What lies ahead for the renewables sector if expiring tax incentives are not renewed by Congress? During today's OnPoint, Allan Marks, a partner with Milbank, Tweed, Hadley & McCloy, discusses his expectations for how Congress will handle the incentive extensions and how the decision will affect the wind and solar industries.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Allan Marks, a partner with the global law firm Milbank Tweed. Allan, thanks for coming on the show.
Allan Marks: Thank you, Monica.
Monica Trauzzi: Allan, Congress will be deciding on whether to extend the expiring renewable energy grant program Section 1603 before leaving town for recess. With just days left before break, what are your expectations for how this may pan out?
Allan Marks: Well, I think hopes and expectations are two different things, so I would certainly hope that 1603 and also PTC extension could be included in the tax extender package. Whether that will happen or not I'm not sure, but there is a window of opportunity and we're certainly still trying.
Monica Trauzzi: Do you think it's more likely that they won't go ahead with 1603, but they will with PTC maybe at a later date?
Allan Marks: I think the PTC extension is much more likely and probably more critically important as well to the industry. 1603 should be extended. It certainly has created what it was meant to create. It's leveraged over $22 billion of private capital and all they're really talking about with 1603 is how effectively an existing tax credit can be used. The idea behind 1603, or the cash grant in lieu of the investment tax credit, was to enable companies developing renewable power plants to take advantage of the existing investment tax credit for wind and solar and so forth without having to rely on a tax equity market that was severely damaged by the economic recession in 2008 and 2009. The tax equity market has recovered to some extent, but not fully and I wouldn't be surprised to see if 1603 were not extended now, and if we didn't have the ability to have a cash grant in lieu of the ITC, I wouldn't be surprised if we saw a fall-off in the volume of capital available to finance projects, maybe by as much as 50 percent in 2012.
Monica Trauzzi: All right, and that means what for the wind industry?
Allan Marks: Well, for wind and for solar both, I think you see there's still a reliance, to a large degree, on federal incentives. 1603 is just one of them, but the production tax credit and the investment tax credit, more broadly, are very important to the industry. Without them it's much more difficult to obtain capital. There's more complexity. It's simply a less efficient way of spurring that kind of investment and that kind of job creation.
Monica Trauzzi: Is the bigger issue with the wind sector however, in terms of reliance on these tax credits?
Allan Marks: Yes, I mean historically the wind sector has depended more on the production tax credit. The stimulus and the associated packages changed that for a time and the cash grant was certainly very important to wind as well when they became eligible for the investment tax credit. Going forward in the long run, I mean there's different ways one could incentivize renewable energy investment, either lowering costs, and in the case of these credits lowering the cost of capital, which is significant, or stimulating revenue. And the federal government doesn't, generally speaking, try to incentivize renewables on the revenue side. That's left to states with renewable portfolio standards. In other countries we see feed-in tariffs and that sort of thing, but the tax code has been used as the main device to spur these kinds of investments by lowering the cost of capital.
Monica Trauzzi: There really seems to be an extreme shift in tone from where we were last year on renewables. How do you account for that? What's happened that's really brought us to this place now where renewables are not seen as this great solution?
Allan Marks: Sure, I think there's been a couple of differences. You know, personally, I've been working in this field for over 20 years and when I was an aide on Capitol Hill, 25 years ago, before becoming a lawyer in the industry, you know, there was an essence of doing what was good for the country before party or ideology. There was a sense of compromise. There was a sense of people trying to get together to do what worked and was pragmatic. And even say five or 10 years ago, when the production tax credit would come up for extension or renewal, which it's done over half a dozen times in the last several years, you found a bipartisan consensus that it was an effective way of stimulating investments which were good for the country, both from not just an economic standpoint, but also an energy and environmental standpoint. The tone is very different. The other difference, of course, is we're in an election cycle and the 2010 election was fairly bitter. In many areas, I think the 2012 presidential race certainly is shaping up to be similarly difficult for both parties. And renewable energy has somehow started to fall in as other types of policies have to this -- it's been held hostage to this type of political dynamic, which is not really conducive to compromise or implementing new policies.
Monica Trauzzi: Do you think the general sense though is still that renewables will play a major role in the U.S.'s future energy policy or are the discussions sort of leading us to believe that it might be a smaller percentage of renewables that we see in the future?
Allan Marks: No, I think there's still a long-term trend, and this is true for both parties and it's also true outside the Beltway, outside of Washington, there's a long-term trend of support across the board for renewable energy. It has environmental benefits, it has economic benefits, it also helps our national security and the reliability and diversity of our energy grid. There's no one who thinks that we should have an energy policy, to the extent we have one, 20 years from now that looks like it does today. And if you look at forecasts going forward with retirement of coal-fired power plants, with a lack of broad support for expanded nuclear investment, what I think you'll see picking up the slack going forward will be increased investment in wind and solar in particular, but also other alternative energy sources and natural gas, because gas will, I think, play an expanded role in energy generation going forward as well, hand in hand with those intermittent renewable resources.
Monica Trauzzi: Venture capitalists aren't throwing their money at renewables any longer. If these companies aren't getting money from venture capitalists and they're not getting the tax extensions that they need from the government, will they take a big enough hit that they might not be able to recover from?
Allan Marks: Well, here it's important to make a distinction between innovative or experimental technology, much of which depends on venture capital, and government support to bridge that gap between the innovation and the scale up to commercial scale where it can really be used widely. In contrast, I think we see on the project financing for more established technologies, like mature wind projects, we see a dependence instead on private capital coming in, in terms of long-term loans, which depend on stable cash flows. And those predictable cash flows depend on a predictable regulatory environment and that regulatory uncertainty, I think, chills investment much more so than just bad policies. In some ways, it's better to have a bad policy, at least if you know what it is you can price around it, than it is to have this kind of uncertainty where the rules keep changing every year or two.
Monica Trauzzi: All right, we'll end it there. Allan, thanks for coming on the show.
Allan Marks: OK, thank you very much, it's a pleasure.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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