Each Treasury cash grant paid on renewable energy projects after January 2, 2013 will be subject to a haircut of 7.6%, according to a report the Office of Management and Budget sent Congress in mid-September.
The haircut will apply only if across-the-board spending cuts — called "sequestration" — occur as scheduled starting January 2.
There is talk in Congress about delaying the start of sequestration by at least six months to give Congress more time to work out a budget deal.
Congress and the Obama administration averted a default on US debts in August 2011 by agreeing to appointment of a "super" committee to try to agree on a plan to cut the US budget deficit by $1.2 trillion over nine years. The committee had until November 23, 2011 to do so. It failed in that task. This set in motion $984 million in automatic spending cuts spread ratably over nine years. The cuts start on January 2, 2013. The spending cuts are supposed to be split equally between defense and non-defense spending.
According to the Office of Management and Budget, this translates into an 8.2% cut next year in non-defense spending that is considered discretionary and 7.6% in such spending that is considered mandatory.
The Treasury cash grant program has been classified as "sequestrable" and mandatory.
There were questions when the sequestration bill passed Congress last year about how the spending cuts would apply to the grant program since the program has an open-ended appropriation and any remaining grants owed at this point are a reward for activity that already occurred on projects on which renewable energy companies started construction during the period 2009 through 2011. Congress exempted some other entitlement programs from the spending cuts, but Treasury cash grants were not on the list.
OMB said the calculations are preliminary.
The US is facing a "fiscal cliff" at year end when the Bush-era tax cuts expire and the automatic spending cuts take effect. Many economists argue that the US economy is still too weak to move so rapidly to an austerity policy. An informal bipartisan group of eight Senators is trying to come up with an agreed spending and tax plan to replace sequestration. Two former Treasury secretaries — Clinton Treasury Secretary Robert Rubin and Reagan Treasury Secretary James Baker — called on Congress last week to give itself another six months to work out a deal. The Republican-controlled House voted 223 to 196 to replace sequestration with a set of still-to-be-named recommendations from the White House. Rep. Chris van Hollen, a Democratic spokesman on budget issues, said last week that the issue is not whether, but how sequestration will be averted. However, House Speaker John Boehner said last week that he is pessimistic a deal can be worked out.
The potential haircuts may lead to a rush of applications this fall to try to receive grants before any haircuts apply.
However, final grant applications cannot be submitted until projects are in service.
The potential haircuts may also drive larger developers who are able to raise tax equity back to tax credits. In 2011, 53% of wind projects financed in the tax equity market chose production tax credits rather than cash grants.