Key Recovery Act Program Deserves Renewal
In yet another demonstration of the success of the American Recovery and Reinvestment Act of 2009, new research finds that the U.S. renewable energy industry created 40,000 jobs because of a Treasury Department cash grant program created to provide incentives for clean energy project development. This important Recovery Act program could create another 100,000 more jobs if Congress extends the so called 1603 cash grants when it returns to Washington next month.
Unfortunately, the program is wrongly and disingenuously attacked by political opportunists who charge that Recovery Act 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.
At best, these assertions are based on a poor understanding of the cash grant program, which replaced a renewable energy tax credit program that fell apart during the 2008-2009 financial crisis. More troublingly, these claims misrepresent the value of the cash grants and ignore the tens of thousands of jobs on the line if this program is not renewed by Congress.
In fact, the Section 1063 cash grant program enabled alternative energy companies to continue creating good paying jobs at no additional cost to the federal government””jobs that otherwise would not have happened””and can create more than double the number of new jobs over the next year if the program is extended. So let’s examine these facts to rebut dangerous claims that if believed could cause severe job losses and crippling lost job opportunities.
The importance of Section 1603 cash grants
The U.S. Treasury’s new Section 1603 cash grant program provided an alternative to the renewable energy production tax credit program that suddenly was useless amid the turmoil of the 2008-2009 financial crisis. Under the new program, renewable energy project developers who were eligible for the production tax credit but could not use it due to the crisis could instead elect to receive a cash grant for a similar value. This cash grant was critical for renewable energy development companies, particularly wind energy, and their employees and new job-seekers in the industry.
The reason: Many renewable energy developers, especially small or start-up firms, do not make any profit. If they don’t owe any taxes they are not eligible for tax credits. Before the financial crisis, however, these companies would sell the tax credit to a “tax equity partner,” typically a bank or some other large financial institution, which could use the tax credit to offset some of its taxable earnings. The renewable energy 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 they could not use.
The cash grant program rectified this situation by providing the option of a cash grant in lieu of the tax credit. The cash grant program resulted in real dollars going directly to alternative energy developers as the economy struggled out of the Great Recession, but the actual cost to the government remained the same because the net cost of giving out a grant to a developer is the same as the cost of providing a tax credit to that developer. Now that’s a pretty good way of using existing federal resources to boost economic recovery, but for renewable energy developers who do not otherwise owe taxes, the value of the grant is significantly higher.
What’s more, a recent CAP report, “America’s Hidden Power Bill,” identifies two major benefits to the Section 1603 cash grant program beyond the direct value to developers.
- Transparency and accountability. To claim the production tax credit, a renewable energy developer simply checks a box and fills in a number on their tax returns, which are then kept confidential by the Internal Revenue Service. Taxpayers have no idea who has used the tax credit directly or indirectly. In contrast, to claim the treasury cash grant a developer must detail his spending plans, including information about job creation and project specifications, elements of which are then made public on the program’s website.
- Equal access to capital. 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.
In short, the 1603 cash grant program is good for the government, good for taxpayers, and good for business.
Cash grants powered new wind investments
The 1603 cash grant program drove clean energy development that would not have otherwise happened. According to the American Wind Energy Association, the cash grants enabled the construction of 10,000 MW of new wind capacity in 2009, while just 4,000 MW would have been built without the program.
There are two reasons why the cash grants drove significant new investment. First of all, many renewable energy developers would not have been able to continue financing the construction of new projects because the production tax credits were suddenly worthless to tax equity investors. Many projects already in train would have failed, with significant job losses, without the cash grants. The history of wind power development is replete with examples of projects stalling or collapsing when the production tax credit lapses. The production tax credit program, created in 1992, has never been permanently renewed, which means renewable energy industries experienced previous boom-and-bust cycles when the credit expires and is then renewed. Without any public investment these projects would likely have come to a halt. The cash grant allowed them to move forward.
Secondly, the grant program applies to projects that started producing energy in 2009. That’s a good thing, yet many of these projects were financed prior to 2009 based on the assumption that the renewable energy developers could use or sell production tax credits earned in 2009. That assumption was wrong””the financial crisis again””which means that without the cash grants many renewable energy developers would have been unable to complete their projects and start selling renewable energy last year and in 2010. The grant in lieu of tax credit program under ARRA enabled the projects to continue, and thus saved jobs.
Both of these points are proven in valuable research by Gilbert Metcalf, a Tufts University economist, who demonstrates 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.
Indeed, if critics of renewable energy production incentives want a real target to go after, we suggest 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 our country has consistently declined since 1970.
Cash grants will create many more new jobs
The results are in on the job-creating power of the 1603 program and the news is good. According to a report on the stimulus bill from Vice President Joe Biden, the cash grants 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 research and development. 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, in addition to permanent jobs in operating and maintaining the projects.
Given the enormous value of the cash grants to the renewable energy industry and many local economies, and to overall U.S. economic competitiveness in global renewable energy industries, 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, according to a U.S. Partnership for Renewable Energy Finance report by clean energy specialists at GE and Deutsche Bank. Now that is an economic recovery program we should get behind.
– Richard W. Caperton is a Policy Analyst with the Energy Opportunity team and Kate Gordon is the Vice President for Energy Policy at American Progress.