New Government Incentives May Be Needed to Renew Green Development
Friday, January 9, 2009
President-elect Barack Obama said yesterday that he wanted to double the production of alternative energy over the next three years, a goal that will probably require a new set of government incentives for the capital-intensive solar and wind industries.
Six months ago, some of the biggest names in solar- and wind-project finance were firms such as Lehman Brothers, Morgan Stanley, GE Capital, Wells Fargo and Municipal Mortgage & Equity. But many of those firms are mired in their own financial crises, and existing tax benefits for renewable energy projects are now unattractive to them. A technical aspect of the bank bailout has even made renewable tax incentives useless for some profitable banks.
That has left the developers of big wind and solar projects struggling to find the capital needed to continue their expansion. And many firms are retrenching.
On Monday, a maker of towers for wind energy turbines, DMI Industries, said it would lay off 20 percent of its workforce at facilities in North Dakota, Oklahoma and Ontario. The next day, LM Glasfiber, a maker of wind turbine blades, said it would lay off 150 workers at a plant in Little Rock. Last fall, Florida-based FPL, one of the biggest owners and developers of wind power in the country, scaled back ambitious expansion plans for 2009 by about 25 percent.
"Many people have asked us if we are interested in their wind development projects and many more -- recognizing the futility of the economics and the financing situation -- are simply shelving their projects," said David Crane, chief executive of NRG Energy, a major electric power generator.
Solar prospects have clouded, too. Construction of big concentrated solar plants -- covering acres of land and built as utility generating stations -- has essentially stopped going forward. "We had dozens in development just a few months ago," said Rhone Resch, president of the Solar Energy Industries Association. The source of funding, he said, has "dried up."
Obama's economic advisers are negotiating with Senate leaders about how to revive stalled projects in the renewable sector. One issue is how to structure new incentives and whether to increase the current budget year's deficit or figure out a way to push the cost into later years.
It was only three months ago that the wind and solar industries won a long battle to extend renewable tax credits. Wind companies won a one-year extension of a production tax credit and solar companies won an eight-year extension of an investment tax credit. Every dollar of tax credit offsets an equal amount of tax owed.
But many of the banks that were using these tax credits don't need them or can't use them anymore. Lehman went bankrupt, and other investors are uncertain when they will show profits again.
In addition, the Treasury gave a special tax break to profitable banks that acquire troubled ones, thus allowing them to avoid taxation of billions of dollars of future profits for up to 20 years. Wells Fargo, for example, which invested more than $700 million in solar and wind energy projects from 2006 to 2008, may be able to shelter its next $74 billion in profits from taxation because of the tax break it received for buying Wachovia.
Michael J. Ahearn, chief executive of First Solar, said that investors who still have an appetite for renewable tax credits don't need to invest in new projects; they can simply buy stakes in existing projects from investors who no longer need the credits or who want to raise cash immediately.
Crane said higher capital costs over the past five months have also made the relatively modest rates of return on projects unappealing.