Tax Equity News

Soundbites from Solar + Wind Finance and Investment Summit 2022

Posted by David Burton

April 14, 2022

Posted in Power Renewable energy Solar Wind Blog article


The inaugural Solar + Wind Finance and Investment Summit was held in Scottsdale, AZ from March 6 to 9. The conference was extremely well-attended, and much of the time it was difficult to pass through the hotel lobby due to all the people networking. 

Below are soundbites from various panel discussions. They are organized by topic, rather than chronologically. They are edited for clarity. 

The topics covered are:

This post is the first installment of soundbites from Infocast. A second post will cover topics such as offshore wind, transmission and the offtake market.

Tax Equity Market

“The tax equity market has doubled from US$10 billion in 2017 to US$20 billion in 2021. The split between wind and solar was 50/50.”

Money Center Bank, Managing Director

“Right now, there are haves and have nots with respect to tax equity.”

[Explanation: well-established sponsors can tap existing relationships with tax equity investors, while new entrants to the market can find it challenging to get the attention of tax equity investors. The new entrants have trouble getting attention because tax equity investors typically have more quality deals presented to them than they approval from their management to invest in.]

Renewable Energy Sponsor, Executive

“We’ve done multi-resource deals – wind and solar and even wind, solar and battery.”

Money Center Bank, Managing Director

“We are engaged in a handful of triple play projects – wind, solar and storage. Those are tough: you need high wind and high radiation, and you don’t want the turbines shading the solar.”

Independent Engineer

“The larger investors in the solar market typically do a yield based flip with a deficit restoration obligation” [to allow their capital account to go negative without having to reallocate losses to the managing member].

Boutique Financial Advisor, Managing Director

“For solar tax equity as a percentage of the project’s fair market value, think of the amount of the tax equity investor’s contribution as roughly the investment tax credit (ITC) plus 5%” (i.e., 35 percent (for a 30 percent ITC project) or 31 percent (for a 26 percent ITC project)). 

US Renewable Energy Sponsor Owned by a European Utility, Executive

“There is going to be a lot of competition for tax equity if the production tax credit (PTC) is not expanded to include solar and spread out the tax intensity.”

Corporate Conglomerate, Executive

“A lot of corporate are looking for ITC deals, not PTC deals, because their tax department cannot project tax appetite ten years in the future.”

[Explanation: The ITC accrues all in the first year, while the PTC accrues based on production of electricity for the project’s firsts ten years of operations. Both the ITC and the PTC can be carried forward twenty years.]

US Renewable Energy Sponsor Owned by a European Utility, Executive

Most of our sponsor clients seek tax equity commitments at notice to proceed (NTP) [(i.e., when the construction company starts work)], so they can raise a tax equity bridge loan; however, some of our sponsor clients with robust balance sheets are waiting until after NTP to raise tax equity. Some of those who waited are getting better tax equity terms now than if they had obtained a commitment at NTP.

Boutique Financial Advisor, Managing Director

“Sometimes tax equity [investors] add risks to the projects. Look at winter storm Uri in Texas, if it were not for tax equity most of those projects would not have entered into those hedges” that required payments for assumed capacity even when the projects could not physically dispatch electricity.

Investment Bank, Senior Managing Director

Corporates as Tax Equity Investors

The term “corporate” refers to tax equity investors that are not banks and insurance companies. Some corporates are motivated by the high after-tax returns available to tax equity investors, while some see tax equity as part of a policy to be carbon neutral. 

“We are welcoming corporates as tax equity investors, which is unusual to welcome a competitor, because there is such an imbalance between tax equity supply and demand.”

Money Center Bank, Managing Director

“We have seen corporates join the tax equity market. The issue with corporates is that they have had very specific needs to satisfy their ESG targets in terms of geography, technology, timing and the need for renewable energy certificates (RECs).”

[Explanation: many corporations have made it a priority to be carbon neutral. This requires them to acquire RECs for the electricity they use to allow them to say that their electricity comes from non-carbon sources. However, tax equity structures were not designed to provide the tax equity investor with RECs as usually the off-taker contracts to buy the RECs with the electricity.] 

Money Center Bank, Managing Director

“There are corporate who will do tax equity if they get the RECs, and then there are pure financial investor corporates who invest in tax equity through syndicators.”

Boutique Financial Advisor, Managing Director

“The corporates have previously dabbled in tax equity and then they left.”

Corporate Conglomerate, Executive

Tax Equity Market for Wind Projects

“Fewer wind PTC projects are being brought to market than solar ITC projects, so there is greater supply of tax equity for wind PTC projects.”

[Explanation: Under current law, if a wind project begins construction this year or later, it qualifies for no tax credit. If a wind project began construction in 2021 or 2020 it qualifies for 60 percent of the PTC (or ITC) or US$15 a MwH PTC (or an 18 percent ITC). For a wind project to qualify for a full tax credit, it would have had to have “begun construction” in 2016 or earlier.]

Boutique Financial Advisor, Managing Director

Sale-Leasebacks

“There are lots of sale leasebacks in solar; most of that is for distributed generation and community solar.”

Boutique Financial Advisor, Managing Director

Tax Risk Insurance

Tax risk insurance is becoming a common feature in tax equity deals. Some of tax issues that are often insured are (i) what year did the project begin construction for purposes of determining the level of tax credit it qualifies for, (ii) how much of the tax basis of an ITC project is eligible for the ITC and (iii) the risk of an ITC project during its first five years of operations being damaged and removed from service such that the ITC must be recaptured.

“Tax insurance premiums are between US$.02 and US$.03 on the dollar of insurance coverage for tax equity transactions.”

