01.010 The Electricity Journal

A second negativeconsequenceof the short extension isthat it may act toencourage certainrenewable energy typesover others.

M

recovered to pre-crisis levels and

it is unlikely that a lending

environment akin to 2007 will

reemerge soon. Total funding for

renewable energy could have

plummeted approximately 56

percent in 2011 if section 1603 had

not been extended.24

S imilarly, the cash grants free

the renewable energy

industry from dependency on tax

equity financing to monetize the

value of tax credits. The cash

grant is a more efficient way to

realize the value of the tax credits

because it provides the value of

the tax credits without the

intermediary tax equity

partnership. Therefore, an

argument could be made that

section 1603 should have been

extended even if the tax equity

market had fully recovered.

In terms of jobs, the U.S.

Partnership for Renewable

Energy Finance estimated that

104,000 jobs in the wind, solar,

biomass, and geothermal

industries would be foregone in

2011 if section 1603 was not

extended.25 Therefore, section

1603 will benefit the renewable

energy industry in 2011.

C. Problems associated with

short-term extension

However, section 1603 would

have been even more beneficial if

it had been extended for a longer

term. The positive impact will be

diminished because of the short

length of the extension in at least

three ways. First, the short-term

extension means fewer entities

will risk investing in renewable

arch 2011, Vol. 24, Issue 2 1040-6190/$–se

energy. Second, the short

extension may unevenly benefit

some renewable energy sources

over others and discourage larger,

more complex projects. Third, the

short deadline may lead to hasty

decision-making.

The primary negative impact of

the short-term extension will be

relatively lower investment in

renewable energy. The short time

frame of the extension presents a

risk to potential investors in

renewable energy projects. In

particular, investors and

developers will have to determine

the probability that they will be

able to meet the 2011 deadline.

Then, if they determine that there

is a possibility that they may not

make the deadline, they must

gamble on whether the program

will be extended again. This risk

will decrease the financing

available compared to what the

market would support had there

been a long-term extension.

The risk of regulatory

uncertainty on the renewable

energy industry is clear. The

expiration of government

programs can have large

e front matter # 2011 Elsevier Inc. All rights r

consequences on the growth of

renewable energy capacity. For

example, the PTC was allowed to

expire three times: in 1999, 2001,

and again in 2003.26 Each

expiration saw a corresponding

drop in installed wind power

capacity. The last expiration, in

2003, saw new capacity

installation drop from 1,687 MW

per year to less than 400 MW per

year.27

A second negative consequence

of the short extension is that it

may act to encourage certain

renewable energy types over

others. Under Section 1603, as

extended, construction must

begin before the end of 2011 in

order to qualify for a cash grant.

Renewable energy types with

relatively longer planning and

construction times, such as

geothermal and solar thermal,

will be dissuaded from entering

the market if they are not

confident that they can begin

construction by the end of the

year.28

Similarly, the deadline will

dissuade larger-scale energy

projects of all types. Even

renewable energy types such as

wind and solar that can be

installed relatively quickly

require extensive planning,

finance, and permitting

arrangements proportional to the

size of a project. For new wind

facilities, for example, the

planning and permitting period

can take up to two years.29 A

developer seeking to begin work

today on a large-scale project

must, as an initial matter,

determine whether it will be able

eserved., doi:/10.1016/j.tej.2011.01.010 31

32

to begin work before the deadline.

If not, or if the answer is in doubt,

the developer may scale back its

plans or drop them entirely.

F inally, enterprises that are

not discouraged from

investing because of the lack of

dependable policy might find

themselves racing to start their

projects in time to qualify for the

cash grant. This hurry could lead

to rash decisions on any number

of issues. And, of course, the haste

might be wasted if the

government extends the program

at the last minute, as it did in 2010.

