U.S. wind turbine domestic manufacturing has grown twelve-fold in recent years — boosted by government policies
The U.S. renewable energy industry has directly created more than 40,000 jobs because of the Section 1603 cash grants, and can create 100,000 more if the program is extended. CAP’s Richard W. Caperton and Kate Gordon have the story.
In yet another attack on the highly effective American Recovery and Reinvestment Act, an article published in today’s Greenwire (subscription required) includes claims that significant clean energy funding was wasted through a Treasury cash grant program. The cash grant program was intended to provide incentives for clean energy project development. Sources quoted in the article allege that recovery funds went to projects that would have been built even without the program and, further, that the projects have not significantly contributed to job growth. These assertions are based on a poor understanding of the ARRA grant in lieu of tax credit program, misrepresent the value of the cash grants, and ignore the significant job creation resulting from these projects. The claims are especially dangerous, because ending the cash grant program today would prevent the renewable energy industry from creating more than 100,000 jobs in the future.
The Section 1603 Cash Grant Program
At issue is the U.S. Treasury’s cash grant in lieu of tax credit program, also known as the “Section 1603 program,” which was created in the American Recovery and Reinvestment Act. Under this program, project developers who would have been eligible to receive a production tax credit can now elect to receive a cash grant for a similar value. The production tax credit was created in 1992 to provide incentives to generate electricity from renewable resources. The size of the credit depends on the generating technology, but is currently about 2.2 cents per kwh for wind generation. Unfortunately, Congress has never permanently extended the production tax credit, which has led to a boom and bust cycle in the renewable energy industry as the credit expires and is then renewed. In either case, the projects are eligible for these benefits only after the project begins to produce electricity.
The cash grant option has been critical for renewable energy development, particularly wind energy. Many renewable energy developers, especially those in small or start-up firms, do not make any profit and thus do not owe any taxes. As a result, they are not eligible for tax credits. Before the financial crisis, these companies would sell the tax credit to a “tax equity partner” — typically a bank or some other large financial investor. The company would then use these funds to build the project. The financial crisis put an end to this model, as the tax equity partners disappeared, leaving developers with tax credits that they could not use.
The cash grant program rectified this situation by providing acash grant in lieu of the tax credit. While the program resulted in real dollars going to developers, the actual cost to the government remained the same. In other words, the net cost of giving out a grant to a developer is the same to the government as the cost of providing a tax credit to that developer. But to the developer who does not otherwise owe taxes, the value of the grant is significantly higher.
There are other benefits to cash grant programs. In a recent CAP report, “America’s Hidden Power Bill,” we identified two major benefits to the Section 1603 cash grant program beyond the direct value to developers:
- Transparency and Accountability. Ironically, the Greenwire article would have been virtually impossible to write without the cash grant program. To claim the production tax credit, a developer simply checks a box and fills in a number on their tax returns, which are then kept confidential by the Internal Revenue Service. To claim the Treasury cash grant, in contrast, the developer has to fill out an extensive form, including information about job creation and project specifications, elements of which are then made public on the program’s website. Ironically, the Greenwire article would have been virtually impossible to write without the cash grant program.
- Equal Access to Capital. The Greenwire story implies that it is somehow a bad thing that more developers are able to benefit from a cash grant than from a tax credit. The opposite is true. Small businesses, cooperatives, community groups, family farmers, and private investors can all claim the cash grant, but are often unable to use tax credits because of legal restrictions. These types of companies and cooperatives make up many of the investors in renewable energy, which is an emerging industry that attracts smaller, newer investors.
Wind Investment Would Not Have Happened Without Cash Grants
In its most muddled section, the Greenwire story claims that many of the renewable energy projects would have been built anyway. This is incredibly misleading.
First, all of the evidence in the article that the projects would have been built anyway is based on an assumption that these project developers would have had access to the production tax credit after the projects came on line. But in fact, given the non-existent tax equity market, the tax credits available would have been worthless to project developers. So many developers had no choice but to seek the grants or developing it without government support at all. Given the history of wind power development, in which projects have dropped off significantly when the production tax credit lapsed, it is clear that without any public investment these projects would likely have come to a halt. The cash grant allowed them to move forward.
Second, the grant program correctly applies to projects that were “placed in service” in 2009. Many of these projects began prior to the September 2008 equity crisis, and were financed based on the assumption that the developers could use or sell the PTC.. However, as the crisis worsened and the tax equity market shriveled up, those developers quite possibly would have been forced to stop construction on these projects because a major element of their financing – money from the sale of the tax credit – would have evaporated. , The grant in lieu of tax credit program under ARRA enabled the projects to continue, and thus saved jobs. These projects also resulted in 4 gigawatts of new carbon-free energy coming online, enough to provide non-polluting power to nearly 4 million homes when operating at peak capacity.
Greenwire quotes Tufts University economist Gilbert Metcalf as noting that, “Any time you use subsidies to encourage new investment, you’re always going to end up giving money to people who would have done the project anyway.” Metcalf’s own valuable research shows the fallacy of this statement by demonstrating that the production tax credit does drive investment in wind generation that would not have otherwise happened. Since the cash grant was functionally equivalent to the tax credit, there’s no reason to expect that it did not drive investment.
