How Will Renewable Energy Fare in 2012?

Renewable energy is considered the future. The best way for us to combat climate change, survive the decline of oil and generally provide cheap, safer, secure energy. However the industry is still in its infancy and relies heavily on government subsidies and tax incentives. Every year or two the renewable energy companies experience a few tense months as the subsidies and incentives approach their expiration date. Invariably Congress comes to the rescue at the 11th hour and extends them for another year or two, the companies can breathe a sigh of relief and everyone can enjoy the holidays relatively stress free. However this year could prove to be different. We are in the midst of a presidential election year where the Republicans are using the bankruptcy of Solyndra to slam the Obama administration’s green energy policies. As a result Congress may well let the tax breaks die.

During the depths of the recession in 2009 the Obama administration gave renewable energy developers the option of taking a 30% tax credit as there weren’t many project financiers left with sufficient profits. Congress at the end of 2010 extended the program for another year, and now time’s up.

According to Joe Desmond, senior vice president of communications and government affairs for BrightSource Energy, fears that the solar industry would just be back in 12 months time asking for another extension are erroneous. The extension is only needed to bridge the gap until the economy improves sufficiently and a permanent financing program can be created. “As soon as the economy recovers, it takes the burden off of having to request an extension.” he said. He makes the point that, “the problem remains … there are tax equity investors out there. But it remains insufficient to serve the anticipated demand moving forward until the economy recovers.” Or, to put it another way, there are too many projects, such as the multibillion-dollar solar thermal power stations BrightSource builds or the residential rooftop photovoltaic systems SolarCity leases, and too few investors.

The Solar Energy Industries Association conducted a survey that found that nearly 37,000 jobs would not be created in 2012 if the cash grant program expires at the end of 2011, and that would be on top of the jobs lost due to renewable energy companies going bankrupt without the federal support. “More than 100,000 Americans work in the solar industry, double the number in 2009,” Rhone Resch, the chief executive of the solar trade group, said in a statement. “Solar is a proven job creator at a time when the unemployment rate for the country remains stubbornly high.”

Desmond also noted that two of BrightSource’s solar power plants set for production will create $800 million in wages, with each employing more than a thousand workers. Meanwhile, The American Wind Energy Association has released a study that predicted an extension of the production tax credit would create 54,000 jobs over the next four years.

Without the grants all renewable energy projects would rely on pre-grant incentives, such as tax equity markets, but the tax equity market still hasn’t recovered since the 2008 crash. According to Jeff Davis, a partner and co-head of the renewable energy practice at Mayer Brown, “we are still in a situation that we've been in since 2008 where the tax capacity or the ability to monetize those production tax credits and investment tax credits hasn't really recovered."

Jonathan Postal, senior vice president at Main Street Power, thinks we'll see more innovation in deal financing, similar to before the grant was passed. "You're going to need multiple partners, different ownership structures. Banks aren't going to just do the financing,” he said, "it's going to make things significantly more challenging.”

Financiers in the renewable energy market have all agreed that 2012 will be tough, no matter how you look at it. That, whilst the beginning of the year should be fine due to the completion of projects that began under the grant, the second half could well be very difficult.

By. James Burgess of Oilprice.com