The outlook for solar energy markets in the United States remains positive, despite lagging levels of new investment in 2009 compared to the boom years of 2007 and 2008. Particularly, the American Recovery and Reinvestment Act of 2009 contains a number of provisions widely expected to stimulate investment and contribute to a major scale-up of the solar energy industry in the USA, beginning anew in 2010.

Solar investment environment in 2009

Investment in solar energy relies on two primary factors: the availability of capital to finance projects – which have high upfront costs – and commodity prices of electricity and fossil fuels. Throughout late 2007 and the first half of 2008, commodity prices were high, giving solar energy projects comparatively high returns, and money flowed into the solar energy sector, especially where state governments provided financial incentives, subsidies, and set-asides.

After the financial market crisis of late 2008 and early 2009, however, commodity prices declined. Simultaneously, the credit market became virtually frozen as creditors sought to reduce and avoid risk.

As a result, solar energy investment in the first half of 2009 dropped substantially compared to the first half of 2008. In the first half of 2008, venture capital and private equity investment in solar energy totaled almost US$900 million, versus only about US$350m in the first half of 2009. Likewise, the debt market declined from US$142m in the first half of 2008 to only US$56m in 2009. Mergers and acquisitions in the solar industry dropped from US$132m in 2008 to US$14m during the same period in 2009, according to New Energy Finance.

This inability to finance solar energy projects and companies can have serious consequences for continued growth of the solar industry and the economy in general.

“This year, the rate of renewable energy installations has fallen by about half, largely due to an inability to secure financing,” said Sanjay Wagle, a Renewable Energy Advisor at the Department of Energy (DoE). “In addition to lost construction jobs, renewables manufacturers too are suffering a sudden loss in demand for their products.”

Federal leadership and agenda-setting

Recognizing the potential for renewable energy to jump-start the economy – in addition to mitigating the effects of climate change – President Obama called for a doubling of renewable energy in three years in his January 2009 speech.

President Obama made renewable energy a key aspect of his legislative agenda – giving hope to the industry despite the near-catastrophic investment environment. In addition to proposals for a renewable electricity standard and a cap-and-trade system, President Obama incorporated renewable energy as a major feature of the economic stimulus program, the American Recovery and Reinvestment Act (ARRA), which became law in February 2009.

The American Recovery and Reinvestment Act of 2009

Historically, the Investment Tax Credit (ITC) has been the primary policy mechanism supporting solar energy project development. The ITC is an income tax credit for businesses and individuals who purchase, install, and own eligible renewable energy systems, including solar. The credit amount equals 30% of the total cost of the system, including the cost of installation.

Despite the provisions contained in the Energy Improvement and Extension Act of 2008 to help boost the renewable energy industry by removing certain barriers to obtaining the ITC, new investment in solar and other renewable energy technologies continued to lag in late 2008 and early 2009. Utilizing the ITC requires up-front financing – usually in the form of tax equity – that became prohibitively expensive for many potential recipients seeking to install solar energy systems in late 2008.

To help mitigate the high cost of financing renewable energy projects, the ARRA created and enhanced a number of mechanisms to finance projects and boost markets.

Cash grant in-lieu of tax credit

To help eliminate the challenges associated with tax credit financing, ARRA offers ITC-eligible project developers the option of receiving a cash grant instead of the tax credit. The cash grant offers immediate funding for renewable energy projects placed in service before 2011 and is intended to address the lack of readily available project finance during the recession.

“This new program directly addresses the problem, by turning existing tax credits for renewable energy projects into upfront capital, enabling companies and firms to secure financing and begin construction again,” said DoE’s Wagle. “President Obama and Secretary Chu have both said they want America to lead the world in creating the new clean energy economy of the future, and this new program is going to allow us to do that, only at a much quicker pace.”

DoE expects the grant program to aid the construction of up to 5000 renewable energy projects, supported by over US$3 billion in cash grants. There is no limit on the dollar amount of the program.

According to Wagle, “the US$3bn in grants could enable between US$10-14bn of capital investment in projects that would not be financed without this program – projects that are ready to be built but are waiting to close financing and start construction.”

Section 1705 Loan Guarantee Program

In addition, ARRA expands the Loan Guarantee Program, which was originally established under Title XVII of the Energy Policy Act of 2005 to help pre-commercial energy technologies bridge the so-called “Valley of Death” between technology development and the commercialization.

The Recovery Act creates the Section 1705 Loan Guarantee Program, intended to facilitate rapid deployment of renewable energy and transmission projects by strengthening investor confidence in the ability of borrowers to repay loans. Section 1705 aims to promote commercially-ready technologies, whereas Section 1703 was established to advance pre-commercial, ‘cutting edge’ technologies.

“This program alone will create more than 15,000 new jobs in the solar energy industry in 2010, as long as the DoE can process the applications quickly,” said Rhone Resch, CEO of the Solar Energy Industries Association (SEPA). “Through this program, we expect the solar industry to deploy more than 5 GW of utility-scale solar power representing an investment in the US economy of tens of billions of dollars.”

As Resch noted, the potential for the Loan Guarantee Program to boost investment in solar energy hinges on the DoE’s ability to process applications and release funds quickly. At ACORE’s Renewable Energy Finance Forum in June 2009, the conference speakers pressed this point.

In late July, DoE released two funding solicitations for the Loan Guarantee Program, which are expected to provide up to US$30bn in loan guarantees for renewable energy and transmission infrastructure projects by the end of 2011.

