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Independent, non-profit Foundation studying markets, trends and operations to illuminate the future of the equipment finance industry.

Executive Summary

The financing of alternative energy equipment and projects is emerging as an important component of the equipment leasing and finance industry. This report and related survey are intended to provide the reader with a view of the current state, the business impact, and future projections for this increasingly important sector of the equipment financing industry.

For purposes of this report, we define alternative energy projects and equipment as assets, equipment, components, and related systems and infrastructure used for the generation of electrical energy from renewable or biologically based resources.1 To bring focus to our analysis, we have further defined the scope of this report to include only the following alternative energy technologies:

  • Electricity generated from biomass (agricultural and biological waste) by combustion or by gasification
  • Electricity generated from the use of geothermal heat resources
  • Electricity generated from solar energy by thermal heating or by photovoltaic conversion
  • Electricity generated from wind energy

This report explores differences in the policy environment between Europe and the United States and identifies key policy differences that impact renewable electricity investment. Four key findings are of particular note.

  1. The European experiment with feed-in tariffs and renewable portfolio standards (as described in detail in this report) suggests that feed-in tariffs may dominate RPS systems as effective policy tools to encourage investment.
  2. The U.S. preference for income tax incentives has clearly not had the same simulative investment impact as feed-in tariffs have had.
  3. A modest feed-in tariff for projects fueled by wind power and biomass would make these technologies cost competitive with natural gas.
  4. Considerable research and technological development will be required before solar electricity can compete in the market place, regardless of the pricing support policy in place.

The report also includes the results of a survey conducted by the authors, in conjunction with the Equipment Leasing & Finance Foundation, specifically to assess the views and experience of leading participants in the equipment leasing and finance industry (the "EL&FF Survey").

The EL&FF Survey includes responses from senior executives in 33 firms which are active in the equipment leasing and finance industry, approximately 47% of them being commercial banks or other institutional lenders, 38% being independent leasing companies, and the rest being captive lessors, equipment lessees, transaction packagers, and service providers. Although 80% of respondents have invested less than $10 million in alternative energy equipment and projects, a number of companies have invested $50 million or more in these assets; and while all of the responding companies that are involved in alternative energy are active in North America, about half of them are also active in such transactions in other regions throughout the world, covering nearly every continent.

Of those respondent companies that currently have investments in alternative energy equipment or projects, 71% say they plan to continue making such investments. However, of the companies that do not currently have alternative energy investments on the books, only 27% say they plan to begin investing in this area.

In the area of policy, 60% of respondents favor replacing the federal electricity production tax credit (PTC) with a national renewable portfolio standard (RPS) or federal renewable energy standard (RES), requiring a certain percentage of total generating capacity to be fueled from renewable resources. Not surprisingly, however, 37% of respondents also favor extending the federal electricity PTC, or making it permanent, rather than requiring it to be re-authorized by Congress every one or two years, as at present.

Additional results of the EL&FF Survey are given in context throughout this report, and the complete responses and statistics are shown in Appendix A to this report.

It is the hope of the Equipment Leasing & Finance Foundation that this report will stimulate greater interest and involvement in this dynamic and promising area of equipment financing and will provide insight into the history, current activities, policy considerations, and future opportunities in this important field.

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Income Tax And Accounting Treatment

The U.S. Internal Revenue Code (I.R.C.) is used regularly by the federal government both to stimulate the economy and to further social programs and policies through the provision of various income tax incentives. Typical incentives include accelerated depreciation, tax credits, tax rate reductions, and enterprise zones. The alternative energy sector provides a classic example of the use of this practice, as the government has enacted various income tax provisions to spur investment in what otherwise may be economically less attractive ventures. In general, the income tax incentives for alternative energy investments are a combination of depreciation, investment tax credits, and production credits. The broad composition of these current incentives includes:

  • Accelerated Depreciation
    Renewable electricity property, such as wind, solar, and others as described in subparagraph (B)(vi) of I.R.C. §168(e)(3), is considered to be five-year MACRS class life property for depreciation purposes, providing a shorter recovery period (and more rapid depreciation) than would otherwise be the case.
  • Production Tax Credits (PTCs)
    Qualified energy resources, as defined in I.R.C. §45, including wind, closed-loop biomass, open-loop biomass, geothermal deposits, and solar projects, are allowed a 1.9ยข per Kwh production tax credit. The production tax credit is subject to a price-based phase-out and is reduced by any grants, tax-exempt bond proceeds, and subsidized energy financing amounts. This credit is subject to biennial reauthorization, with the current credit scheduled to expire at the end of 2008.38
  • Investment Tax Credits
    Certain investments in alternative energy projects are allowed investment tax credits under I.R.C. §48. Solar powered electricity installations are allowed a 30% investment tax credit, while geothermal facilities can claim a 10% credit. Restrictions governing interaction between the production and investment tax credits preclude taxpayers from doubling up on these income tax benefits, however.

    Tax incentives are a key component of driving investment in alternate energy projects, particularly in achieving cost parity with conventional energy resources. As a comparative example of the impact of tax incentives on energy prices, Table 1 reports levelized costs39 of electricity in cents per Kwh (measured in 2004 dollars) for a plant placed in service after January 1, 2006, so that solar power is eligible for the 30% investment tax credit under I.R.C. §48.

Table 1. Levelized Cost Comparison (¢/Kwh)

  (1)
Current Policy
Policy		 (2)
No Tax		 (3)
Level Playing
Field		 (4)
No PTC
or ITC		 (5)
No 5-year
depreciation
Natural Gas 5.47 5.29 5.61 5.47 5.47
Biomass 5.34 4.96 5.95 5.56 5.34
Wind 5.04 4.95 6.64 5.25 5.70
Solar Thermal 10.89 13.84 18.82 14.73 12.25
Solar PV 19.93 26.64 37.39 28.22 22.99

Source: Authors' calculations (See Gilbert E. Metcalf, "Federal Tax Policy Towards Energy," Tax Policy and the Economy, 21, pp. 145-84 (2007).

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Table of Contents:


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Additional Renewable Energy Resources:

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