Idea of the Day: Extend the 1603 Cash Grant Program

October 22, 2010

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In yet another demonstration of the success of the American Recovery and Reinvestment Act of 2009, new research finds that the U.S. renewable energy industry created 40,000 jobs because of a Treasury Department cash grant program created to provide incentives for clean energy project development. This important Recovery Act program could create another 100,000 more jobs if Congress extends the so called 1603 cash grants when it returns to Washington next month.

Unfortunately, the program is wrongly and disingenuously attacked by political opportunists who charge that Recovery Act funds went to projects that would have been built even without the program and, further, that the projects have not significantly contributed to job growth.

In fact, the Section 1063 cash grant program enabled alternative energy companies to continue creating good paying jobs at no additional cost to the federal government—jobs that otherwise would not have happened—and can create more than double the number of new jobs over the next year if the program is extended.

The U.S. Treasury’s new Section 1603 cash grant program provided an alternative to the renewable energy production tax credit program that suddenly was useless amid the turmoil of the 2008-2009 financial crisis. Under the new program, renewable energy project developers who were eligible for the production tax credit but could not use it due to the crisis could instead elect to receive a cash grant for a similar value. This cash grant was critical for renewable energy development companies, particularly wind energy, and their employees and new job-seekers in the industry.

The reason: Many renewable energy developers, especially small or start-up firms, do not make any profit. If they don’t owe any taxes they are not eligible for tax credits. Before the financial crisis, however, these companies would sell the tax credit to a “tax equity partner,” typically a bank or some other large financial institution, which could use the tax credit to offset some of its taxable earnings. The renewable energy company would then use these funds to build the project. The financial crisis put an end to this model, as the tax equity partners disappeared, leaving developers with tax credits they could not use.

The cash grant program rectified this situation by providing the option of a cash grant in lieu of the tax credit. The cash grant program resulted in real dollars going directly to alternative energy developers as the economy struggled out of the Great Recession, but the actual cost to the government remained the same because the net cost of giving out a grant to a developer is the same as the cost of providing a tax credit to that developer. Now that’s a pretty good way of using existing federal resources to boost economic recovery, but for renewable energy developers who do not otherwise owe taxes, the value of the grant is significantly higher.

The 1603 cash grant program is good for the government, good for taxpayers, and good for business.

For more on this subject please see:

• Generating Clean Energy Jobs by Richard W. Caperton and Kate Gordon