December 4, 2017

Tax Law Changes Could Chill Solar, Wind Investments

Tax equity has become a critical part of the capital stack for solar and wind projects in the US, effectively letting large corporations shrink their tax bills by providing cheap capital for new renewable energy projects developed by third parties.

But the tax reform package weaving its way through Congress could shrink the appetites of those investors. And that would leave developers and project sponsors assuming more of the cost -- and risk -- to build up the nation's renewable energy capacity in the coming years. Leaders in the industry say those changes could slow the growth of renewable energy nationwide.

To be sure, there are many moving parts in the tax bill before the Senate, and what could come out of a conference committee may bear little resemblance to either that bill or the version the House approved earlier this month. But one significant constant in both proposals is a call for corporate tax rates to step down to 20% from 35%, meaning corporations would have less need to make tax equity investments in renewable projects.

Furthermore, the structures of the programs that open the door for tax equity investors could change. Most solar projects qualify for the investment tax credit ((ITC), which represents a rebate for the cost of building a project, while wind projects can alternatively qualify for the production tax credit (PTC), which, as the name implies, is a credit for the electricity produced. The Senate leaves the rates for both untouched, while the House bill would slash the PTC from 2.4 cents per kWh to 1.5 cents per kWh. The house bill also fully phases out the ITC for utility and commercial projects after 2027. Those proposed changes would particularly affect projects beginning construction after 2020, according to an analysis of the bill by advisory firm Orrick.

Financing for projects already under way or close to beginning could also be threatened, as some project investors prepared for the possibility of reduced tax credits and lower tax rates by putting protective language in deal documents that would allow them to change terms, according to two sector advisers.

David Eisenbud, head of solar M&A for Current powered by GE, said during a panel at the recent Clean Energy Means Business Corporate Summit in Denver that the company has "hundreds of millions of dollars" in tax equity to invest in renewable energy projects, even if the tax rates change. But he said the money needs to be deployed in ways that maximize the tax benefits for GE. Recently, that has meant writing deals that make the investments work regardless of the tax landscape.

Eisenbud did not describe how Current’s recent deals have been structured, but the two sector advisers described language they have seen in other companies' deals. In the most extreme cases, tax equity investors have built deals that would allow them to pull out of projects if the investment tax credit is so much as threatened with elimination by a congressional committee. More common have been structures that require less up-front capital from tax equity investors, building around assumptions that corporate tax rates will drop and they would have less incentive to need writeoffs through tax equity investments. The project sponsors bear more of the risk, though the structures often allow tax equity investors to put in money later if expected changes did not materialize.

"If tax equity investors were paying attention, they prepared for this," said one sector adviser. "We're going to have some serious uncertainty for a while."

The second sector adviser said there are around 50 regular tax equity investors in the market, typically larger financial institutions such as HSBC, JPMorgan and US Bank. Regional banks and insurance companies such as Allianz have also begun moving into the space, providing tax equity for projects smaller than the utility-scale installations that attract the most money.

That adviser added that utilities will still have a large tax burden and may become significant tax equity investors if the traditional sources dry up, providing capital so developers and sponsors of projects such as Enel Green Power, Cypress Creek and Apex Clean Energy can keep advancing.

The second adviser also said the PTC stands a good chance of surviving unscathed from a conference, pointing to a report by the American Wind Energy Association that highlighted that the vast majority of wind capacity is going into states that voted for President Trump.

"It's not just a blue state thing," the second sector adviser said of wind power. "And do you really think every GOP senator up for re-election in 2018 would vote for a package that would kill jobs in their states? Peel three of them off and it's dead," the adviser said, noting how many GOP votes could derail the bill if all Democratic senators were to vote against it.

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