How Sequestration Will Impact Wind Energy


How Sequestration Will Impact Wind Energy The widespread government spending cuts that were triggered on March 1 will impact nearly every sector of the U.S. economy, including wind energy. Indeed, sequestration will slash the government's budget for renewable energy, including in the areas of finance, research and development, and even regulatory matters.

Last week, U.S. Department of the Interior (DOI) Secretary Ken Salazar warned that the sequester would delay the already-lengthy process of issuing permits for new energy projects, as well as slow the environmental-review process for projects sited on public lands.

The budget cuts also threaten to delay the studies needed to jump-start U.S. offshore wind energy development, Salazar said, adding that the identification and leasing of wind energy areas would move at a slower pace.

Under sequestration, the DOI's budget will be reduced by $883 million for the remainder of the fiscal year, which ends Sept. 30. That amount includes a $75 million cut for the Bureau of Land Management and an $8 million reduction for the Bureau of Ocean Energy Management.

It is also possible that there will be layoffs within the DOI, as the White House's Office of Management and Budget has slashed the department's salary budget by $31 million. The DOI has not clarified whether those reductions would come in the form of layoffs, furloughs and/or pay cuts, but fewer staff could potentially lead to a slower permitting and siting process for energy projects.

Meanwhile, within the Department of Energy (DOE), $91 million will be cut from the Office of Energy Efficiency and Renewable Energy's $1.8 billion budget, and the Advanced Research Projects Agency – Energy will take a $14 million haircut off its $277 million allocation.

The DOE's loan-guarantee program will also take a 5% hit, reducing its budget by $2 million through the end of the fiscal year. Although Section 1705 – the program that backed now-defunct solar company Solyndra – expired in 2011, the DOE is still considering applications for Section 1703 of the program, which supports clean energy technologies that are unable to obtain conventional private financing.

Cuts to Treasury programs
Sequestration will also deal a blow to the Treasury Department's renewable energy programs, including the Section 1603 cash-grant program, which allows companies to claim a 30% cash grant in lieu of the investment tax credit (ITC).

This week, the Treasury announced that cash grants awarded between March 1 and Sept. 30 will be reduced by 8.7%, no matter when the application was received by the Treasury. Cash grants awarded prior to March 1 will not be impacted, and the sequestration rate could change after Sept. 30, the Treasury notes.

In order for a wind project to qualify for a cash grant, it must have started construction before Dec. 31, 2011, and have been completed before Dec. 31, 2012. Because the project-operation deadline has already passed, cuts to the Section 1603 program will have a more severe impact on solar energy companies, which have more of a preference for the ITC than does the wind industry, which tends to opt for the production tax credit.

Most wind energy companies that applied for a cash grant have already received it. However, several projects could be subject to the recent cuts. According to Keith Martin, a partner at law firm Chadbourne & Parke, there are at least six wind projects that are still awaiting cash grants.

Section 1603 applications for wind projects must be received within 90 days of the project's commercial operation date, Martin notes, so that gives companies with projects that went online in December 2012 roughly until the end of this month to file an application.

But even though the Section 1603 haircut may only have a minor impact on wind energy projects, it could have larger indirect ramifications for the industry, notes David Burton, a partner at law firm Akin Gump Strauss Hauer & Feld.

"The more indirect impact the sequester could have on the [wind] market is that more solar projects may opt for the ITC, rather than grants, due to the haircut of the sequester," he tells NAW. "So that will create even more demand for tax equity, and there's already a shortage of tax equity in the market."

"We could see wind projects having to pay higher yields to tax-equity investors," he adds.

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