RENEWABLE ENERGY:

Stimulus cash flowed to completed, under-way projects

Before the economic collapse, before President Obama's election, before cries for action to help ailing businesses, construction workers started building Barton Chapel wind farm in Texas.

Turbines started turning at the farm in January 2009 as Congress debated the stimulus bill. A few weeks later that legislation became law and launched a grant program aimed at spurring green energy growth.

The new program paid developer Iberdrola Renewables Inc. $72.6 million for building Barton Chapel Wind, even though the farm was finished when the stimulus bill became law.

Iberdrola was not alone in collecting stimulus funding for a development under way or completed when the program took effect. Of the 50 highest dollar grants awarded, 64 percent -- worth a combined $2.7 billion -- went to projects that began construction before the stimulus measures started, a Greenwire analysis of the program found.

That portion represents more than half of the $5.2 billion total given so far under the renewable energy grant effort.

The Obama administration and green companies argued that the program provided necessary help so that companies could complete projects, including those started before the stimulus bill. They also said the Recovery Act intended to help ongoing projects. In addition, they said, the effort motivated new developments and kick-started a U.S.-based clean energy economy.

"It's been absolutely critical in our getting these projects up in the air," said Paul Gaynor, CEO of First Wind, which received a $120.1 million grant for its Milford Wind Project in Utah, which started early construction in fall 2008.

As First Wind prepared to launch major building on the Milford project in early 2009, Gaynor said, the company hit the "nuclear winter of financing. It was very, very difficult to attract any kind of capital."

Without the grants, he said "we very likely would not have built any of these projects." First Wind also received grants for three other projects, including a New York wind project that started building in 2007.

Critics, however, contend that the program emphasizes building over producing power, with insufficient safeguards for taxpayers. The grants are more generous and likely benefit more companies than the tax credit they supplanted, analysts said. And government watchdogs questioned how much business growth the spending actually stimulated.

"It's essentially funding economic activity that already would have occurred," said Steve Ellis, vice president of Taxpayers for Common Sense. "So it's just a pure subsidy."

Money spent on those projects might have helped the economy more had it been used for other efforts targeting the most troubled states or workers, Ellis added. The stimulus bill "threw cash" at programs, he said, without a comprehensive plan.

The $787 billion stimulus, passed in February 2009, authorized a slew of spending and new energy efforts that included $11 billion to modernize the electric grid, $6.3 billion for energy efficiency and $6 billion for energy loan guarantees.

It extended tax credits for renewable power producers but also gave some green energy developers a new choice: Instead of taking those tax credits, they could obtain grants equaling up to 30 percent of their costs. Any project that finished and began operating last year became eligible for the grant, regardless of when the work began.

Greenwire determined construction start dates based on interviews with the companies, corporate press releases, filings with utility regulators and news reports about the developments.

How the money was distributed is one of several issues raised about the program. Economists and researchers have questioned the job creation numbers developers cite, while analysts are concerned about the stability of projects going forward without a national energy policy to drive renewable power demand.

The renewable grant program likely will move back on lawmakers' radar after the election. Green energy companies want Congress to renew the incentive plan before it expires at year's end. They have pledged to continue lobbying for that extension.

"You need at least the grant, if you want to keep the industry alive," said Patrick Woodson, chief development officer for U.S. operations at E.ON Climate & Renewables North America Inc., a recipient of $474 million in the grant funds.

While the program exists, companies are rushing to get enough construction done to qualify for future payments. Developers who complete "physical work of a significant nature" by Dec. 31, according to the legislation, can qualify for a grant if the project is operable by January 2013.

Iberdrola Renewables plans to build another $6 billion in renewable projects. Grants for those projects if approved would equal about $2 billion in federal money.

House Republicans, as part of their "Pledge to America," however, said they would halt all remaining stimulus spending.

Updating a worthless tax incentive

The renewable energy grant program to date has paid 1,143 companies, their subsidiaries and individuals. In some cases those awards cover more than one project, like a wind development with multiple phases.

Grants so far range in amount from $428 to a solar development in Iowa to $218.4 million to Windy Flats Partners, a large wind farm in Goldendale, Wash., near the state's southern border.

Any company or person who qualifies and applies for the money can get a grant, said the Treasury Department, which is making payments. The department by law does not have the power to rank projects. Grants are unlimited, Treasury said, for those who qualify and meet the deadlines.

The program "has helped dramatically expand and accelerate renewable energy development across the country, enabling companies to create and retain tens of thousands of jobs," said Sandra Salstrom, a Treasury spokeswoman.

