Hundreds of millions of federal dollars from a flagship clean energy grant program were awarded to projects that were well under way before Barack Obama was inaugurated, despite the aim of the 1603 grant program to “primarily” stimulate new projects.
“When the financial crisis hit many developers found that they didn’t have the tax liability that would allow them to claim the credits, so the program was developed to offer an alternative way to continue to incentivize renewable energy development,” a Treasury spokeswoman said. “So, the 1603 program was primarily meant to incentivize new renewable energy projects, but it also supported some existing investments.”
The 1603 grant program was funded through the American Recovery and Reinvestment Act 2009, better known as the stimulus, but was extended for another 12 months last year.
The 1603 “cash” grant program was a payment for “energy property” in lieu of tax credits, such as the Production Tax Credit used mostly in the wind industry, and the Investment Tax Credit used mostly to encourage solar developments. Awards were equivalent to 30% of the project’s total cost placed in service on 1 January or later. At least one payment has been made to a company after it went bust.
As of 31 October 2011, Treasury figures for the 1603 grant show that $8.474 billion of a possible $9.6 billion was split between 22,747 projects. Treasury claims these grants attracted an additional $32.9bn in private and federal investment to fund 14.1 GW-worth of projects, with a total estimated electricity generation of 36.8TWh.
The top 1603 award for any renewable industry went to E.ON Climate & Renewables North America. Treasury documents show that $542.53 million was awarded to E.ON Climate & Renewables North America this September for six projects.
The six E.ON projects to receive the largest combined sum include Stony Creek in Pennsylvania, and Inadale, Pyron, Panther Creek III, and both Papalote Creek I and Papalote Creek II in Texas.
Bankruptcy Is No Bump In The Road
In March 2010, Pattern Energy Group, based in San Francisco, acquired the 283.2 MW Gulf Windenergy project in Texas for an undisclosed sum from Babcock & Brown, which was placed into voluntary liquidation in March 2009.
Pattern Energy Group was a spin out from the Sydney-based global investment firm and purchased the Gulf Wind project as part of Babcock & Brown’s liquidation of assets. But $178 million, the third largest 1603 grant, was awarded to Babcock & Brown in December 2009, four months after it went bust.
But the Treasury still paid out on the award after the company called in the administrators.
“Treasury would only become a creditor if we had to recapture the funds because, for example, the project was abandoned,” said a spokeswoman. “The project was sold to another entity, which is allowed under the Section 1603 program, and is still operating.”
Pattern Energy Group also received two identical 1603 payments of $40.155 million this year for its two Hatchet Ridge wind projects in California.
Last year, Investigative Reporting Workshop revealed that $706 million in federal stimulus money went to wind farms that were completed before President Obama was inaugurated. A total of $1.3 billion went to 19 farms finished before the first dime of stimulus grant money for renewable energy was ever handed out, the report said.
As of October 31, 2011, Treasury records show at least 95 solar and wind projects were awarded grants in 2009, which means it is almost certain that these projects were well under way before Barack Obama introduced the stimulus. Although there is no suggestion of wrongdoing, there is a question of additionality, a clear objective of the stimulus funds.
Stepping In When Banks Falter
But many developers were faced with a finance gap as credit markets dried up from 2008, forcing investors to shy away from the tax-revenue dependent PTC. The funding shortfall in 2008 reveals the precariousness of mechanisms to finance renewable energy projects. Without healthy rates of tax revenue, the industry is at risk of collapse.
Moraine Wind II developed by Iberdrola Renewables, was an example of hundreds of projects that could have collapsed if the government had not introduced the 1603 cash grant.
PPM Energy, a precursor to Iberdrola Renewables, was granted a site permit authorizing construction of the project on 31 July 2007, Minnesota Public Utilities Commission records show. That project was complete by 1 January 2009, and Iberdrola Renewables was awarded $28,019,520 in September 2009.
Jan Johnson, communications director of Iberdrola Renewables, says the 1603 grant arrived just in time.
“It was essential when the 2008 financial crisis wiped out the market for monetizing tax credits,” he said, “leaving wind companies that were in the midst of building multi-million dollar facilities stuck with a decision to shut down construction and lay off workers or continue projects and take huge financial losses.
“Iberdrola Renewables and other renewable energy project developers has reasonably good assurance from the Obama transition team and congressional leaders in late 2008 that Congress would adopt what eventually became the 1603 program.”
Defending The Forward March Of Wind
Developer and manufacturers in the wind industry would also have been badly hit, says Vic Abate, VP of GE Energy’s Renewables business.
“The industry would have come to a screeching halt without 1603. A lot of those projects would never have been built. That would have been much more disruptive in my view to the economy to the industry and to the success of the US in moving forward towards a more independent energy future. 1603 did exactly what it was intended to do. It allowed those projects to keep marching forward.”
The 1603 grant was only seen by the market as a mechanism to promote additionality to the extent that it prevented the industry from grinding to a halt.
“The 1603 was not a new program, it was in lieu of the tax credits,” says Richard Caperton, a senior policy analyst with the energy opportunity team at the Center for American Progress. “These wind farms were already going to get a tax credit but they got a cash grant.
“It was intended to pick up the slack in that industry. A lot of projects get built by selling the tax credit to a tax equity investor and when there are no tax equity investors, the tax credits are worth significantly less so they created the cash grant program to make up for that. It was a well-designed alternative to a tax credit that met a specific need.
You could try to get the general public upset about this, but tax credits and cash grants are economically the same to the government and to the taxpayers.”