During the “lame duck” session of Congress or in 2011, Congress may consider energy policy legislation that could add $25 billion in new and extended energy tax credit incentives over the next 10 years. If enacted, these incentives could enhance returns on clean tech investments and make the US a more attractive location for clean tech production.
The package includes a variety of key incentives for businesses that invest in clean technology, including expansion of the Section 48C advanced energy manufacturing property tax credit that would “uncap” the credit for solar, fuel cell, and energy storage systems, while providing an additional $3 billion in tax credits for other technologies.
The first round of $2.3 billion in funding for the Section 48C program proved useful to many clean technology companies who filed competitive applications with the Department of Energy and the IRS for tax credits of up to 30% of project costs. Those applications were evaluated on a number of criteria, including commercial viability, emissions reduction effect, and the potential to create domestic jobs. Benefits for successful applicants can be quite substantial. For example, Nanosolar, a California-based developer of printed thin-film solar, received over $43 million in tax credits to expand its San Jose production facility.
Removing the overall funding limitation for the Section 48C program would be a welcome development for the manufacturers of solar, fuel cell, and energy storage systems, who could then claim the 30% tax credit as a matter of right, but other technologies still would have to compete for allocations from the new pool of tax credits.
The package also calls for creating a new Section 48E renewable energy and conservation project credit that would make a total of $2 billion in tax credits available for numerous projects, including manufacturing energy-efficient property, grid storage or superconducting properties, municipal waste-to-energy projects, conversion of plastics, and biogas projects. This program would build on the success of the Section 48C credit and extend credit opportunities to many technologies that are not supported under current law, while allocating credits under a competitive application process similar to the one used for Section 48C.
Other incentives include extending the investment tax credit for geothermal and offshore wind through 2016, adding algae-based fuels to the eligible resources list, and providing additional clean renewable energy bonds.
All of these incentives are temporary, with termination dates ranging from 2013 to 2016. However, even this timing can provide greater certainty for investors and stability for clean tech projects that will be implemented before these incentives expire.
As with previous energy incentives, these proposed tax credits may help accelerate growth and development in the clean tech sector. In particular, extended and expanded tax credit programs for manufacturers of clean technology could have a direct effect on the bottom line, while enhancements to the ITC could make clean tech options more cost competitive for companies looking for alternative energy solutions. Options to treat most of these incentives as tax payments (and thus as effectively refundable) will make them easier for start up companies to monetize, since many start up companies do not face current tax liabilities and, thus, must rely on transaction structures involving “tax equity” investors to monetize traditional tax credits. This option also may be attractive to clean technology purchasers that have carry-forward tax losses to offset their current income.
But our experience has seen that businesses should not look at these incentives as a primary driver of their business models. Businesses must be cautious not to chase these grants or tax credits if it means straying from their original business plans or diverting from their critical investments.
While it’s helpful to gain another source of capital in an uncertain time, we believe business models need to be robust enough to outlive expiring tax incentives; in fact, investors evaluating investment opportunities seek business models that eventually can stand on their own, not models that must rely solely on policy and tax credits to succeed.
Tim Carey is the US Cleantech Leader at PwC, where he works with companies in the cleantech and semiconductor industries. He formerly served on the board of the Silicon Valley Chapter of the National Association of Corporate Directors. Venture capitalist funding in cleantech companies surged in 2007, as record-setting oil prices and the emergence of climate change as a major public policy and national security issue drove investors into technologies aimed at making clean energies an economically viable alternative to fossil fuels. Since then we’ve seen cleantech play a central role in the national recovery agenda and then experience the pressures of the credit crisis and the economy. As advisors to cleantech companies PwC can assist with advising on financial health as companies guide their products and services from ideas to market, ensuring more mature companies balance their cleantech efforts with their existing businesses, and providing insight on coming energy and tax policy proposals to keep companies ahead of the curve. For more information, visit http://www.pwc.com/us/en/technology/cleantech.jhtml.