President Obama’s 2011 State of the Union address declared this “our generation’s Sputnik moment” before going on to set a goal for the nation to derive 80 percent of its electricity from clean energy by 2035. In February, Obama submitted a 2012 spending request for the Department of Energy (DOE) that increased spending on renewable energy–including solar, biomass and geothermal projects–while cutting fossil energy programs.

Despite White House support, the renewable energy industry still faces challenges. Financing is scarce, a result of the still-recovering markets, the relatively low recent prices of traditional fossil fuels and the lack of a price on carbon emissions. Meanwhile, the DOE budget proposal faces political attacks.

“Looking out onto the horizon, it seems like more clouds of uncertainty are emerging. … There have been reports on House proposals to eliminate or significantly reduce various DOE financing mechanisms for renewing loan guarantees and other things,” says Brian Dunkiel, founding partner at Shems Dunkiel Raubvogel & Saunders. “The renewal of the [Treasury Department's] cash grant program was helpful–but these fits and starts are a real challenge, especially when some of the larger projects take several years to conceive, permit, finance and construct.”

Not all renewables are suffering–although 2010 saw the slowest year for wind power since 2007, it was the best year the solar energy industry has ever seen. Key to the continuing growth of renewables are two federal programs, a cash grant program and a loan guarantee program respectively created and bolstered by the American Recovery and Reinvestment Act of 2009 (ARRA).

Cashing In

In December 2010, President Obama signed into law a one-year extension of a Treasury Department grant program that has been crucial to keeping the renewable energy industry afloat. Prior to the creation of the grant program, renewable energy developers relied on their ability to leverage an investment tax credit worth either 10 percent or 30 percent of expenditures. Many partnered with tax equity investors to finance projects, but after the financial crisis hit, the renewables tax equity market quickly dried up, dropping to $1.2 billion in 2009 from $6.1 billion in 2007, according to the U.S. Partnership for Renewable Energy Finance (US PREF).

Under Section 1603 of ARRA, developers can receive a cash grant in lieu of the tax credit, enhancing liquidity and making it easier for developers to secure financing even in the face of a depressed tax appetite. Andy Melka, a wind project development manager with E.ON Climate & Renewables, says the Treasury grant program allows developers to recoup some of their costs up front rather than over 10 to 15 years, thus reducing the risk associated with falling energy costs.

“That really got investors off the bench,” says Kathleen Drakulich, a partner at McDonald, Carano and Wilson and former in-house counsel to utility companies. “You don’t have to waste time now.”

Funding Projects

From Section 1603′s enactment in February 2009 until February 2011, grants totaling around $6 billion have been awarded to 1,878 projects (mainly wind and solar).

“In the deals I’ve seen, the cash grant really significantly can increase the viability of a project,” says Dunkiel. “That change was really important in keeping projects moving along when the market would have been much more depressed than what it was.”

As part of the tax bill Obama signed in December, the 1603 grant program was extended for one year, until the end of 2011. US PREF estimated last year that absent the extension, renewable energy projects totaling more than $24 billion would not have gone forward. Unless another extension is passed before the end of 2011, renewables will lose a program that likely will remain integral to financing projects.

“The tax investors are not coming back yet,” Melka says. “It really would be putting wind power at a distinct disadvantage compared to traditional energy sources if the grants went away and the tax equity market was still depressed. All forms of energy are subsidized. This is just putting wind on more of an equal footing with other traditional forms of energy.”

Crucial Credit

The DOE’s Title XVII Loan Guarantee Program, created in 2005, is another federal program supporting the industry through diminished sources of financing. ARRA created a “rapid deployment” sub-program and funneled $6 billion to the DOE program to support loan guarantees of up to $60 billion for eligible renewable energy and transmission projects. In total, the DOE’s loan program has committed nearly $18 billion in loans to support 20 clean energy projects since 2009.

The DOE announced on Feb. 15 a $343 million loan guarantee to develop the ON Line project, a 500-kilovolt transmission line stretching 235 miles across Nevada land rich in solar, geothermal and wind resources.

“The DOE came in strong,” says Drakulich, whose firm represented developers as Nevada counsel on the DOE opinion piece of the loan application process. She praises the program: “It makes these loans available, and on a low-interest basis, which saves cities and states lots of money.”

While Melka describes the 1603 grant application process as quick and relatively pain-free, the loan guarantee program has taken some criticism for a complicated application process hampered by bureaucracy and a lengthy review process. But while the Treasury grants might be for $10 million or $20 million, the loan guarantees can cover hundreds of millions of dollars.

With that much money at play, “the Office of Management and Budget, the Department of the Treasury and the DOE all like to be pretty satisfied when they provide a loan guarantee that the projects are going to work,” says Mary Anne Sullivan, a partner at Hogan Lovells and former general counsel of the DOE.

In addition, she says the application process has improved, particularly in the past six months. Whereas previously the DOE upheld a policy against asking follow-up questions before resolving an application, they’re now more willing to prod applicants for additional information. The burgeoning program
now is fully staffed and has created processes for selecting law firms and individual engineers and technology reviewers, which has streamlined its due diligence process.

“The program has taken a lot of criticism, but the first-of-a-kind technologies would not otherwise be getting to the marketplace at all,” Sullivan says. “I keep saying to clients that the loan guarantee process is so difficult, you shouldn’t go to the DOE if you have other options–but they don’t have other options.”