In addition, Salstrom added, the program "is a good deal for taxpayers -- for each federal dollar spent in payments, more than $2 are spent in private-sector investments in these clean renewable energy projects."

The program aimed to boost companies by replacing a tax incentive that many had suddenly found worthless.

Wind, solar, geothermal and certain biomass developers qualify for a tax deduction of 2.2 cents per kilowatt-hour of energy produced. Before the recession, companies often sold investments to banks that then took the deductions.

During the recession, companies said, it became nearly impossible to find investors. Banks saw incomes fall and did not need deductions to lower tax bills. Those that had money were buying up collapsing banks and did not need to invest in wind farms as a deduction.

"Frankly, construction almost came to a halt," said Jim Spencer, president and CEO of EverPower, which built the Highland Wind project in Krayn, Pa.

Construction at Highland Wind started in the summer of 2008 but skidded in December 2008, Spencer said. After the collapse of Lehman Brothers and American International Group Inc., Spencer said, surviving banks stopped lending.

EverPower had a construction loan it had planned to repay with a larger loan obtained by selling investments in the wind farm once it was finished, Spencer said. But it looked doubtful, he said, that EverPower would be able to attract investors.

The company might have abandoned the project, he said, despite a $100 million investment, if not for the federal grant program.

"If you have no way of recovering the $100 million, are you really going to put another $40 million into the project?" Spencer said. "Probably not."

Other companies, however, said they could have gone forward with existing projects and carried some debt, but doing so would have meant less money for other developments.

"Any renewable project developer has a limited amount of capital to apply to new projects," said Greg Efthimiou, spokesman for Duke Energy Corp. The company received a $90.4 million grant for its Notrees Windpower project in Texas, which started construction in May 2008 and finished in April 2009, two months after the stimulus passed.

"What this did was allow us to complete our Notrees project and free up capital to devote to other wind projects we had on the drawing board for 2009 and beyond," Efthimiou said.

Other companies said the grant project created more development.

Iberdrola Renewables recycled all its grants into new projects in the United States, said spokesman Paul Copleman. The company has received $975 million in renewable energy grants, including money for the Barton Chapel Wind farm and at least eight other projects that started before the stimulus passed.

"This stimulus money has put Americans to work at clean energy jobs, helping to build a homegrown renewable energy supply," Copleman said. "These stimulus grants helped kick-start projects that might have stalled or not been built, and created thousands of jobs when they were needed most."

If not for the stimulus bill, Iberdrola said, it would have chosen to invest abroad instead of in the United States.

"The company currently has nine projects under construction ... meaning thousands of people are at work at a time when jobs are critical," Iberdrola said in a statement.

Copleman noted that all of the Iberdrola projects started running last year or this year, as the program rules required.

In addition to Barton Chapel Wind, a portion of projects were largely done when the stimulus bill passed. Of the 50 that Greenwire examined, nearly one-quarter completed construction by the end of April 2009, 10 weeks after the bill became law.

Developers who received grants for projects under way before 2009 said that it is unfair to criticize them for taking the funds because those projects otherwise would have received the production tax credit.

"The cost to the U.S. government is not materially different," said an executive who asked not to be identified because his company, a subsidiary of a foreign corporation, has been criticized about its renewable energy grants.

The grant and the earlier tax credit are not equivalent, however, said Gilbert Metcalf, a Tufts University professor who teaches energy economics and tax policy.

While it differs based on the project, Metcalf said, the grant typically is worth more money to a company than the production tax credit. Developers get the grants when the project is finished and can use the money immediately. And, he said, while some developers could not have used the tax credit, all of them can use the cash grant.

"It's those things that make the grant more valuable to the developer or on the other hand more costly to the taxpayer," Metcalf said, adding "it's just a more generous program."

Grant programs are an inefficient way to drive green power development, Metcalf argued, because there is no way for officials to discern which projects require help in order to proceed.

"Any time you use subsidies to encourage new investment, you're always going to end up giving money to people who would have done the project anyway," Metcalf said.

Counting 'free riders'

The renewable energy grant program did not pay awards immediately after stimulus became law. Treasury in July 2009 issued guidance to those wanting to apply for grants. The government made its first payments in September 2009.

Treasury doled out more when it first issued checks than in any other month to date, Greenwire's analysis of the program found. Treasury paid $1.2 billion in September 2009, with a large portion of the money directed toward wind projects.

