Posts Tagged ‘Investment Tax Credit’
As we watch Europe’s financial system teeter on the brink, many are preparing for the US’s own unwelcomed, but necessary austerity effort. Yet with yesterday’s deadlock by the Super Committee, we’re all left wondering if our elected leaders have been watching too much ESPN, detailing the NBA’s own failure to come to an agreement, after over two years of negotiations.
With this latest partisan gridlock in the face of a financial storm, its a fait accompli that we will see a December 31st expiration of the Section 1603 cleantech cash grant incentives. Solyndra alone has put cleantech supporting Democrats on their heels and become a “reckless government spending” lapel button on Republican sport coats. Rightly or not, large bookable losses from the DOE’s attempt to stimulate jobs make it harder for politicians to put Section 1603 in a cleantech jobs creation wrapper.
Which means the cleantech markets will need to rely only on tax credits, as opposed to grants, in order to weather the looming US austerity period, whenever our politicians decide its important enough to address.
Today I’m attending the 27th annual NAESCO conference in Phoenix, AZ, a conference that serves as an annual checkpoint for the ESCO industry.
Yesterday’s panel, “Does the ESCO Business Model Version 2010 Still Get The Job Done?” featured a number of ESCO legends (senior executives with 20+ years of industry experience) and each openly discussed how the ESCO market is evolving, good and bad, and where things may be headed.
Four topics stuck out:
1. Is the Stimulus program finally done? Thank god…With their focus on performance contracts for tax-exempt MUSH (municipal, university, schools, hospitals) customers, ESCOs were slowed in 2009/2010 by the ARRA/Stimulus program, which tentatively assigned “free” grant capital to their customers. (We heard this last year as well) In practice customers paused on ESCO contract decisions while waiting to see if they would get a grant. One executive said this market stall cost his firm “$50-60 million in project bookings last year alone.”
2. Lobby like the Solar Industry. The solar lobby in Washington and around the country has successfully convinced several state PUC’s to mandate green energy production (i.e. you must buy solar PV), and gained huge solar PV specific ARRA dollars. One panelist commented that “although it makes no sense to put a solar array on an energy inefficient building,” his firm was recently forced to do exactly this as his customer was told by the DOE they “could only get money for a solar array” (which produced a 30-year return on investment). How about the DOE mandating an energy efficient building retrofit with a 10-year return?
3. Its a BIG market – if the capital is made available. According to the McKinsey estimate, there’s a $520 billion total available US market for energy efficiency upgrades. Retrofitting the whole market would generate $1.2 trillion in savings, or a $680 billion stimulus to the economy. Like the US Federal government stepped in for TARP or General Motors and will ultimately gain back their lendings through loan repayment and sale of GM stock in their IPO, a Federally delivered loan program for energy efficiency retrofits could be a massive catalyst.
4. We sell “stuff” because “our customers need stuff.” The ESCOs have a great model, enabling MUSH customers to replace their aging infrastructure. Their customers don’t buy energy savings (like C&I customers), they buy stuff. It just so happens they pay for this stuff with operating savings from their energy bills. MUSH customers have even less money today than a few years ago, but they do have the capacity to borrow through issuing tax exempt bonds. Which means they can pay for the stuff. Even in the rare case where a municipal customer goes bankrupt the ESCOs know that that the customer “will always be around.” And after the bankrupt municipal bonds get restructured? They’ll buy more stuff. What a wonderful model.
During our 2010 business planning we’ve been speculating on trends that may affect our corporate customers (positively or negatively) in the coming 12 months. In 2009 Groom Energy delivered projects in 25 states and Puerto Rico. What’s stunning is how much time we spent confirming the incentives available in these states, through utilities, regional ISO’s and Clean Energy trusts. 2010 promises to introduce even great complexity to this already challenging game – in this regard here are four areas we think are worth watching:
1. PACE rollout across the US – this emerging energy tech financing program, which started in Berkeley, CA as a residential solar PV financing program, has now grown into a much more powerful concept. PACE (or Property Assessed Clean Energy) financing has broadened, becoming the poster child for enabling both residential and commercial property owners to invest more easily in renewable and energy efficiency upgrades. Legislation for PACE like programs has now been “enabled” in 17 states, but the devil will be in the details as to how each rolls out their own version, delivering low cost tax exempt debt to property owners. Regardless, in a market where commercial lending has ground to a standstill, PACE programs have the chance to catalyze lots of projects, providing significant energy and carbon savings – it remains to be seen how fast these programs can be rolled out in a scalable way.
2. The continued fragmentation of state level PV incentives - While for the past few years CA, NJ, MA and CT have led the nation with developed PV incentive programs, each state has had their formulas for distributing these incentives, and each has experienced intermittent funding for their programs, both for policy and economic reasons. 2010 will bring another level of complication, as incentive programs in several new states will become available. In these newer programs, confirming incentive formulas will part of the story – continued funding for these programs is a new risk to assess. As the economics for PV breaks without heavy state incentives, incentive commitment letters for these “approved” projects will be critical.
