In February of 2009, Congress passed new legislation that provides renewable energy projects with an alternative option for realizing the value of federal tax benefits: a grant in lieu of tax credits (Section 1603 of the American Recovery and Reinvestment Act of 2009 ( P.L. 111-5 )). The Section 1603 grant program was initially enacted on a temporary basis, and was scheduled to expire at the end of 2010. Congress extended the program for one year, through 2011, in the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 ( P.L. 111-312 ). Understanding how different renewable energy markets have responded to the grant option may provide some insight regarding the potential implications for the renewable energy market of letting the Section 1603 grant program expire as scheduled at the end of 2011. As noted above, absent congressional action, the Section 1603 grant program is scheduled to expire at the end of 2011. One option is to further extend the Section 1603 grant program. As of October 24, 2011, grant awards had been made to 3,801 recipients with a total grant award value of $9.2 billion. Approximately $7.2 billion in grants have been awarded to 205 recipients. Wind capacity additions in 2010 were approximately 5 GW, roughly half the 2009 level. Therefore some wind projects, prior to Section 1603 availability, would essentially monetize the PTC and depreciation tax benefits, at a discount, through a tax equity investor (a definition and description of tax equity is provided in this report under the section heading " Section 1603 and the Renewable Energy Tax Equity Market ") and use the cash proceeds to cover capital and installation costs. Solar Electricity

The solar electricity marketplace (photovoltaic, solar thermal, etc.) Calendar year 2011 is expected to be another record year for the industry with forecasts predicting approximately 1,700 MW of new installations. While the "value" of the 30% ITC and the Section 1603 cash grant, in theory, should be equal, in practice the cash grant will likely be perceived as being more valuable than the ITC for the following reasons:
No transaction costs: Realization of investment tax credits may require the project to monetize incentives at a discount to a tax equity investor and also demands personnel time and professional fees to complete the investment transaction. The number of projects that have received awards in the "other technologies" category is relatively small compared to wind and solar electricity. Section 1603 and the Renewable Energy Tax Equity Market

The Section 1603 cash grant program was created as an alternative mechanism for renewable energy projects to realize federal tax incentives. An estimated $6.1 billion of "tax equity" went to various projects with approximately $5 billion dedicated to wind. Compared to tax incentives, the Section 1603 grants, or grants generally, may be a more efficient subsidy. Finally, there have been a number of benefits associated with the Section 1603 grants in lieu of tax credits that could be achieved through modifications to the existing PTC and ITC. Several issues arise in considering an extension of the Section 1603 grant program. The first option Congress may want to consider is modifying existing tax incentives to allow for some of the indirect benefits that are afforded by the Section 1603 grant. Furthermore, the Section 1603 grant program was motivated by difficult economic conditions that resulted in less tax equity investment capacity available for renewable energy projects to realize the value of ITC and PTC incentives. Section 1603 grants may be a more economically efficient mechanism than tax credits for delivering benefits to the renewable energy sector.
Congress created the Section 1603 grant program as part of the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). This program, administered by the U.S. Department of the Treasury, provides cash grant incentives for renewable energy projects. Initially, the Section 1603 grant program was scheduled to expire at the end of 2010. A one-year extension was enacted as part of the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) at an estimated cost of $3 billion. Absent congressional action, the Section 1603 grant program will expire at the end of 2011.
As of December 6, 2010, grants totaling approximately $5.6 billion had been awarded to 1,495 entities, since Section 1603 became law in February 2009. Wind has received approximately 84% of the grant award value, while solar electric represents approximately 75% of entities that have received grant awards. "Other" technologies (qualifying energy property not represented by wind or solar electricity) have also received grant awards, although the value and number of awards represented by this category is relatively small compared to wind and solar electricity.
Prior to the availability of Section 1603 grants, qualifying renewable energy projects were federally supported primarily through the production tax credit (PTC) or investment tax credit (ITC). It has been common industry practice for renewable energy developers to partner with tax-equity investors, where the tax-equity investors offer cash in exchange for project ownership, project cash flows, tax credits, and depreciation benefits. The Section 1603 grant program was motivated by difficult economic conditions and the perceived lack of tax-equity capacity to support renewable energy projects. Analysis of the tax equity marketplace reveals fluctuations in the dollar volume, number of participants, and required rates of return between 2007 and 2010.
Market response, since Section 1603 was established, has been mixed. The solar industry had a record year of installations in 2010 (887 Megawatts) and is forecasting another record year in 2011 (approximately 1,700 Megawatts). In 2010, the wind industry experienced a 50% decline compared to 2009 (approximately 5 Gigawatts installed in 2010 compared to 10 Gigwatts installed in 2009). Wind industry forecasts for 2011 are approximately 7,000 Megawatts. It is important to note, however, that many factors influence annual renewable energy installations, the cash grant being just one.
If Congress considers additional extensions to or modifications of the Section 1603 grant program, economic and cost factors may also be taken into account. Grants, as opposed to tax credit, may be a more efficient mechanism for delivering public funds to the renewable energy sector. As is the case with most tax or subsidy programs, however, there are concerns that grants may be going to projects that would have moved forward without added federal incentives.
Finally, this report presents various policy options Congress may want to consider regarding the Section 1603 grant and related tax credits for renewable energy. The first option presented is to allow the grant program to expire. Even if the grant program were to expire, tax incentives would remain available. A second option is to extend the Section 1603 grant program. An extension of the grant program may be considered alongside an extension of the PTC for wind, which is set to expire at the end of 2012. A modification to the ITC and PTC, which could potentially enhance the benefits associated with the existing tax incentives, is presented as a third option.