Projects may qualify for loan guarantees under either Section 1703 or 1705 – with the key difference being commercial viability. Projects that are considered “new or significantly improved” but not commercially viable will qualify under 1703, while projects that are both “new” and commercially ready will qualify under the ARRA program, Section 1705. The projects that qualify under Section 1705 will be exempt from paying the credit subsidy costs associated with loan guarantees, which typically account for about 10% of the total guarantee amount.

Though most photovoltaic (PV) projects will probably not qualify for either solicitation – because they have reached commercial scale – solar thermal electric projects are likely to be one of the few technologies to qualify for this round of 1705 funding. Other new technologies that have not been proven to be commercially viable, like enhanced geothermal, may qualify for 1703 funding, but project developers will have to pay the upfront credit subsidy cost, whereas ARRA covers this cost for 1705-eligible projects.

Thus, the solar thermal electric industry is poised to benefit most from the first two rounds of Loan Guarantee funding. Much of the US$2bn in subsidy costs available for Section 1705 eligible projects will likely go toward loan guarantees for solar thermal projects to begin construction before 2011, and much of the estimated US$30bn in loan guarantees expected to result from this round of Loan Guarantee solicitations will likely support utility-scale solar thermal projects.

Manufacturing tax credit

On 13 August, the Department of Energy released details and guidelines for the implementation of another Recovery Act program – the Qualified Advanced Energy Project (QAEP) tax credit for renewable energy manufacturers. ARRA included US$2.3bn in tax credits for facilities that “re-equips, expands, or establishes” a facility that manufactures renewable energy property. Intended to increase both energy independence and economic development, the credit provides up to 30% of the cost of investment in qualifying facilities.

Clean Renewable Energy Bonds (CREBs)

The CREB program was initiated in 2005, and regained traction in 2008 with the passage of the Energy Improvement and Extension Act of 2008, which allocated additional funding to the program. The first two rounds of the CREBs program financed over 900 state and local renewable energy projects, primarily distributed solar and wind energy projects.

ARRA expanded funding for CREBs to about US$2.4bn, which is available in equal shares for state and municipal governments, public power providers, and electric cooperatives – entities that cannot benefit from renewable energy tax incentives because they are tax exempt.

The primary benefit of CREBs is that they allow public sector organizations to develop renewable energy projects at a near-zero interest rate. According to the DoE’s Office of Energy Efficiency and Renewable Energy (EERE), “CREBs can provide attractive, low-cost financing for deploying projects that will generate clean, reliable, and affordable energy to help our nation become more energy independent.”

CREBs allow state and local governments to sell bonds for renewable energy projects, and the bond purchasers receive a federal tax credit in lieu of interest payments from the bond issuer. This allows financiers to receive an up-front benefit in the form of a tax credit, and also provides zero-interest (or near-zero-interest) financing for state and local governments and electric cooperatives.

Research, development, demonstration, and deployment

The DoE’s EERE announced that it would allocate US$2.5bn to support its applied research, development and deployment activities. Of this, US$117.6m will be allocated to the rapidly expanding solar industry. The funds are intended to address the market barriers to the achieving the scale-up of solar energy manufacturing, production, and distribution, with the ultimate goal of making solar energy cost-competitive with conventional energy sources.

Research and development funds will be applied to three areas:

• US$51.5m for photovoltaic technology development, particularly advanced PV concepts and “high-impact” technologies, with the goal of helping PV achieve cost parity;
• US$40.5m for solar energy deployment, focusing on non-technical barriers to solar energy deployment, particularly market barriers to solar energy adoption in cities, and the lack of well-qualified solar energy installers; and
• US$25.6m for concentrating solar power (CSP) research and development, focusing on improving the reliability of CSP technologies and enhancing the capabilities of DoE’s national laboratories to provide support to the solar industry.

These ARRA funds will be distributed through a series of funding opportunity announcements (FOAs) in the coming months. State governments, research facilities, universities, and non-profits will be the primary beneficiaries of the solar FOAs.

The solar industry in 2010 and beyond

Nationwide, there are approximately 125 solar power projects in development that have not yet secured financing, totaling 11 GW of power. With the Loan Guarantee Program, the cash grant in-lieu of the ITC, and overall federal leadership in the renewable energy sector, these projects have a reasonable chance of securing financing and being commissioned in the next few years.

Solar energy investment in the third quarter of 2009 is showing signs of resurgence. With one month left to go in the quarter [at the time of writing, ed.], third quarter venture capital and private equity investment in solar has already surpassed second quarter investment levels, suggesting that the market is recovering.

Financial experts predict that although 2009 investment levels will continue to rise, they will still be below 2008 levels. In 2010, however, ACORE anticipates that the solar industry will experience strong growth, which will continue in the years to come, as long as long-term policy frameworks – including a carbon price via cap-and-trade, a national Renewable Energy Standard, and a federal financing authority – are implemented. Provisions in current proposed legislation in both the House and Senate seek to establish all three of these long-term policy frameworks.

One of the most influential policies to promote long-term growth in the solar energy sector is the proposed Clean Energy Deployment Administration (CEDA), or green bank, that would provide affordable financing for the accelerated deployment of clean energy, energy infrastructure, energy efficiency and manufacturing technologies. Current proposals in Congress would allocate up to US$10bn for the creation of an independent government corporation that would provide loans, loan guarantees, letters of credit, and other financing mechanisms for clean energy technologies.

Combined with the Recovery Act provisions – which will successfully bolster short-term growth in the industry, these policies are necessary to ensure long-term growth and investment in the US solar energy sector.