Virginia made big commitments to renewables. What does the economic slump mean for them?

Three weeks ago, Virginia’s Democrat-led General Assembly passed the most ambitious plan for transitioning off of fossil fuels and onto renewable energy sources to come out of the South yet.

It was a banner moment for environmentalists. Among the promises they secured were state commitments to build out 24 gigawatts of solar, wind and energy storage by 2035 — almost 40 percent more than the existing capacity of the fossil fuel units owned by the state’s largest utility, Dominion Energy — and annual targets that would bind the utilities to progressively including more and more renewables in their energy portfolios.

Then the new coronavirus hit, and the financial markets tanked.

“Our early estimates are that our industry is going to be halved,” said Karla Loeb, chief policy officer of Charlottesville-based Sigora Solar and a member of the executive committee of the national Solar Energy Industry Association. “That is entirely possible.”

As the federal government finalizes a third round of economic stimulus designed to provide relief to both individuals and the markets, the renewables industry is coming up empty-handed. While earlier versions of the $2 trillion third package included provisions to encourage continued investment in clean power, the compromise bill that cleared the U.S. Senate late Wednesday omitted any such aid.

What that will mean for Virginia’s planned buildout is not yet clear. The Clean Economy Act that passed the General Assembly March 6 and is expected to be signed by Democratic Gov. Ralph Northam calls for at least 35 percent of new solar, wind and energy storage development to be carried out by private, non-utility companies — all of which rely on robust investment that has suddenly dried up.

“There’s nothing now,” said Loeb. 

Loeb isn’t alone in her fears for the industry: a recent survey by clean energy business group Advanced Energy Economy found that 43 percent of their members have already stopped hiring new workers, while 29 percent have begun layoffs. Loeb said she was aware of at least one Virginia firm that had already laid off 12 percent of its workforce.

Two federal asks

Renewables groups facing steep losses are seeking two key forms of relief, both of which are intended to ensure projects remain attractive to investors: an extension of federal tax credits for wind and solar development that are set to expire in one to two years and the ability for developers to receive a direct payment in lieu of the tax credit.

Federal tax credits for wind and solar have been in place for wind since 1992 (with some interruptions) and for solar since 2006, and the expiration dates for both have been extended several times. Most recently, Congress agreed to keep the wind credit alive until the end of 2020 and the solar credit until 2022.

But given supply chain disruptions caused by COVID-19, industry members say those expiration dates no longer make sense. 

Developers “are already seeing project delays from the supply chain piece,” said J. R. Tolbert, managing director of Advanced Energy Economy, which was active in passing Virginia’s Clean Economy Act. 

Equally as vital, say renewables advocates, is the option for developers to receive a direct payment instead of the tax credit.

Both wind and solar development rely heavily on tax equity, through which investors finance a project in exchange for using the credits to reduce their own tax liability. 

“These projects are of such large size that the tax credits they would generate are much larger than the tax bill they would owe to the federal government,” said John Hensley, vice president of the American Wind Energy Association. Instead, developers look to investors with large tax liabilities, usually multinational banks.

The strategy has largely been effective — but not in an economy where heavy losses wipe out most of that liability.

The concern, said Hensley, is that “the profits of the banks can be hurt, and their willingness to engage in the tax equity market may be reduced. Without those players present in the market it becomes much more difficult for project developers to access the financing.”

Loeb put it more bluntly: “We may have a quote unquote tax credit, but nobody has a tax liability anymore. So there is no opportunity to continue construction.”

Direct payments, renewables groups have argued, would sidestep that problem while also providing immediate cash flow to developers. 

The idea isn’t unprecedented: under the 1603 Program that was part of the 2009 economic stimulus package passed by Congress, developers could also opt to receive direct payments instead of tax credits.

“There was a similar situation in that the banks that provide tax equity were not seeing projects and were not interested in providing financing,” said Tom Kiernan, CEO of the American Wind Energy Association. “The 1603 Program provided that liquidity.”

What now?

The most recent push for federal aid may have failed, but many renewables advocates said they are confident the measures will be considered again in later rounds of assistance.

“Everything I hear is that this isn’t the last package,” said Tolbert. “So it’s not as dire as some folks may try to paint the picture.”

Both Loeb and Tolbert said that on a state level, the declaration of renewables development as an essential industry could provide some relief by allowing work to continue even as states order all residents to stay at home. Washington State has already done so, as have Massachusetts and Oklahoma, among others. 

In the longer term, advocates argue, measures to encourage the continued development of renewables could not only aid the industry but provide a major spur to Virginia’s economy at a time when Secretary of Finance Aubrey Layne has projected annual $1 billion revenue losses over the next two budget years.

Renewable energy “is one of the fastest-growing sectors of the economy that we have,” said Tolbert. “Frankly, launching an industry in the U.S. at a time to come out of an economic recession or, God forbid, an economic depression is a good thing.” 

Some of the groundwork has already been laid. Wind developers have been closely eyeing the state, and especially the Hampton Roads region, as a promising place to develop a U.S. supply chain for offshore wind. Solar jobs have also been growing apace: according to data from the Solar Foundation, Virginia saw such jobs increase 15 percent between 2018 and 2019, putting the state seventh in the nation for growth. 

“There isn’t a single legislative district on the state level in Virginia that doesn’t have a solar installation in it,” said Loeb. 

Those assets, and the government commitment to the renewables transition outlined in the VCEA, may help the industry weather the storm in Virginia.

“While we are concerned for the near-term health of the industry given the disruptions caused by the public health situation, we don’t see this affecting the long-term ability of Virginia to achieve its storage targets,” said Jason Burwen, vice president of policy for the Energy Storage Association.

Offshore wind buildouts, too, are still several years in the future, said Kiernan and Hensley. And energy efficiency and solar rooftop installations that could reduce electric bills may prove even more attractive to customers looking at tighter budgets, particularly cash-strapped local governments and school districts, Tolbert pointed out.

“Localities have been making those investments because it’s more cost-effective for them to meet their energy demand,” he said. “Those economics don’t change.”