Clean Power

Published on January 4th, 2012 | by John Farrell


Federal Tax Credits May Handcuff Clean Energy Development

January 4th, 2012 by  

This post originally appeared on Energy Self-Reliant States, a resource of the Institute for Local Self-Reliance’s New Rules Project.

Clean energy advocates should cast aside their worries about increasing Republican scrutiny of energy subsidies. The clean energy industry’s foolish reliance on tax incentives has already handcuffed its expansion.

Unlike the leading nations in the clean energy race, the United States has no coherent energy policy. Rather, its energy market is balkanized by 50 distinct state policies and overlaid with poorly conceived federal tax incentives. Federal tax incentives have one redeeming feature. To get a tax incentive only takes one vote of Congress while getting any other kind of monetary subsidy requires two votes, an authorization, and then an appropriations bill.

The drawbacks are much more substantial. Building a clean energy future on a foundation of tax credits and deductions means significant inefficiency, reduced opportunity for the public sector, and handcuffing clean energy deployments.

Tax incentives may be politically expedient, but they are financially wasteful. In fact, tax credits cost Uncle Sam (and the taxpayer) twice as much as handing out cash. Why?  For many clean energy projects, the developer doesn’t have enough tax liability to effectively use the 30% investment tax credit or production tax credit. Instead, they need a “tax equity partner” (like a Wall Street banker) who can use a big tax credit. With some legal finagling, the two partners ink a deal that “monetizes” the entire federal incentive, but the Wall Street equity partner takes a hefty cut. In 2010, renewable energy developers were selling their tax credits to financiers for 30-50 cents on the dollar, with the remainder padding the pockets of financiers rather than buying down the cost of clean energy.

These tax equity partnerships aren’t just an inefficient use of public dollars for clean energy, they make locally owned projects more difficult to developundercutting the political clout of clean energy by reducing the local economic value of (and commensurate support for) wind and solar projects.

Tax credits also curb pubic sector participation in clean energy. “Solar for schools” may be a great rallying cry for the solar industry and for education, but tax code incentives don’t apply to schools, municipal buildings or non-profits. Instead, schools and others must seek private partners to offer them a lease, power purchase agreement, or other ownership structure that allows the project to capture at least some of the federal tax incentives. As the following chart illustrates, however, these arrangements for schools are never quite as cost-effective as privately-owned solar projects. Furthermore, the partnerships mean the public sector can’t use its best weapon, low-cost financing (e.g. bonding), to spread clean energy development.

The use of tax credits may also artificially cap the clean energy market. Since clean energy projects must rely on a limited set of tax equity partners and a limited-size tax equity market, when tax equity dries up, so do wind and solar projects. The economic crisis of 2008 made the problem particularly evident, as the tax equity market shrank by 80 percent from 2007 to 2009. Only the cash grant program saved the wind and solar industries from total collapse in the intervening years (2009-11), and the cash grant will likely expire at the end of 2011. The following chart from a SEIA presentation illustrates [pdf] the problem, even though it was devised before the 1-year extension of the cash grant in 2010.

The problem of limited tax equity isn’t just short term. Marshal Salant, managing director of Citigroup Global Markets Inc., said in a recent interview: “There’s more demand for tax equity to finance renewable energy projects than we will ever have in the way of supply.”

In other words, using the tax code for energy policy handcuffs U.S. clean energy development. The limited market for clean energy will also continue to suffer from major inefficiency and severely constrained options for the public sector, undermining public support for clean energy policies.

There are alternatives to the reliance on tax incentives (outlined last week in our discussion of Germany’s run-away success with its comprehensive feed-in tariff energy policy). But until the clean energy industry is ready to admit the folly of its marriage to tax equity, the American market for wind and solar will suffer.

Photo credits: handcuffs by Vectorportal, Wall Street sign by runnx, collage by John Farrell.

Check out our new 93-page EV report, based on over 2,000 surveys collected from EV drivers in 49 of 50 US states, 26 European countries, and 9 Canadian provinces.

Tags: , , , , , , , , ,

About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (, and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at

  • Oh, ya, right, like anyone really gives a damn… company have 3….count ’em…THREE new renewable powerplant designs, and even with a working prototype for each, can’t find financial support……ahem….uh….isn’t that a little strange? YET….2 companies, who had “theory only” designs, who were backed by some wall street connections, went public and made millions…..and of course, have all but dropped out of sight…..disgusting, huh?

  • America, infortunately, probably the most altruistic nation on the planet when it comes to OTHER countries, but to our own people…not so much.
    Virtually all social, economic, environmental and political problems are caused by the equivelent of a bunch of rouge teenage junkies running something…..get the drugs….er….money, at all costs……those costs being paid by you and I.

  • Rick Hammond

    You are speaking my language! I am in the business of selling “small wind” turbines to rural customers, in Minnesota. We are restricted to adding a maximum of 40 kw/hr to the electrical grid, because of the prevailing net metering law. Consequently, most of our customers need the 30% rebate from the Treasury Department in order to achieve a return on investment within a reasonable time frame. Most of these customers do not earn enough to make full use of the 30% tax credit. If we were allowed to put, say, 100kw/hr on the grid, we would not need any help from the Treasury Dept. Our turbines would produce enough “income” to handle any loan payments and achieve their ROI in an acceptable time.

    • Mr. Hammond, wouldn’t your customers still have to depend on one MAJOR factor in their ROI schedule, and that would be wind. Renewable Energy should be subsidize by our government, this would also means that our government is”encouraging” the use of clean technology. For years federal tax dollars have been spent assisting private oil companies with their exploration for fossil fuel. Would it not be reasonable to say that when Clean energy technology is used our local air we breathe improves, the water we drink improves, our short and long term physical health improves, and Americans have more disposable money to circulate into the American and Global economy. Why wouldn’t a smart government not “invest” into this level of ROI. Furthermore, the reason for your state’s regulation of your cogeneration property, think “Fossil Fuel Loyalist or plainly put LOBBYIST!. I say if we should spend Taxpayer’s money, let it be a smart investment so that they can have a good return of their invested dollars. Just look at China,Brazil,Russia,India,and Germany these countries understand the end game, which is leveraging Human Capital. The more independent they are on their energy consumption, the longer their population will live to be consumers and producers of their nation. We have allowed policies that contributed to poor air quality, poor water quality, and a poor quality national food supply all of these are directly related to the quality of life for Americans. I’m pro- smart business. In final, There are two companies, Company A , focuses on making enormous profits at all cost, even at the cost of destroying their customers to their death. Then there is Company B, which also focuses on making enormous profits but they would like their customers to live as long as they can, so they can keep spending money with them. So which Company has a smarter business model?

  • With all due respect Mr. Farrell. Maybe you should look at the centuries of federal incentives that were granted to the fossil fuel industry and as I reply back to this post which represents a total disregard for an intellectual understanding of historical truths. Mr. Farrell, I was taught that if one wish not to speak kindly and with unequivocally honesty regarding a matter, then one should not speak upon that matter. So I’m kindly asking you to consider the unequivocally facts of an subject matter before you decide to publicly endorse such elementary content. If I’m misunderstanding your purpose to endorse this particular content, then please hereby accept this public apology. I do apologize.

Back to Top ↑