SAN FRANCISCO -- Wind power developers have long relied on complex tax-equity financing to bring most of their projects to market, but that system, once hailed as innovative, has collapsed over the last year, leaving the wind sector flailing for the cash it needs to make generation projects a reality.

This is how it worked: Large financial institutions like AIG, Wachovia, J.P. Morgan, Wells Fargo, Lehman Brothers and others would buy federal tax benefits from renewable energy startups that did not have enough taxable income to use the credits on their own.

In other words, big financial firms traded financing to offset tax liability. So-called tax-equity investors would bankroll a solar or wind project in exchange for a tax shelter, which was effectively pinned to profits. The system worked as long as Congress renewed the federal investment and production tax credits that granted developers a range of incentives, and it was widely viewed as a essential avenue within the renewable energy development community.

No more. The system, like other schemes crafted by insiders, has crumbled as AIG, Lehman and others have collapsed. The big boys no longer have cash to bankroll projects or the means to pull the profits to get credits, so the tax-equity space has turned into a financial dead zone.

According to figures from Hudson Clean Energy Partners, about 25 of the largest financial firms were active in tax equity for alternative energy in 2007. But at least 16 of them left the field last year (Greenwire, March 20).

That means an industry that had consolidated behind a handful of major players was left vulnerable to their demise. Wind in particular had banked on tax equity, financing 95 percent of its projects through this system in 2007 and following the same track in 2008 until the crash, according to numbers from J.P. Morgan.

So what now? Experts at a cleantech conference last week offered a simple fix: Figure out how to tap the American Reinvestment and Recovery Act, the economic stimulus law.

Adding finance options

Like their solar counterparts, wind companies sense opportunity in a stimulus provision that provides cash grants in lieu of tax credits for renewable energy. The program has solar companies breathing a sigh of relief, a feeling that appears to have spread to wind developers (Greenwire, March 26).

Under the previous investment tax credit, renewable energy developers could apply a 30 percent credit only to profits as a deduction. But the stimulus, for a period of two years, has made it possible to get back the 30 percent as cash, under a grant program to be administered by the Treasury Department.

Wind power is now eligible for the grant program, the plans for which are still being finalized by Treasury's understaffed tax department. Once the program gets going, one analyst said, the system should thaw frozen credit markets over the next few months -- a little bit at a time.

"It adds a number of options for how to finance a project," said Tyler Tringas, a wind energy analyst at New Energy Finance. "It gives [the developers] a new sort of very large decision tree to finance a wind project."

Standing to benefit, Tringas explained, are smaller projects that were often ignored by large tax-equity investors who were inclined to back bigger installations. Before the meltdown, a small community developer "would be very hard pressed to get an elite group of tax-equity investors," he said.

"You're going to be able to access a much broader base of capital at a lower rate," Tringas said. "This is going to be pretty good for a lot of those marginal projects."

And the policy may have come along just in time. Warren Byrne, founder and CEO of Foresight Wind Energy, and Tom Carbone, CEO of Nordic Windpower, both said the previous system had set up a top-heavy dynamic that may ultimately have hurt the fledgling sector.

"You could count on two hands the companies responsible for financing," Carbone said. "That was a dangerous landscape to have."

Temporary fix?

But others took issue with this maze of tax incentives, so-called partnership swaps and cash grants.

To Yaron Brook, president and executive director of the Ayn Rand Institute, the stimulus is the latest example of government meddling in free markets to subsidize uncompetitive energy sources.

Brook said the government, in setting up the grants, would distort energy markets by favoring wind, solar and other renewable sources. He compared the policy shift under the Obama administration to lawmakers' subsidizing of mortgages, which led to "enormous unintended consequences."

"We should learn from the financial crisis," Brook said. "Using tax policy to get us all into a home was probably not a good idea."

The same could be said of renewable energy, in Brook's view, because the tax policies could divert public dollars away from scalable power plants that do not rely on intermittent energy. "It is going to be disruptive, and it is going to ultimately be destructive -- particularly to entrepreneurs," he said.

Tringas countered that he regards the stimulus as a temporary solution until Congress passes a national renewable portfolio standard, which would send much simpler signals to the market, or a cap-and-trade system to regulate carbon emissions from power plants. He added that he does not believe in government meddling, but he does think lawmakers need to account somehow for the cost of carbon.

"This is enough to keep the wind industry moving forward," Tringas said of the stimulus. "It's enough to prevent the catastrophic collapse that might have happened."

He added, "There was a big problem with the primary source of capital essentially evaporating."

That is just fine for Brook, who said he doubts the science behind climate change and views carbon policy as a giant waste of money.

"I don't believe there's an externality cost to CO2," he told Tringas.

'Dead as hell'

So how badly is the sector hurting? Oil tycoon turned wind speculator T. Boone Pickens recently described the wind market as "dead as hell" to the Wall Street Journal. Richard Saunders, director of project development at GreenHunter Renewable Power, said Pickens was not far off.

Saunders estimates that in 2009, about 4,000 megawatts in new wind capacity will come online. That would be down significantly from the 8,400 MW built last year. And much of the new capacity is "really just things that are carrying over" from permits already issued in 2008.

"They've slowed down their activities tremendously," Saunders said. "They can't get the money."

While Saunders is optimistic that activity will pick up by the end of the year, Geoff Sharples, principal of renewable energy at Google Inc., is not so sure.

"The stimulus is intended to make 2009 not a terrible year," Sharples told attendees at the cleantech conference. "But it's pretty hard to tell how many banks are looking at this and thinking, 'How are we going to come in and make this play?'"

Gregory Jenner, a former tax specialist at Treasury and a partner at Stoel Rives LLP, said Treasury staff members are writing rules for the cash grant program as fast as they can. Jenner said he has talked to staff and expects "something coming out of Treasury very very quickly."

"The bad news is they've never done anything like this before," Jenner added, in a note of warning. "They're trying to figure out how it works."

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