How to Provide More Certainty in Financing Biomass Power Projects

Having spent the last 2 days meeting with developers and biomass industry executives at the 2011 International Biomass Conference & Expo in St. Louis, I seemed to hear the same story over and over again: financing the construction of a biomass project is difficult without long term certainty regarding the availability of the current trio of federal tax incentives: the investment tax credit (the "ITC"), the federal grant in lieu of the investment tax credit (referred to as the "1603 Grant") and the production tax credit (the "PTC").

These incentives are excellent tools to help finance power plant construction.  However, the problem with these current federal tax incentives is that they are available only if a power plant is placed in service within a certain timeframe.  Although Congress has in the past extended the deadline for qualifying for these incentives, these extensions have typically been for only one or two years at a time.  Given how long it takes to permit and construct a power plant, many biomass power plants under consideration might not be operational before the current incentives expire.  Any such risk would understandably spook a lender or investor in the biomass project.

For the biomass industry, this uncertainty has not only stifled the development of power plants, but also has stifled the development of the feedstock supply sector (thus exacerbating the difficulties in developing biomass power plants).  Biomass power plant developers often complain that the difficulty in securing a dependable feedstock supply is a barrier to developing such power plants.  Simultaneously, potential feedstock suppliers complain that they can't develop a feedstock supply sector because they can't depend on enough biomass power plants being built to purchase their product.  Coupled with the current low cost of natural gas (an alternative to biomass-derived power), this financing uncertainty has created a strong headwind to biomass power development. 

One solution would be for Congress to make these federal incentives open-ended programs without deadlines.  A precedent for this solution can be found in the federal low-income housing tax credit, which does not have an expiration date, and has thus been a remarkably effective tool over the last few decades to spur the construction of low-income housing.  A middle-ground (at least from a Congressional budget perspective) would be to give these federal incentives a long deadline (e.g., 5 years) to help provide time to develop the feedstock infrastructure.  Although either solution would be expensive at a time when Congress is searching for budget cuts, it would better align federal spending with the oft-stated goal of reducing our reliance on fossil fuels.