Congress Considering Expanding Tax Benefits For Clean Energy

WASHINGTON --Congress appears increasingly likely to expand tax benefits for renewable energy sources like wind and solar in an upcoming economic stimulus bill, say lobbyists and congressional aides. But for who, for how long, and under what conditions remain major question marks.

Wind and solar power producers have mounted a furious lobbying campaign to secure benefits in the bill. Lawmakers and staff have been mostly receptive to their key request, which is that tax credits be made refundable so that wind or solar farm developers can get a direct government subsidy, regardless of their tax liability.

But industry lobbyists are having trouble selling a second proposal for an advance federal refund for tax depreciation benefits that now must be spread over five years.

The collapse of the financial sector has hit wind and solar projects hard. Construction of solar and wind power relies on upfront financing from third-party investors, mostly large banks who buy the tax credits.

The financial crisis felled some renewable energy tax credit investors, like Wachovia Bank (WB), and left others in a loss position, so they won't have a need for tax credits this year. That has meant investment dollars are scarce for projects completed in 2009.

In the wind energy sector, project developers will have to decide whether to take delivery of turbines and other components in 2009, which may have been ordered months ago.

"It's a difficult situation," said Joshua Magee, an analyst at market research firm Emerging Energy Research. "They'll have to evaluate on a project-by-project basis whether they can sustain a delay, or whether they need to go forward according to their original schedule." Ironically, the trouble in the tax credit market came on the heels of Congress approving another $8 billion in tax credits in October, and a burgeoning interest in renewable sources driven by soaring fossil fuel prices.

"The sector was like a confirmed bachelor who after all these years was finally walking down the aisle with a smile on his face. Now, he's been stopped five feet short of the altar because of the credit crisis," said Fred Copeman, the national director of Ernst & Young's tax credit advisory services.

Senate Majority Leader Harry Reid, D-Nev., this week announced he supports making renewable energy tax credits refundable.

The industry's hope is that making the credits refundable will boost their value to the point that more high-tech companies and other non-financial firms will want to invest. "This would substantially lower the reliance on third-party financial investors," said Magee.

With a refundable credit, it's also possible that some developers could self-finance and cut the third-party investors out of the equation entirely. That would depend upon how any new legislation is written. One concern voiced by some congressional staff is whether removing the third-party investors would create opportunities for fraud and abuse.

Tax benefits from investing in clean energy projects are two-fold. There are the tax credit benefits, which for solar projects are worth 30% of initial investment costs, and for wind projects are tied to the number of kilowatt hours of electricity produced. But investors also become co-owners of equipment, which they can depreciate over a five-year period.

These depreciation tax benefits are particularly important in the wind energy sector. As U.S. demand for wind energy has grown in recent years, costs of turbines and equipment has also risen dramatically. That has made the value of depreciation benefits to investors roughly equal to the value they get from the tax credit itself, people affiliated with the industry say.

"The reality is the depreciation can be as important as the tax credit in terms of making the financing work," said Greg Wetstone, senior director of governmental affairs at the American Wind Energy Association.

Wetstone said the industry is looking for at least a one-year extension of the production tax credit, through 2010, and for the refundable benefit to last for the period of the extension.

But congressional staffers are skeptical of the proposal to make depreciation refundable. There isn't much precedent for advance rebates to companies to cover future tax benefits they expect to benefit from. One possible model is a provision in last year's housing legislation that allowed companies in a loss position to speed up payments for unused alternative minimum tax and research credits.

One staffer noted that companies in many sectors of the economy would like to have the cash from speeding up depreciation benefits, not just clean energy ventures. But that doesn't mean it would be good tax policy to do so, the staffer said.

-By Martin Vaughan, Dow Jones Newswires; 202-862-9244; martin.vaughan@dowjones.com