This is the moment when the public sector proponents of renewable clean energy must prove their mettle. The organizations, both in and out of government, that have been set up to promote market-based action support for cleaner technologies now have access to American Recovery and Reinvestment Act ("ARRA") funds.

The challenge is to best use these funds -- set up a sturdy scaffolding that will support private commercial operations which validate the use of new technologies and the wise use of Federal funds. That is what will be left after the temporary ARRA tide goes out.

It comes in at the state level through several discrete statutory pipes. Consequently, to use its funds effectively, state implementers of ARRA should seek to broadly construe project eligibility definitions, to combine incentives flexibly, and to use financial engineering to maximize use of available Federal funds. Here's how states and NGOs can do that.

The initial round of decisions regarding application of ARRA funds to renewables will necessarily, to a large degree, be made at the Federal level. Key landmarks will be the forthcoming rules on the highly-leverageable Temporary Loan Guarantee Program (e.g., definition of the role of private financial project sponsors in implementation), and on the innovative tax provision which permits conversion of the available project PTC/ITC credits into cash grants, (e.g., explanation of the statutorily authorized grant claw back). Policies will also have to be forged with respect to renewables regarding the terms of availability of the $2.5 billion RDD&D grants to renewables' development, and the rules related to issuance of several types of tax-credit-benefited debt, such as Clean Renewable Energy Bonds (CREBs), for the benefit of co-ops, public power, and non-profit electric utilities.

Some of these Federal funds, designated for state and local use or otherwise, fit into state and local governance schemes for renewables development. $3.1 billion is to have been appropriated to State Energy Funds for commercial renewables as such; an even greater amount is available for energy efficiency and related programs. To maximize application of these funds optimally it is necessary for states and state-level NGOs to examine both: (i) what assets are eligible for financing, and (ii) how ARRA funds' use can be optimized, in terms of number of renewable projects, speed of fund disbursement, future project performance capability, and contribution to green industry development.

It may seem at first blush that these questions are all resolvable by reference to applicable statutory guidelines of the state funding bodies and specially organized state NGO funds. ARRA Section 410 provides that the "Additional State Energy Grants" are meant to supplement the grants under the applicable provisions of the Energy Policy & Conservation Act of 2003, i.e., they may be made available for a wide range of applications in the Plans to be submitted and approved by DoE.

The Additional State Energy Grants also are subject to receipt by DoE of specified gubernatorial "assurances" that relate to state consideration of utility recovery of necessary investments for programs encouraging consumer efficiency, state implementation of building code revision and code compliance within eight years, and an overall requirement that states prioritize the use of State Energy Grants for funding energy efficiency and renewable energy "including" both state energy efficiency programs and the expansion of existing state deployment activities and programs already in place to support renewables.

The ARRA appropriation which funds this additional State Energy Grant provision is part of ARRA's large "Energy Efficiency & Renewable Energy" provision, which is broken down into State Energy Plan Funds and Energy Efficiency & Block Grants ($3.2 billion), funding the provisions of the Energy Independence and Security Act of 2007 (which encompasses reduction of energy use by eligible governmental entities, and contemplates improvement of energy efficiency in all sectors); $5 billion for weatherization funding; and $2 billion for an advanced battery program. This guidance is elaborated upon by applicable state statutory provisions and the terms of the state programs themselves, specifying the types of activities undertaken.

So, at the state level, we have renewable energy and energy efficiency, two merely fraternal twins separated at birth, and struggling for state parental understanding and attention.

Rigidity in interpretation of applicable statutory language to the detriment of renewables' development may result in failure to take cognizance of the flexibilities stated or implicit in ARRA. A good starting point for making this type of "flexibility stress" analysis is closer examination of the temporary loan guarantee provisions of the ARRA Loan Guarantee Program (Section 406). As will become even more apparent after regulations finally are issued, the Temporary Loan Guarantee Program provision may be applied in a flexible manner. The forthcoming grant in lieu of ITC regulations should modestly reinforce the point further.

Renewables (along with transmission and biofuel) are, of course, the major beneficiary of the ARRA Loan Guarantee Program (Section 406). It is not a program which, by its explicit terms, equips State and Special State Funds with greater authority. However, that program does point the way (by example) to the integration of ARRA incentives into financings which involve certain aspects of leveraged public-private partnerships which may be emulated in its application at the state level. Flexibility is contemplated in the ARRA loan guarantee provisions for permitting leveraging the public share of projects with private funds. Specifically permissible is private utilization of combinations of Federal loan guarantees with the 30 percent PTC/ITC grant benefits afforded private developers of renewables. Federal grants may also be leveraged with eligible state incentive programs or with proceeds of state tax exempt finance. These are major reasons why interest in public-private partnerships has blossomed.

Finally, while not organized as revolving funds or keyed to other repayment mechanisms, ARRA contains no proscriptions against their use in that type of funding arrangement and additionally is at pains to protect outlays from the public funds on either loan guarantees or grants, presumably in part to enhance the possibilities of the further revolution of the use of the appropriate credit.

Constructive imagination also is called for in interpretation of statutory definitions, given the dynamic changes in technology in and surrounding the renewable energy industry. This is critical because, in concept and practical application, renewables and energy efficiency are beginning to converge. Some room is also left in ARRA for the confluence of renewable energy and energy efficiency activities. The substitution of energy systems using renewables flanged up either with efficiency facilities or with the concurrent use of some equipment and appliances which either come under the rubbery rubric of efficiency or even under the very broad definition of "smart grid" facilities (for which $4.5 billion in matching Federal grants have been put aside) This creative synthesis is a strategy which some utilities are beginning to prove out. It is also one pursued by some energy service companies. Energy service companies and their customers generally think of combining energy efficiency device usage with, for example, solar energy. There is also increasing cutting edge exploration of the convergence of renewables (like wind and solar, frequently remote from load centers), with the advancing field of storage. FERC has recently endorsed these concepts in its "smart grid" rulemaking.

In sum, when state governmental and NGO energy project funders set out to take advantage of the ARRA "DREAM" window to foster renewables, they face some inherent problems. Renewables, unlike energy efficiency, generally require subsidies -- which are predominantly Federal -- to private developers. Renewables are technologically more cost effective in overall contexts, where energy efficiency applications are present (or at least playing an ancillary role). More, and arguably more sustainable, renewables will be financed if the financing structure incorporates private leverage. Moreover, by definition, if managed properly, funding arrangements which reflect some "revolving" characteristics will produce a larger volume of projects which, if managed properly, will be more sustainable as well.

But, in fact, state governments, and NGOs seeking to utilize ARRA in that manner are, to some extent, faced with the statutory stovepipes delivering the ARRA stimulus funds to them. These pipes are specifically functionally defined, and the organizational forms which respond to alleged functional lines are correspondingly somewhat. While the optimal technical configuration of many energy project developments is a hybrid, and the optimal financing model is a leveraged public-private partnership financed using revolving funds, the tools available to achieve these goals will only work optimally with the type of innovative approach described earlier. DoE is now actively working to make ARRA more flexible in that way.

If, despite ARRA, clean energy should fail to gain ground against traditional energy sources, it could be because, while traditional energy sources provided by integrated industries with sophisticated capital structures, are not impaired. as clean energy is, to an extent, by ARRA's piecemeal implementation approach to finances and self-imposed limitation on state and NGO flexibility in renewables financing. This would be ironic and unfortunate. The statutory pipes which deliver ARRA funds to the states must not be allowed to become cramped stovepipes which do not serve to produce the green jobs which ARRA intended.

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