This article seeks to give some historical and current perspective on government and private sector activity in renewable energy in the United States, and concludes with an outlook.

Government policy for renewable energy started in the late-1960s. Many people have forgotten that the Ford Foundation funded a three-year national energy policy study that was managed by one of the great pioneers of eco-friendly generation, S. David Freeman, who is presently Deputy Mayor of Los Angeles. The study concluded that the US, for its own best interests, must pursue a strategy centred on both energy efficiency plus solar and hydroelectric energy generation.

Then came the oil embargo of 1973, the Presidential calls for energy independence, and a flurry of policies and programs for new and clean energy throughout the 1970s. One of the most powerful new laws was the Public Utility Regulatory Policies Act (PURPA) of 1978, which ordered the utilities to buy the electricity from non-utility generators (NUGs) that built Qualifying Facilities (QFs) which used alternative energy sources or cogenerated electricity and steam, sold the power at a price equal to the utility's Avoided Cost, and were not more than 49 per cent – owned by utility companies. PURPA led to the creation of the initial NUG industry that has swept the world.

Progress on new technologies like renewable energy, synthetic fuels and advanced nuclear were all set back in the 1980s, first as the Reagan Administration slashed government research and development budgets in 1981, and then as oil and natural gas prices declined in 1985-1986.

Title 12 of the Energy Policy Act (EPACT) of 1992 was entitled, ‘Independent Power’, but actually amended PURPA by eliminating the 49 per cent ownership rule and allowed almost any kind of power plant to be developed by NUGs. This opened the door to electric utility companies creating unregulated sister companies that acquired most of the truly independent power producers. This led to the industry structure we have today in which, for example, the largest owner of renewable energy power plants in the US today is NextEra Energy, the sister company of the regulated utility Florida Power and Light. Other examples include Constellation, sister company to Baltimore Gas and Electric, Mission Energy, sister to Southern California Edison, and others. This has now advanced to the development of holding companies that own regulated utilities and unregulated power generators; examples include NRG from the US, Iberdrola from Spain, and E.On from Germany, to name a few.

EPACT 1992 also contained the Production Tax Credit (PTC) for wind power. It is interesting that the PTC was not used until 1999 when the first state-level Renewable Portfolio Standard (RPS) was enacted by the State of Texas in the form of a commitment for 2,000 megawatts (MW) of wind power by 2009; this was actually built out by 2003. Texas is now the number one state for wind power generation.

From 2000–2010, over 30 states adopted some form of an RPS ordering utilities to generate a certain percentage of their energy from renewable sources by a certain date (i.e., 20 per cent by 2020). Pretty soon it became obvious that wind power would take nearly all of the opportunity, and over 15 states have adopted solar carve-outs and other rules to create balanced portfolios.

Meanwhile, the battle for policy stability continued in Washington DC, where the Federal Government prefers tax incentives. The PTC was allowed to expire three times, creating ups and downs in the market, and the solar business was lobbying for a return to the 30 per cent investment tax credit that it enjoyed in the 1980s. All this came together in the economic crisis of 2007–2008, and the Economic Recovery Act of 2008 included the wind PTC until 2012, the PTC for hydro, geothermal and biomass until 2013, and the 30 per cent investment tax credit (ITC) for solar until 2016.

Then came President Obama's presidential election and the work of his Transition Team to craft their climate and energy policy package in December 2008 and January 2009. By then, the economic crisis had intensified, and there was a call for a Stimulus Program. The Obama clean energy policy package, developed by the Transition Team, was assembled and went forward as the energy portion of the American Recovery and Reinvestment Act (ARRA) of 2009. As a result, renewables and efficiency got 100 per cent of the Stimulus Program, while oil, gas, coal and nuclear got nothing.

