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Recovery programs cash grants create American jobs and American energy

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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:

  1. 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.
  2. 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.

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6 Responses to Recovery programs cash grants create American jobs and American energy

  1. cr says:

    OT (sort of ):

    A new study by researchers at Yale University suggests that Americans’ knowledge of climate science is limited and scattershot, with some understanding of basic issues like the contribution of fossil fuels to global warming and some singular misconceptions as well.

    http://green.blogs.nytimes.com/2010/10/14/in-u-s-survey-52-percent-flunk-climate-101/?hp

  2. BB says:

    “Representing 85,000 people working in the American wind industry…”

    how come here…

    http://www.awea.org/faq/wwt_economy.html#How%20many%20people%20work%20in%20the%20U.S.%20wind%20industry

    …I see this quote by the AWEA…

    “The U.S. wind industry currently directly employs more than 2,000 people.”

    Doesn’t seem to be the same numbers, unless one or the other has to stretch the boundaries of their words.

    I’m highly suspicious of the ‘jobs saved’ bit too … as it seems like these jobs are triple-dipped through many fields, and supposedly are threatened to be lost vs. saved through just about any reduction in government funding or policy.

    Perhaps we’ll have to wait until a Republican becomes president before we can go back to the more concrete definitions of a job gained or lost. (This, unfortunately, from a Democrat).

  3. @ #2 You found a very old link.

    Check this update that includes data from Q1 2010: http://www.awea.org/pubs/factsheets/Market_Update_Factsheet.pdf

    “Approximately 85,000 people are employed in the wind industry today and hold jobs in areas as varied as turbine component manufacturing, construction and installation of wind turbines, wind turbine operations and maintenance, legal and marketing services, transportation and logistical services, and more.”

    These employment numbers do not include indirect employment like advertising and office support. When I clicked an updated link like the one you reference, I see the correct numbers: http://www.awea.org/faq/wwt_economy.html

    More from the .pdf that I link above: “Iowa leads in terms of percentage of electricity from wind power, getting 14% of its power from the wind, and also leads in highest number of jobs in the manufacturing sector. Texas consolidated its lead in wind capacity and in largest wind farms installed.”

    “The total wind power capacity now operating in the U.S. is over 35,600
    MW, generating enough to power the equivalent of 9.7 million homes. America’s wind power fleet will avoid an estimated 62 million tons of carbon dioxide annually, equivalent to taking 10.5 million cars off the
    road, and will conserve approximately 20 billion gallons of water annually, which would otherwise be consumed for steam or cooling in conventional power plants.”

    In Dallas, in May 2010, over 30,000 people attended the Windpower 2010 meetings. George W Bush was interviewed by Denise Bode on stage and GopverrRick Perry was on continuous loop in the lobby touting what windpower is doing for Texas.

  4. BB says:

    Apparently, from what I was able to gather, the link I have (from the same awea site) is from 2009.

    If so, that’s quite an explosion in job growth, to go from 2,000 one year, to 85,000 :-)

    It’s equally astounding that more than 50% of an entire industry is wholly dependent on a single cash grant policy, such that if it were to be removed…those 40,000 “wind industry jobs” would be gone. Unless they’re referring to indirect jobs, the same way that a military base closing down could kill a whole town or something.

    I guess there are other energy sectors that are also hugely dependent on subsidies. At least some of that though is designed to keep consumer costs down, because the sector itself is already sustainable (through for example, pricing to meet costs). Measuring wind energy against an already established energy sector is probably unfair, but it appears that in order for it to be competitive we have to subsidize both the cost of construction/maintenance, and the price of its products.

    If that’s always the case, in equal proportions, across all energy sectors, then I wonder why we don’t just go ahead and have government run the sectors outright.

    [JR: Well, the tax credit/cash grant is a long-standing support for this emerging industry. Other clean energy forms get similar support. Nuclear and fossil fuels have gotten much more.]

  5. Terry Tremwell is correct–the link that says 2,000 jobs is very outdated (dates from 2005 or earlier). Us-a culpa–we started out years ago trying to put a ton of stuff about wind power on our Web site, and now it is an enormous job to try to ferret out the outdated material and update it. Thanks to BB for inspiring us to get the lead out.

