Alternative energy tax credits - and other credits

There was an interesting story in this morning's Financial Times about the collateral damage to the alternative energy sector due to the profit problems in the financial sector - Energy projects fund hits buffers:

A vehicle for funding clean energy projects in the US has stopped functioning, jeopardising the continued development of large-scale wind and solar projects.

The so-called “tax equity markets”, in which banks and others invest in renewable energy projects in exchange for tax credits, are struggling because the investors no longer have profits that will be taxed.

The small group of investors included Wachovia, Lehman Brothers and AIG. All have been hit hard by the financial crisis and, with profit forecasts uncertain, most have stopped making deals, according to Randall Swisher, executive director of the American Wind Energy Association.

. . .

Mr Swisher said a proposed solution was circulating among policymakers and renewable energy providers. Backers of the fix suggest the US government should make the tax credits for renewable energy production refundable.

This would allow investors without significant profits to re-enter the tax equity market, and also, said Mr Swisher, greatly enlarge the pool of potential investors.

The tax equity market allows companies to basically raise cash by selling off the tax credit. (For a more detailed explanation, see What's Hot in Renewable Energy Project Financing.) While these markets have been abused in the past, making the alternative energy tax credit refundable is an interesting idea. It would help start up companies, even if they didn't raise funds by monetizing the tax credit in the tax equity market.

For the same reason -- to help start-ups -- we should think about making other tax credits refundable, such as the R&D tax credit. With or without the tax equity markets, select uses of refundable tax credits could be powerful ways to finance start ups. A lot of thought would need to go into this to ensure it works properly and does not become just a big give away. But let's start thinking.