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The Importance of Extending the 1603 Treasury Grant Program

December 19, 2010

Anyone working in renewable energy will tell you that when it comes to getting a project off the ground, financing is key. Treasury Grant 1603, found in the ARRA, was designed to address the front loaded costs to entrepreneurs of installing renewable energy. Known as the Treasury cash grant, this program has been a lifeline for an industry that has had to depend on a complicated tax code and financial institutions. Last week, Congress extended the program until 12/31/2011.

Without 1603 the clean energy industry would not be enjoying the success it is today.  To effectively compete against a fossil fuel industry that is heavily subsidized by the federal government, the renewable energy industry has needed federal help to level the playing field.

Unfortunately, the lack of a strong national energy policy has required the renewable energy industry to become cost effective through tax credits. The problem with trying to stimulate an emerging industry with tax credits is that it fails to eliminate two central problems facing small businesses, large upfront costs and lower initial profits meaning lower initial tax credits. Many new clean energy businesses did not have enough income to fully utilize these tax credits, forcing them to turn to large financial institutions to realize the advantages of such credits. After the financial meltdown and the resulting lack of finance, it became next to impossible to take advantage of the tax credits in the same way.

The Treasury cash grant program provides a lifeline by transitioning the unfavorable tax credits to upfront payments not tied to a particular company’s income. This is huge help to renewable energy developers and did not cost taxpayers any additional money – since it merely shifted the tax credit to an upfront subsidy. The effect of the Treasury grant program was a rapid growth in clean energy deployment and thus job creation.

With help from the 1603 program, clean energy has started to pick up momentum, gain economies of scale, and attract venture capital. Over the past two years, the price of solar modules have declined by roughly 25% and wind turbines by nearly 15%. As of October 26, the program leveraged $5.4 billion in federal funds to attract over $12.7 billion of outside investment.

The US is on the verge of taking a step backwards and jeopardizing future gains of this magnitude. On a purely economic basis, the US cannot afford to move renewable energy back to a boutique industry with correspondingly high prices. With the cash grants extended by one year, through 2011, the recipient companies in the clean energy industry would create more than 100,000 new jobs. Furthermore, renewing the grant program indefinitely will create over 58,000 additional permanent jobs in the solar industry and the installation of over 1,600 MW of solar electricity by 2016.

Most importantly, the 1603 program allows small businesses and community investors to participate in this emerging industry by lowering the upfront capital required for renewable energy projects. The flexibility of the 1603 program also allows nonprofits to partner with leasing companies to create small, community based wind or solar energy systems, an act prohibited under the tax credit system.

If the US seeks to become a leader in clean energy technology and reduce its consumption of fossil fuels in a cost effective fashion, an extension of the 1603 program is critical. With a properly designed and stable policy framework, the budding renewable energy industry can finally have the opportunity to compete head to head with fossil fuels. After witnessing increases in cost competitiveness and capacity in renewables over the past two years, it is obvious why the fossil fuel industry wants renewable energy to return to fighting with one arm tied behind the back.

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