Not only are renewable incentives effective, but there are actually other programs that would be worthwhile targets for opponents of government profligacy. For example, there are energy tax subsidies that benefit big oil companies for the production of oil and gas that would have occurred anyway. Consider the “percentage depletion allowance,” a special tax credit that is given to oil and gas producers to the tune of $1.3 billion per year. This tax benefit has been in effect since 1926 and there is absolutely no evidence that it does anything to increase oil production in the United States, its purported purpose. In fact, oil production in the U.S. has consistently declined since 1970.
Cash Grants Create Jobs, and Will Create More in the Future
Even putting aside the question of whether these projects would have moved forward as quickly, or at all, without the cash grants, the reality is that the 1603 program has created thousands of jobs across the country. According to a report on the stimulus bill from Vice President Joe Biden, the cash grants have directly resulted in 10,000 construction jobs and 2,000 permanent jobs in 44 states across the country. The American Wind Energy Association credits the cash grants with saving 40,000 jobs in construction, manufacturing and R&D. These jobs demonstrate that the renewable projects receiving grant funds created direct jobs, as well as the indirect jobs generated in the local economies where the projects are located. This captures the full positive employment impact of these investments, rather than narrow the benefits to the “15 to 20″ permanent operations jobs at each project as Greenwire.
Given the enormous value of the cash grants to the renewable energy industry and to many local economies, not to mention to U.S. competitiveness in the global clean energy industry, now is not the time to argue about the 1603 grant program. Now is the time to extend it so these companies and communities continue to see these benefits. If the cash grants are extended by just one year, through 2011, the recipient companies in the clean energy industry will create more than 100,000 new jobs. Now that is an economic recovery program we should get behind.
– Richard W. Caperton is a Policy Analyst with the Energy Opportunity team at American Progress and Kate Gordon is the Vice President for Energy Policy at American Progress.
JR: Wonk Room has a guest post “Denise Bode: Recovery Act Saved 40,000 American Wind Industry Jobs” that I’m reprinting below. Denise Bode is CEO of the American Wind Energy Alliance.
Representing 85,000 people working in the American wind industry, we can say unequivocally that the Recovery Act’s 1603 tax credit has been one of the most effective public policies in existence for saving American jobs.
At a time when the recession threatened at least 40,000 American wind construction, manufacturing and other jobs, the 1603 tax credit program restarted stalled projects and saved all 40,000 jobs at risk. This year, a study by Lawrence Berkley National Laboratory (LBNL) found that the 1603 tax credit supported shovel-ready projects and over 50,000 American jobs. The 1603 program actually led to a record-breaking year of 10,000 megawatts (MW) of new wind in 2009, compared to the 4,000 MW feared prior to the Recovery Act.
Tax credits for renewable energy begin to level the playing field with oil, gas, coal, and nuclear energy. As a matter of fact fossil fuels have received permanent taxpayer money since 1920s, costing taxpayers well over $500 billion. Even in recent years, after maturing for a century, fossil energy still receives five times the subsidies as renewables, according to the Government Accountability Office. Even more, Americans pay for fossil fuel in the form of an additional $60 billion in health care costs, according to the Bush Administration report on hidden costs of energy.
We have a choice between a balanced energy plan that includes wind and renewable America energy or a plan that continues our increasing dependence on fossil fuels for our electricity, which is now over 60 percent. In the recession, project development and financing was difficult to obtain and costly. Many wind projects in mid-development could not complete financing. As a result, wind investment stalled with some projects stopping mid-construction; laying off construction workers and leaving wind towers and blades on the ground.
Every job saved was an American job. One hundred percent of projects that receive investment tax credits through 1603 are built in the United States, as required by the Recovery Act. The program also supports America’s growing manufacturing and supply chain industries. U.S. wind turbine domestic manufacturing has grown twelve-fold, with an increase in domestic content from 25 percent only a few years ago to over 50 percent now, and nearly 400 American manufacturing facilities making wind components. Contrary to recent campaign ads, data from the International Trade Commission (ITC) shows that less than five percent of the value of turbine parts used in the U.S. is imported from China.
The 1603 program continues and modifies the Production Tax Credit, which was first passed in 1992. In most respects the program operates exactly like all other tax credits in the tax code: all eligible projects receive the credit and it applies to all projects completed in a given year. However in one respect Congress tweaked the program to make the tax credit usable during a recession. Unlike the oil and gas industries which have other provisions called “Master-Limited Partnerships” (MLPs) to enable them to use tax credits, MLPs are not available to renewable energy industries. Instead, Congress provided for a reimbursement of the eligible tax credit, which made the program successful even in the deep recession.
The program is a more efficient use of taxpayer money because 100% of the incentive goes to the company making the investment and creating the jobs. Taxpayers get more jobs and clean energy per dollar spent. Many people have confused this program with discretionary government grants and recent news stories have suggested, for example, that the only projects that should receive the incentive are those begun after the Recovery Act was passed.
In this case, a key part of the program’s success was to complete many projects that had begun but were completely stalled, keeping Americans at work.
The 1603 tax credit program has been extremely effective at keeping Americans at work. Unfortunately, the program is set to expire at the end of 2010. Unlike oil, gas, coal, and nuclear industries who have permanent incentives, renewable energy industries will be stalled again unless Congress acts soon to extend the program into 2011 and 2012.