Production tax credits (PTC) play a key role in securing the profitability of RE projects. Qualifying projects receive about 2 cents per kilowatt hour (kWh) in tax credit, usually for the first ten years of operation. With these credits, wind energy becomes a competitive alternative to fossil fuels in most regions of the US. The PTC effectively complements state RPS that require a certain percentage of a utility’s power plant capacity or generation to come from renewable or alternative energy sources by a given date. The effectiveness and efficiency of specific RPS policies depend greatly on design features such as the ambitiousness of the standard and the inclusion of financial incentives through a tradable credit scheme. However, international experience has demonstrated the inability of RPS to offer as much investment certainty as feed-in tariffs. Their incentive structures alone therefore seem insufficient. Production tax credits remedy this problem – at least to some degree – by indirectly ensuring investors a steady income equal to at least the amount of the tax credit as long as the installation generates electricity.
Grants play an important role when the ability of developers to monetize tax credits through equity financing is lacking. Currently, corporations with large tax obligations provide funds to projects and then use the credits to offset their own tax burdens. This way, projects can monetize benefits upfront. However, because demand exceeds supply, availability of equity finance remains a constraint. The aim must be to attract new tax equity providers such as pension funds. For this to happen, the perceived risk of renewable energy investments has to be lower. The easiest way for the government to achieve this is by offering a clear vision and a long-term policy framework for renewable energy.
Despite the harsh criticism it has received, the DOE Loan Guarantee Program has been another important component of the RE policy mix. The program provides leverage and low-cost debt to innovative projects that would not otherwise receive funding. Typically, such projects are either at an early stage of development or use new technologies that are not yet commercially proven – both reasons why banks might be hesitant to provide loans. Without the availability of guaranteed government loans, many innovative energy ventures would fail to attain commercialization and would end in the so-called valley of death.
Many of these technologies promise to bring great societal value; some might prove transformative. Ideally, the much-publicized examples of Solyndra and Beacon would not have received any public support. To avoid such mistakes in the future, the review process of loan recipients must be improved. It is important to note, however, that some defaults are inevitable at the innovation stage. Any bank assumes a certain default rate on their loans; the aim is to keep them as low as possible. Despite the defaults of companies like Solyndra and Beacon, the overall financial performance of the loan program has been much better than public perception would indicate. While the government budgeted $2.47 billion to cover potential project defaults, actual defaults have been much lower. Solyndra and Beacon received loans worth $535 and $43 million respectively. Even in the unlikely event that no portion of these funds can be recouped, more than 75 percent of the money put aside for losses would remain in the Treasury.
The potential for renewable energy in the US is vast. The National Renewable Energy Laboratory (NREL) very recently confirmed that renewable energy sources could conceivably cover 80 percent of US electricity demand by 2050. Great natural resource availability coupled with falling costs make RE an increasingly attractive option in many locations. However, investors need greater government commitment and a better long-term vision on the future role of RE in the US. They seek a degree of consistency and market certainty that the current policy framework lacks. An extension of the current policy mix is a minimum requirement to attract further investment. A federal RE target combined with a carbon tax would be an even better option.