The Federal Stimulus Package included a number of provisions that have given the United States solar industry new life, but none have arrived with more anticipation than Section 1603, the Cash Grant in Lieu of the Federal Investment Tax Credit ("ITC"). By temporarily eliminating the requirement for tax equity investors in new projects, the cash grant program has the potential to spur market growth despite the limited availability of financing. But a closer look at the first month of cash grant applications suggests that its benefits to the United States solar market may be short-lived and significantly smaller than intended.
The United States Treasury began accepting applications for the Cash Grant on Aug. 1, 2009, and within three weeks was forced (or proud?) to admit that applications were arriving much faster than expected. The cash grant program was intended to last through Oct. 1, 2011 with no funding cap. There was, however, an expected outlay from the Federal Government of $3 billion, which was intended to support $10 to $14 billion in total project investment. On Aug. 19, The Department of Energy sent a note to the American Council on Renewable Energy (ACORE), an industry trade group, with a veiled suggestion that project developers should expedite their development process if they want to ensure reception of the cash grants. And on Sept. 1, Treasury announced that it had awarded $502 million in grants in the program's first 30 days, only $2.7 million of which went to PV projects. At that rate, $3 billion would be reached by the end of Feb. 2010, leaving developers wondering how long the Treasury will continue to fund new projects. More funding may indeed become available, but there is no guarantee that it will. And this leads us to three conclusions about the real impact of the cash grant program.
First, many of the projects that have received the cash grant thus far would have been developed anyway. A project owner cannot apply for the cash grant until "construction" begins on the project, which generally means, at a minimum, after financing and equipment contracts have been secured. This means that the $1 billion in cash grant applications received in August comes mostly from projects that secured financing prior to the DOE accepting applications. Many projects likely completed financing even prior to the cash grant guidelines being released in July. In other words, these projects were financed before they were sure to receive, or even be eligible for, the cash grant. So much of the first $1 billion in cash grant allocation went towards supporting existing demand, not creating new demand.
Second, the PV may ultimately constitute a minimal proportion of cash grant funding. While the earliest applications were expected to be dominated by wind projects that had already begun construction, the 0.5 percent allocation to PV in the first round of funding was below even pessimistic expectations. The proportion may increase somewhat, but we remain cautious of the conclusion that the cash grant will result in any meaningful increase in U.S. PV demand through 2010.
Finally, projects that are currently seeking financing may find that investors are wary of providing capital based on the assumption that the project will receive a cash grant. The initial funding estimate appears likely to run out, so projects that aim to begin construction in 2010 have no assurance that the cash grant will still be available. In the absence of an equity investor with sufficient tax appetite to make use of the ITC, lenders and other financiers will view this as a significant economic risk to the project. Thus, the cash grant may fail to induce new demand, particularly from the very projects that would rely on it in the first place.
There is a large supply of pent-up demand in the United States PV industry – projects that are ready be built pending the availability of financing. The cash grant is intended to enable development of these projects despite the recession, but without a funding guarantee through the end of the program, the impact will be minimal.