Today, the US is experiencing the other side of the Stimulus Program as parts of it end funding or expire:

• The Section 48C manufacturing tax credit has been allocated
• The ethanol 50 cents per gallon tax credit to blenders has expired, and it has been felt by consumers at the pump as a 5–10 cent per gallon price increase
• The Section 1705 Loan Guarantee program expired on 30 September 2001, hurting the future for Concentrating Solar Power (CSP) especially
• The Section 1603 Cash Grants (in lieu of the PTC and ITC) expired December 31, 2011, hurting all renewable power financing, as there is perhaps $US10–$12 billion of tax equity required in 2012 against perhaps $US3–$4 billion of tax equity capacity.

Looking ahead, the wind power PTC expires 31 December 2012, and the PTC for other renewable generators expires on 31 December 2013. This will have the effect of reducing the development of new projects in 2013 and 2014.

The solar ITC expires 31 December 2016, which seems like a long way out, and it is for the residential rooftop companies, but this is already having an impact on utility-scale photovoltaic (PV) and CSP development in 2012.

It seems that the new stressors on governments and their budgets is making it difficult to get the incentives renewed, which is causing market demand to decline and jobs to be lost.

Meanwhile there is a tremendous effort underway in the renewable energy industry and finance sector to develop and lobby for new policy regimes that require less ‘subsidy’ and more market stimulation and risk mitigation, to attract long-term debt capital to the renewable energy sector.

Renewable energy in the US is increasingly approaching ‘parity’ with conventional power sources, and so subsidies are becoming less powerful and risk mitigation is becoming more relevant to financiers – not immediately, but as one looks ahead 5–10 years.

In addition, the industry is working on new financing methods, or the adoption of methods that are presently used in other industries such as the Real Estate Investment Trust (REIT) and Master-Limited Partnership (MLP), and also the development of Project Bonds and Asset-Backed Securities (securitisation of solar loans and energy efficiency loans) to tap the debt of capital markets.

It is also worth noting that a shift in US renewable energy policy from a predominantly tax-based approach to a Feed-in Tariff (FiT) regime would likely have a profound impact on the industry. A FiT system would eliminate the need for tax equity, which complicates the financing of renewable energy projects and hinders merger and acquisition activity. Given the lobbying effort for renewables is heavily tax-focused, this type of shift is unlikely.

As the renewable energy industry continues to mature from a policy and financing perspective in the US and Europe, there is still room for exciting growth in some areas such as PV in the US. China has a strong, policy-driven market for renewables including wind, solar water heating, large hydro, and small hydro – solar PV demand is just beginning now – plus batteries, electric vehicles, high-voltage DC transmission, and nuclear power. India and Brazil have multi billion-dollar renewable energy markets that are growing rapidly. Finally, new policy is being adopted in markets such as Australia, South Africa, Brazil, India, Saudi Arabia, and other countries. Therefore, the US is not alone in its complex policy support for renewables, and in its struggle to advance policy in just the right way.

Climate change advocates argue for stronger and more stable policy commitments for renewables, and conventional energy forces continue to defend the status quo and/or argue in favour of more oil and gas drilling, a renaissance for nuclear power, and continued pursuit of clean coal technologies. Meanwhile, utility-load growth is flat for the next few years, natural gas prices are low and forecast to remain low, and interest rates are at historic lows. It is no longer a question of yes or no about renewable energy in the US. It is a big business that is here to stay. The questions from here forward are how much will be invested each year, who will emerge as the dominant players, and how will development be financed?

Renewable energy policy has been developing in the US for over 35 years. It is complex and deeply rooted, and shall continue, undoubtedly with pros and cons for renewable energy and for its conventional competitors. Stay tuned - this drama is not over.

Michael Eckhart is the founding President of the American Council on Renewable Energy and the Managing Director and Head of Environmental Finance at Citigroup. He is also the Co-Chairman of the World Council for Renewable Energy, and an Observer to the International Renewable Energy Agency.

Mr Eckhart was assisted in the preparation of this article by Gregory Kantrowitz, Associate in Citigroup’s Institutional Clients Group, and Lauren Burns, Analyst, Client Analytics at Citigroup.