Wind developments receiving those first checks in September 2009 likely had been in the works for some time, according to an analysis of the program earlier this year by the Lawrence Berkeley National Laboratory.

"In order for a wind power project to have achieved commercial operations in [second quarter 2009], it would have needed to start construction well before that -- if not in 2008, then at least in [first quarter 2009] and in most cases prior to the passage of the Recovery Act in mid-February," the report says.

"It is likely that most or all of the [second quarter 2009] wind power capacity that selected the grant would have come on line in [second quarter 2009] even absent the Treasury grant program," the report adds.

The report, requested by Congress, examined all awards issued through March of this year. It estimated that 61 percent of all projects through then "likely would have been deployed" regardless of whether the renewable energy grant program had been available, as long as the production tax credit still existed.

The report calls that trend "free-ridership." It noted that the free-ridership trend has lessened as time has passed since the law went into effect.

"As the grant program works through the backlog of legacy projects that it inherited as a result of retroactive eligibility back to the start of 2009, a growing number of wind power projects appear to have been directly motivated by the grant," the study said.

The study writers disagreed with Metcalf of Tufts that the cost of the grant and the production tax credit differ: "Furthermore, the cost of free-ridership to the U.S. Government during 2009 was likely modest, since projects were choosing between the grant and other similar federal incentives (i.e., the production tax credit and investment tax credit), as opposed to choosing between the grant and no other incentive."

But money paid even well into this year still went toward projects that started in 2008.

In June of this year, Treasury paid $1 billion in grants, the second highest amount since the program started. That money included funds for two large wind projects: Windy Flats, which received $218.4 million, and Iberdrola's Streator-Cayuga Ridge wind farm, which garnered $170.1 million.

Construction on Windy Flats started in spring of 2009. Treasury said the Streator-Cayuga project "initially froze the full 300 MW" and authorized construction in 2009, "in direct response to the stimulus package."

Boosting wind

Out of the top 50 most expensive projects, all but three are wind developments. Two are geothermal, and one is solar.

The grant program resulted in major wind growth last year, said Liz Salerno, American Wind Energy Association's director of industry data and analysis. The forecast at the start of 2009 predicted 4,000 MW of power capacity, slightly less than half the amount of power capacity put online the previous year.

Instead, she said, 10,000 MW came online last year, an amount that will power about 3 million homes.

"I don't think anyone knew how effective it was going to be and how quickly it was going to be effective," Salerno said of the grant program.

The wind industry has not seen a continued boom, however, even though the grant program still is available. For the first half of this year, new wind developments were 71 percent below the same period last year, Salerno said. She attributed that to lower demand for power, and lower natural gas prices.

In addition, she said, last year's figures benefited from projects that had been in the pipeline in 2008.

"That momentum carried over into 2009," Salerno said. "It wasn't getting backfilled with additional activity."

Some industry experts who have concerns about overdevelopment of wind in particular noted that the grant program, because it is based on the cost of the project, encourages building and not necessarily green energy production.

Wind developers often pick where they put projects based on available transmission and not necessarily the best wind, said Lisa Linowes, executive director of Industrial Wind Action Group, an activist organization focused on energy policy and renewables. The group is funded by property owners and others concerned about projects in their communities.

"Thirty percent is a lot of money for the public to put up for a project that might be put in a low wind area," Linowes said.

Congress or Treasury could have used stipulations to get the best projects, she said, such as prioritizing developments that would produce generation during hours of peak use or that are built close to wind centers.

Developers said while transmission is a major factor, wind capacity also is evaluated in deciding where to place projects.

Counting jobs

Renewable energy developers point to job creation as one of the major side benefits of the grant program. The projects receiving the largest grants on average produced about 15 to 20 permanent jobs. Some had as few as five permanent workers.

Most of those developments reported creating 200 to 400 construction jobs. E.ON Climate & Renewables said its Inadale Wind Farm in Texas employed 520 construction workers.

The program does not include any mandate that developers create jobs, a Treasury spokeswoman said. Wind's trade group said the program saved jobs because the industry did not see a decline that had been projected for 2009.

"To us that meant about 40,000 jobs were saved," Salerno said. "We went into a year where jobs were at risk. We kept jobs at a net 85,000 jobs."

Wind's trade group and individual companies say that wind projects also create manufacturing jobs. Many use a National Renewable Energy Lab calculator called the Jobs and Economic Development Impact (JEDI) method to show a project's broader economic impact.

