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Tax-based incentives are the enemy of sustainable renewable energy development

| Written by John Farrell | No Comments | Updated on Jul 16, 2009 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/taxbased-incentives-are-enemy-sustainable-renewable-energy-development/

As the New Rules Project has noted in its publications on renewable energy policy (see links below), tax-based incentives for renewable electricity generation create unnecessary inefficiency and hamper the long-term health of the industry.  A recent story in the Atlantic picks up on this, seeing the seeds of the industry’s recent collapse in the use of tax-based incentives in the last energy crisis in the 1970s.

The trouble with tax credits is that in order to make use of them, you must owe taxes, and most start-ups struggling toward profitability do not. So while a company looking to build a wind or solar facility would qualify for valuable benefits, it had no means of realizing this “tax equity.” The work-around was to partner with someone who did, someone large enough to finance a $500 million facility and profitable enough to incur a large tax bill. Having witnessed two decades of busts and bankruptcies, traditional U.S. banks wanted no part of this. European banks, going by their more positive experience, were comfortable funding large renewable projects, but didn’t qualify for U.S. tax credits. The perversity of the government’s incentives demanded a big balance sheet, huge profits, and an indifference to risk. Enter Wall Street.

Investment banks and hedge funds stepped in to fill the void, engineering tax-equity vehicles with suspiciously complicated-sounding names, like “partnership flip structure” and “inverted passthrough lease,” to exploit the tax benefits. These deals amounted to financing agreements for large infrastructure projects, given in exchange for tax credits, often worth hundreds of millions of dollars, that could be applied against profits earned primarily on other investments (like mortgage-backed securities). For renewable-energy companies, tax-equity deals meant life or death: the combination of credits could offset two-thirds of the capital cost of a project. Companies like Lehman Brothers, Wachovia, and AIG became an integral part—even the integral part—of the renewables industry, because the utility-scale projects they financed produce the overwhelming majority of clean energy in the United States.

Basing the entire system of federal incentives on tax equity had two weaknesses, one that has always been clear and another that became clear only recently. Forcing renewables companies to route government support through Wall Street, thereby sacrificing a portion of it, was needless and inefficient. But it also tied the industry’s fate to that of the financial world’s most aggressive players. Just as Wall Street bankers bet that housing prices could never fall and got wiped out when proved wrong, Congress seems never to have imagined that Wall Street might someday have no profits and need no tax equity. Early last year, the multibillion-dollar tax-equity universe consisted of 18 providers. After September’s record carnage, the number dropped to four. Credit froze, and most projects ground to a halt. All of a sudden, not just a few start-ups but the entire renewable-energy industry was staring into the Valley of Death. [emphasis added]

The publications below explore the alternative: a renewable energy policy that pays for production and that drastically simplifies renewable energy incentives so that anyone can generate, and benefit, from the transition to a renewable energy future.

About John Farrell

John Farrell directs the Energy Democracy initiative at the Institute for Local Self-Reliance and he develops tools that allow communities to take charge of their energy future, and pursue the maximum economic benefits of the transition to 100% renewable power. More

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