D. Need for long-term

commitment in energy policy

The lack of durable, long-term

policy discourages investment in

renewable energy. The fact of the

matter is that renewable energy

becomes a more attractive

investment when government

incentives such as tax credits,

grants, loan guarantees, and

accelerated depreciation are in

place. Investors, however, are

rightfully wary of depending on

governmental largess. After all,

the PTC was allowed to sunset not

once, but three times. Even when

a worthy program is renewed

before it expires, the renewal term

is often too short.

The extension of section 1603

provides a typical example.

Despite its success at offering a

more efficient alternative to tax

credits in the midst of an

economic crisis, the program was

not extended until the month of

its expiration. Whether it would

be extended at all was not a given.

1040-6190/$–see front matter # 2011 Els

And yet, the extension is only for

one year. The renewable energy

industry—and those it seeks

financing from—are again left

guessing as to what economic

incentives will exist in a year’s

time. Because many renewable

energy projects must go through

years of planning and permitting,

they face enormous risk that

section 1603 will not be extended

again. This risk makes attracting

capital a difficult task.

W hile the United States

barely manages to extend

modest programs like section

1603, China is widening its lead in

the renewable energy sphere.

China spent $34.6 billion on clean

energy in 2009; the United States,

$18.6 billion.30 China may spend

$738 billion over the next

decade.31 This commitment to

renewable energy has made

China the world’s top destination

for private investment in

renewable energy.32

China’s efforts have led to

impressive results. Today, China

leads the world in renewable

energy financing,33 capacity,34

and growth.35 In 2009 alone,

evier Inc. All rights reserved., doi:/10.1016/j.

China installed 37 GW of clean

energy capacity.36 This

constituted approximately 46

percent of worldwide growth.37

III. Conclusion

In preventing the expiration of

the section 1603 cash grant

program, the Tax Bill kept a

ticking time bomb from

exploding. Over section 1603’s

two-year history, it helped

support the wind, solar,

geothermal, and biomass

industries. The program made

existing tax credits, the ITC and

PTC, more useful to the

renewable energy industry. At the

same time, section 1603’s cash

grants lessened the need for tax

equity financing during the

financial crisis when such

financing was difficult to secure.

If section 1603’s planned 2010

expiration was a time bomb,

however, its recent extension has

merely replaced a short fuse with

an even shorter one. The one-year

extension will limit section 1603’s

effectiveness at encouraging

investment and development.

Large, capital-intensive

renewable energy projects

demand policy stability. Because

many such projects have lead

times of over a year before

construction begins, potential

investors and developers will be

forced to handicap section 1603’s

odds of renewal. As long as such

policy uncertainty exists, the

United States will be at a

competitive disadvantage in

terms of renewable energy.

tej.2011.01.010 The Electricity Journal

M

Section 1603 deserves to be

renewed for the long term, or

even made permanent.&

Endnotes:

1. I.R.C. § 45.

2. Jenna Goodward and MarianaGonzalez, World Research Institute,The Bottom Line On. . . Renewable EnergyTax Credits, Oct. 2010, at http://pdf.wri.org/bottom_line_renewable_energy_tax_credits_10-2010.pdf.

3. Id.

4. Howard Cooper et al., U.S.Partnership for Renewable EnergyFinancing, PTCs, ITCs and Section1603 Grants: Compare and Contrast, athttp://www.uspref.org/white-papers/PTC%20ITC%20and%20Section%201603%20Grants%20v2.1.pdf.

5. Goodward and Gonzalez, supranote 2.

6. Id.

7. Cooper et al., supra note 4, at 2.

8. Ryan Randazzo, Solar-Power Plant aGo After Developers Secure Financing,ARIZ. REPUBLIC, Dec. 21, 2010, at http://www.azcentral.com/business/articles/2010/12/21/20101221solar-power-plant-go-after-developers-secure-financing.html.

9. Xcel Signs Deal with Texas WindFarm, UPI, Dec. 28, 2010, athttp://www.upi.com/Business_News/2010/12/28/Xcel-signs-deal-with-Texas-wind-farm/UPI-72381293572588/.