"The people who are building the project are only a small part of the demand, said Eric Lantz, who works at the National Renewable Energy Lab. For wind projects, he said, "70 to 75 percent of the cost" is the turbine, and "a lot of the labor that goes into building the wind project certainly goes into building the turbine itself."

Iberdrola, for example, says its 13 projects that have received grants have created "9,000 jobs in construction, transportation, manufacturing and related industries in the United States."

Jobs building turbines did not all go to workers in the United States. In many cases grant recipients used parts made abroad. The Lawrence Berkeley National Lab study on the grants estimated that for all projects receiving awards, 40 percent used parts made outside the United States.

Windy Flats, the Goldendale, Wash., project that received a $218.4 million grant, the largest amount to date, installed Siemens turbines assembled in Denmark. The second biggest grant, $178 million, went to Pattern Energy's Gulf Wind in Texas, which used parts from Korea, Japan and Mexico.

Windy Flats developer Cannon Power Group of San Diego did not have any choice but to use foreign-made turbines, said CEO Gary Hardke. He noted that the wind towers came from the United States and Canada.

"Using a U.S. turbine manufacturer was not an option for our project in terms of either availability or technical configuration," Hardke said. That is changing, he said, as more turbines are built in the United States.

Half of wind's materials now are made domestically compared to one-quarter in 2005, AWEA's Salerno said.

In addition to manufacturing, permanent and construction jobs, Hardke said, Cannon hired engineering, legal, insurance and other consultants for the Windy Flats project.

"Moreover, the additional state and local economic benefits that wind projects contribute in terms of taxes, rent, etc., are quite substantial -- in the case of our project, over $145 million," Hardke said.

Renewable energy developments create economic activity in places where they are built, Metcalf said. He noted, however, that "the money that gets spent in developing green energy, if it weren't spent on that it might be spent on something else," like building roads, the military or a new coal plant.

"All of those projects have ancillary benefits as well," Metcalf said.

Instead of focusing on ancillary jobs, Metcalf said, renewable industry backers should concentrate on the direct benefit, like replacing dirty energy with clean power.

Future shock

The grant program created a government incentive that bolstered clean power supplies, analysts said. So far, there is no corresponding federal policy that boosts demand.

Congress has skipped a vote on a renewable electricity standard, a national mandate that utilities generate a portion of power from green sources. The Senate never took up a climate bill that would make burning fossil fuels more expensive.

Some projects could suffer economically going forward, particularly if Republicans take control of one or both houses of Congress and there is less interest in bolstering demand for renewable energy, said Roger Bezdek, president of Management Information Services Inc., an economic research firm that specializes in energy and environment issues.

"The market for most renewables is going to be very volatile in the next few years," Bezdek said. "It's very dependent upon government subsidies and mandates.

"As these mandates or subsidies lessen or go away," he added, "the demand for these renewables also will go away."

Bezdek pointed to what happened when energy policy shifted in the 1980s. The Carter administration created a tax incentive program that boosted renewable power supplies, Bezdek said. When those enticements ended in 1984, he said, the burgeoning solar and wind market collapsed and many projects were sold for scrap.

Some of the renewable developers have secured agreements to sell the power their systems produced.

Cannon Power Group, developer of the Windy Flats project that received the largest grant, recently inked a $547 million deal to sell 20 years' worth of its power to the Southern California Public Power Authority (SCPPA) , a collective of 10 municipal utilities and an irrigation district. SCPPA will take about 70 percent of the electricity that Windy Flats produces.

But other developers who have received grants have not secured power purchase agreements and are selling the energy their systems produce on the open market. That means competing with natural gas prices that right now are comparatively low.

Horizon Wind Energy, subsidiary of Spanish company EDP Renováveis, has built five projects that have received cash grants. So far, one of those has a prepaid contract to sell its power, said Radu Tutos, the company's director of finance.

"It is a fairly difficult environment" economically, Tutos said. "We, like all of the other developers, we are struggling to secure a power purchase agreement."

Horizon's project with the power purchase agreement, Wheat Field wind in Oregon, received a $47.7 million renewable energy grant. Construction on that project began in September 2008 and ended in March 2009, just after the stimulus became law.

Tutos said Horizon can afford to wait out the bad economy.

"We with other large developers are probably in a better position," Tutos said. We continue to be bullish about the future of the renewable industry. We are here for the long run. We know the demand is going to pick up again."

Click here to view a spreadsheet of renewable energy grant recipients that started construction before the stimulus bill passed.

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