    The wind industry was in the midst of an explosive expansion when the meltdown hit, and would have been very heavily impacted were it not for the ARRA. What the ARRA did was take a tax incentive already on the books, and make it possible for companies in the wind business to use it even if they had no tax liability (due to the disintegrating economy) by making it refundable. Other energy industries can rely on a legal structure called Master-Limited Partnerships to achieve the same result with their tax incentives, but those are not available to the renewable energy industries (I guess mature industries need more help than new ones, for some strange reason). Full nine yards available at http://awea.org/blog/index.php?mode=viewid&post_id=486

  6. @ #4 Your number is actually from circa 2004, which still is a fabulous rate of growth. The trend is happening because of on-shoring: the tendency to manufacture towers, nacelles, and blades near the point of installation to save on transportation of oversized and overweight components. Wind component transportation is an area I am quite familiar with, as per a white paper I coauthored that is referenced on the AWEA website.

    From 2004 to 2009, while the capacity installed increased from about 400 MW to 10,010 MW, domestically produced content increased from 25% to 60%. This represents growth of a major U.S. domestic industry, as reflected in the increase of direct employment from 2,000 to 85,000 in 6 years. Multinational wind power companies are jostling to locate manufacturing in the U.S. In Arkansas, Mitsubishi just broke ground on a new plant in Fort Smith, while Nordex (a German company) started producing their first on-shored wind turbines in Jonesboro this month (October 2010). The Mitsubishi models will be 2.4 MW units, while the Nordex models are 2.5 MW. Other multinationals are Vestas, the Global leader from Denmark, locating new facilities in Colorado; Suzlon in Minnesota; Gamesa in Pennsylvania. Siemens is locating in Kansas. Clipper is a U.S.-based company with manufacturing in Iowa. GE is the second largest global manufacturer and has about 40% of the U.S. market. GE manufactures in South Carolina, using a design bought out of the Enron bankruptcy fallout. These manufacturing jobs tend to pay much higher than the alternatives in the areas where they locate. In each case, the turbine manufacturer “encourages” their suppliers to locate nearby. In addition, Chinese wind turbine companies are on the verge of locating manufacturing plants here, too!

    So, the number of jobs in the industry will continue to grow for awhile. DOE estimates that at current expected rates of expansion to 2030, direct domestic employment in manufacturing will exceed 150,000. Directly associated jobs (steel, electrical manufacturing, accountants, lawyers, etc.) will exceed 100,000 (I have personally worked with several law firms on contracts related to the industry and I have worked with a CPA to set up bookkeeping). Indirect effects in surrounding communities will exceed 200,000 jobs. Plus wind farm operations will employ more. http://www.nrel.gov/docs/fy10osti/47531.pdf

    Below is a table of the annual capacity additions and cumulative capacity of wind power in the U.S. for the most recent 14 years. Data from http://www.awea.org/reports/Annual_Market_Report_Press_Release_Teaser.pdf
    1996 1 MW (1,417 MW net cumulative)
    1997 17 MW (1,434 MW)
    1998 140 MW (1,574 MW)
    1999 819 MW (2,394 MW)
    2000 67 MW (2,460 MW)
    2001 1691 MW (4,151 MW)
    2002 412 MW (4,563 MW)
    2003 1670 MW (6,233 MW)
    2004 397 MW (6,629 MW)
    2005 2385 MW (9,014 MW)
    2006 2462 MW (11,476 MW)
    2007 5258 MW (16,725 MW)
    2008 8366 MW (25,076 MW)
    2009 10,010 MW (35,086 MW)

    The expected cumulative installed capacity is 300,000 MW by the 2025 to 2030 time frame (about 20% of projected domestic demand). This is why these multinational turbine companies are locating manufacturing here. Of course, the fossil fuel industry, especially the coal industry, is fighting this vision of a clean energy future because it is an existential threat to their profits and government subsidies. Some fossil fuel subsidies are direct production subsidies and tax credits, some are through the lack of price on externalized costs like the emission of criteria pollutants (including $62 Billion per year in health effects (see NAS and EIA data referenced here- http://www.awea.org/pubs/documents/Outlook_2010.pdf – and included in Joe’s recent blog). This does not include the externalized costs of climate change or the effects of mercury emissions due to burning coal. As wind power generation increases, coal consumption decreases. Natural gas will continue to be needed as a bridge fuel because of its quick reaction time to create a synthetic base load power with wind power, while emitting less CO2 more cleanly than coal. Note that this is one of the climate solution wedges that Joe writes about.

    Of course, Chinese consumption of coal means that the pricing of coal is now a function of international demand more than ever before, but that is a topic for another day.