10. U.S. Partnership for RenewableEnergy Fin., Prospective 2010–2012Tax Equity Market Observations 3,July 20, 2010 [hereinafter USPREF], athttp://seia.org/galleries/pdf/US%20PREF%20Tax%20Equity%20Market%20Observations%207-20-2010%20(5).pdf.

11. Id.

12. I.R.C. § 48(a)(5); see also IRS, NOTICE

2009-52 (2009), at http://www.irs.gov/irb/2009-25_IRB/ar09.html.

arch 2011, Vol. 24, Issue 2 1040-6190/$–se

13. U.S. P.R.E.F., supra note 10, at 2.

14. Id.

15. U.S. Dept. of Treasury, Section1603: List of Awards, at http://www.treasury.gov/initiatives/recovery/Documents/Web%20Posting.xls (lastvisited Dec. 29, 2010) (updatedweekly).

16. USPREF, supra note 10, at 10.

17. Id.

18. Id.

19. Solar Energy Industry Assn., JobCreation from Extending the 1603Treasury Program 2, Nov. 22, 2010, athttp://www.seia.org/galleries/FactSheets/Factsheet_TGP.pdf.

20. EuPD Research, U.S. Solar PolicyImpact Analysis 6, May 19, 2010,http://seia.org/galleries/pdf/EuPD_Research_Solar_Report.pdf.

21. American Recovery andReinvestment Act of 2009, Pub. L. No.111-5 § 1603, 123 Stat. 115, 364 (2009).

22. Tax Relief, UnemploymentInsurance Reauthorization, and JobCreation Act of 2010, H.R. 4853, 111thCong. § 707 (2010) (enacted Pub. L.No.111-312).

23. American <fn0110>Recovery andReinvestment Act of 2009, Pub. L. No.111-5 § 1603, 123 Stat. 115, 364 (2010)(as amended by H.R. 4853, 111thCong. § 707).

24. USPREF, supra note 10, at 5.

25. Steven Taub et al., USPREF, Impacton Jobs Through the Extension of the

e front matter # 2011 Elsevier Inc. All rights r

ARRA 1603 Cash Grant 5, at http://www.uspref.org/white-papers/A_US%20PREF%20Jobs%20Analysis%201603%20v2.2.pdf.

26. Union of Concerned Scientists,Production Tax Credit for RenewableEnergy, at http://www.ucsusa.org/clean_energy/solutions/big_picture_solutions/production-tax-credit-for.html.

27. Id.

28. See Jack Cargas et al., USPREF, athttp://www.uspref.org/white-papers/RE%20Tax%20Equity%20v2.1.pdf.

29. See Union of Concerned Scientists,supra note 26.

30. Pew Charitable Trust, Who’sWinning the Clean Energy Race? 2010, athttp://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G-20%20Report.pdf.

31. Wang Ying and John Duce, ChinaMay Spend $738 Billion on Clean EnergyProjects, BLOOMBERG BUSINESSWEEK,

July 20, 2010, at http://www.businessweek.com/news/2010-07-20/china-may-spend-738-billion-on-clean-energy-projects.html.

32. Pew Charitable Trust, Global CleanPower: A $2.3 Trillion Opportunity 6, 2010,at http://www.pewtrusts.org/uploadedFiles/wwwpewtrustsorg/Reports/Global_warming/G20-Report-LowRes.pdf.

33. Kristi Heim, U.S. Lags China’s HotPursuit of Clean Tech, SEATTLE TIMES,Aug. 22, 2010, at http://www.statesman.com/business/technology/u-s-lags-chinas-hot-pursuit-of-clean-873220.html?printArticle=y.

34. See Pew Charitable Trust, supranote 32, at 48.

35. Renewable Energy Policy Networkfor the 21st Century, Renewable 2010, 16,Sept. 2010, at http://www.ren21.net/Portals/97/documents/GSR/REN21_GSR_2010_full_revised%20Sept2010.pdf.

36. Id.

37. See id. at 54.

eserved., doi:/10.1016/j.tej.2011.01.010 33