3. Carbon Cap’nTrade – Post Copenhagen it’s pretty clear we won’t see 2010 US Federal policy that has immediate economic consequences for Corporate America. What we’ll be watching is whether Federal policy institutes a “grandfather” clause which encourages action while the policy debate continues in the Senate and the House. (This grandfather concept was implemented successfully within the energy efficiency code in the EPAct2005). So in 2010, it could be that state policy overrides lack of Federal policy and defines carbon pricing with vehicles such as RGGI for pricing, although CA will likely not see their program live until 2012. Guidance for emitters at below the 25MW power plant level might also be forthcoming…
4. Utility and Trust sponsored Energy Efficiency rebate programs: While New England and CA have had consistent energy efficiency programs for a number of years, new states and utilities are rolling out more programs in 2010. Considering we’re still in the Great Recession, free money supporting fast returning energy efficiency investments is clearly worth studying on a state by state level.
So there you have it – maybe next year we can look back on this post and give ourselves a report card on our predictions
Attention policy makers – Cleantech Grants and Utility Rebates need to be predictable and continuous
In my former life as a early stage venture capitalist I learned a traditional VC bias against investing in start ups where government subsidies were necessary to make the technology’s economic case work. Year’s later I’m scratching my head at how the VC market has thrown out this bias in cleantech investing, an example being their heavy investment in solar PV technology.
While one can’t dispute that the worldwide PV markets are getting larger, anyone who has run PVwatt knows that without significant subsidies the technology doesn’t work as an alternative to kWh from the grid. An incremental improvement in PV’s performance will not change this situation. In the US, the math says that without a relatively high kWh cost AND a belief that kWh cost will inflate at 5-10%/year AND a large State renewable grant AND a 30% Federal grant or ITC, PV just doesn’t pass a reasonable economic test.
Which means that when Federal or State policy makers contemplate any potential change to renewable grant levels, the market gets really bumpy. We experienced this at the end of 2008 when the Federal ITC extension was in question. We’re currently experiencing this again in Massachusetts where the PV incentive program is temporarily suspended as the State transitions to a REC model “sometime in 2010.“ Kind of makes it difficult on a small local solar installer while it’s customer prospects wait for new incentives….here, an absense of policy has slowed one of the fastest developing PV markets in the US.
Like State renewable grants, utility energy efficiency rebates are watched closely for the signaling effect of change. Earlier this year we saw one utility’s energy efficiency program introduce “accelerated” rebates, only to abruptly cancel the program four months later due to over-subscription. Customers who didn’t participate are left to wonder whether they should wait on the sidelines until another accelerated program comes back to the market. Here, the utility’s haphazard policy has stunted market growth.
As the US moves towards more incentives for both broader renewable and energy efficiency upgrades, Federal, State and utility policy makers need to better coordinate the management, introduction and changes to these programs. They should recognize the dual edged sword they hold – whenever they change the incentives, or worse, suggest they might change the incentives, the market adoption rate is slowed.
Just as the stock market rewards companies which produce predictable financial results with higher multiple stock prices, policy makers need to signal the market as they grow incentive programs, making them predictable and long term. The incentive programs need to reward action today, including grandfather clauses for those who would otherwise sit on the sidelines while new policies are being developed. Without this approach, human nature “wait and see” will rule the day.
When considering a new roof-mounted commercial solar project our engineers need to quickly address key financial questions such as “in which state is your facility? (ie. is there a strong state rebate) and “will you be buying or financing it?” (ie. solar PV still sits outside normal corporate ROI hurdles). If both these answers are affirmative the next question we focus on is the age and type of the existing roof.
A few years ago we performed site visits for adding solar thermal to a series of multi-unit homes. We had gathered data on their historical fuel costs, the type and efficiency of their existing boilers, had a design for the pipe runs connecting the panels and heat exchanger, had determined the optimal orientation of the panels relative to tree shading and had run our energy models with all this data.
In the end their 10 year old EPDM roof made the whole project hard to pull together. At 10 years their roof was too new to require a replacement but too old to support an additional 25 year life span for a solar thermal installation. The project would be burdened with the new roof cost but there would be no financial return for this upgrade. These days we’re a little more sophisticated before we get in a truck for a site visit!
Recently we’ve seen solar technologies which can have an added financial incentive addressing this roof issue. With commercial thin film solar, because a new roof membrane comes with the installation, a portion of the system cost can be included in the Federal Investment Tax Credit – effectively a tax incentive for a new roof. This can also be the case with technologies like Solyndra, which require a white roof for the system to operate effectively and hence take this pro-rata tax benefit when calculating their financial return. Of course, you must be careful to confirm with your (or your financier’s) accountants on their interpretation for your installation.
So perhaps going forward there will be a better opportunity to apply this value in the corporate financial analysis for adding solar. In addition to solar PV systems serving as a (1) a long term energy price hedge, (2) a greening corporate statement and (3) a potential mechanism for carbon tax savings, perhaps our corporate customers will soon begin to look at this opportunity principally as a cheaper way to replace their aging roofs?