CHICAGO — As federal subsidies for renewable energy projects begin to expire, the role of states and local governments will become more important in getting deals done, according to panelists at The Bond Buyer’s Symposium on Public Financing of Sustainable Energy Projects here Wednesday.

The expiration of federal subsidies could mean a drop in production in a market that has struggled to recover from the 2008 market crash, panelists said.

“Historically, when production tax-credits go away, there’s a drop off” in production, said Girard Miller, a Minnesota-based partner at Fulbright & Jaworski LLP. “And there’s an increase when the subsidies get re-upped.”

The market has started to recover from the post-2008 crash but funding remains tight, panelists said.

“Traditional funding sources remain tight, and the market is still finding it difficult to assemble capital sources on cost-effective terms,” said Steven Klein, partner at First Infrastructure Inc., consultants for both the public and private sectors.

“Alternative energy is not cost-competitive absent subsidies,” he added.

The American Recovery and Reinvestment Act featured a tax subsidy dubbed the Section 1603 grant program. The program offers renewable-energy project developers cash payments in lieu of investment tax-credits for projects. The cash is equivalent to 30% of the project’s total eligible cost basis.

As of Feb. 25, the program had financed 7,180 projects for a total of $6.4 billion, according to the Treasury Department. The 1603 grant program is scheduled to expire Dec. 31, 2012.

Meanwhile, both the investment-tax credit and the production-tax credit programs offer lower federal income taxes based on capital investment or based on the kilowatt-per-hour production of the project, respectively.

The ITC program is set to expire in 2016 and the PTC program is set to expire at the end of 2012, though the federal government could extend either program. 

The U.S. Department of Agriculture also offers a loan guarantee program similar to 1603. But that program is limited to smaller projects located in rural areas, Klein noted. The program is expected to continue but is subject to congressional appropriation.

“Support for these programs going forward is unclear in Washington,” Klein said. “The state and local level is where we find most of the action.”

Without the 1603 or PTC subsidies, state and local actions, such as state mandates, will become more important, according to Miller.

State-wide mandates — for example, that utilities generate 10% of their energy from sustainable sources — would help drive projects, as would consumer trends, Miller said.

“Consumers will be driving a lot of this,” he said. “The pace will radically accelerate if electric cars are widely accepted.”

While the price of power is what finally drives the number of completed transactions, subsidies have proved crucial to putting together the financing necessary for often-costly projects that can take years to assemble.

“It will be very hard on the industry if the subsidies were just to go away,” Miller said. “But people in the industry are thinking forward to dealing with an absence of federal subsidies.”

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