Insurance Broker, Senior Vice President

“The cost of tax risk insurance is at an all-time low for tax equity transactions. We will see if the Alta Wind or the Desert Sunlight case changes that.”

[Explanation: Alta Wind and Desert Sunlight are cases 1603 Treasury cash grant program that Congress created in 2009 and has now lapsed. The cases are relevant to transactions today because the 1603 Treasury cash grant program was supposed to “mimic” the ITC rules. After a brief honeymoon period, the Treasury started hair cutting payments to applicants due to Treasury’s view of the amount of eligible basis diverging from the what was applied for. Some of those applicants sued Treasury for the shortfall and that litigation is still in process. Those cases provide insight into areas of the ITC rules for which there is not other guidance. Here’s a link to a blog post about Desert Sunlight and a link to an article about Alta Wind.

Insurance Broker, Senior Vice President

“There are currently 17 US carriers writing tax insurance.”

Global Insurance Broker, Managing Director

“Insurers are willing to take some risk and rely on a more likely than not level of tax advice.”

Global Insurance Broker, Managing Director

“There can either be a single trigger or double trigger policy. A single trigger policy the insurer pays when there is a final determination of an IRS audit adjustment. A double trigger policy the insurer pays if there is a final determination and the sponsor fails to pay the indemnity. We have not seen lower premiums for double trigger policies, so most policies are single trigger.”

Insurance Broker, Senior Vice President

“We are not looking for tax insurance for risk mitigation. We are going to do our due diligence and get comfortable or not. If there is tax insurance behind it then fine, but it does not change our investment decision.”

[Explanation: sometimes sponsors purchase tax risk insurance for their own account to insure issues they have made representations to the tax equity investor with respect to.]

Money Center Bank, Managing Director

Tax Credits as Energy Policy

“Government incentives, like tax credits, with a little bit wrong with them is is better than nothing.”

[Explanation: What the speaker was referring to about being “a little bit wrong” with the tax credits is the limited number of taxpayers that can monetize them due to the passive activity loss rules that apply to individuals. Those rules effectively mean that only publicly traded corporations can efficiently use tax credits, and such corporations have a variety of tax planning strategies available to them.]

Boutique Investment Bank, Managing Director

“It would be great to be able to do what solar can do without incentives, but then you have to take away everyone else’s government incentives, including the monopoly of utilities.”

Boutique Investment Bank, Managing Director

Beginning of Construction Rules to Qualify for Tax Credits

Background: The level of tax credits a project qualifies for is determined based on when it began construction. There are two ways for a project to begin construction before the applicable tax credit deadline: (i) incur five percent of the ultimate total cost of the project or (ii) complete “significant physical work” on the project. The first one is known as the “five percent safe harbor” as it is mathematical, while the second one is known as the “physical work test” which has some subjectivity due to the need to determine what is “significant.”

The guidelines nominally require the project owner to pursue “continuous efforts,” which includes construction, but also tasks like signing project contracts and pursuing permits from the date construction “began” using the standard above through the placed in service date. Project owners do not have to actually pursue such continuous efforts, if the project is placed in service within the “continuity safe harbor” which is between four years and ten years depending on the particular circumstances as specified in IRS notice (e.g., offshore wind is given ten years due to how challenging it is to permit and build) as specified in IRS guidance.

“We have a preference for the five percent safe harbor, but we do physical work too. We have only done deals using the continuity safe harbor, rather than facts and circumstances.”

Money Center Bank, Managing Director

“We’ve insured the physical work test over 100 times.”

Global Insurance Broker, Managing Director

“We are going to see a shift towards physical work. We are expanding our pipeline to two gigawatts per year and to manage that we are going to need shift to physical work because the five percent safe harbor would be billions of dollars.”

US Renewable Energy Sponsor Owned by a European Utility, Executive

“I haven’t seen anyone raise tax equity with a project that is outside the ‘continuous efforts’ time period safe harbor.”

Corporate Conglomerate, Executive

“We’ve been able to insure ‘continuous efforts’ outside the time period safe harbor.”

Global Insurance Broker, Managing Director

Macroeconomic Factors and the Renewable Energy Market

“We’re seeing about a 20 percent price increase for components.”

Consulting Firm, Appraiser

“Most suppliers are sold out for 2022 and some are sold out for 2023.”

Energy Information Firm, Executive

“What does seven percent inflation look like if you run it through your model for a couple of years and you don’t have an inflation escalator in the power purchase agreement? A project with some merchant may be less risky than a project contracted for 20-years without an inflation escalator.”

Real Estate Investment Trust, Executive

“Many projects were delayed from 2021 to 2022.”

Boutique Financial Advisor, Managing Director

“From a trend perspective, we are seeing solar projects get big and bigger.”

Construction Company, Executive

“In terms of selecting markets and locations for development, there is no low hanging fruit in the US any more. You need to reach higher.”

Solar Module Manufacturer, Executive

“Is it good when the geography and permitting makes it easy to site a project or is it bad? When it is easy, less experienced developers drive up land prices and drive down PPA prices. So when permitting and geography are difficult if you have the skills to work through those issues you can create real value.”

Utility Scale Solar Developer, CEO

Battery Storage

“Storage is a hedge against negative energy prices.”

Boutique Investment Bank, Managing Director

“Stand-alone storage is going to be a long-term disaster for the grid with storage drawing power when electricity prices are low and dispatching when prices are high and straining the grid by making it operate at its maximum limits at those times. Developers need to work to pair storage with generation to avoid this potential disaster.”

Utility Scale Solar Developer, CEO

“ERCOT is ripe for massive deployment of storage.”

Solar Module Manufacturer, Executive

“We are seeing batteries combined with C&I solar in the Northeast, and batteries combined with utility scale solar on the West Coast.”

Independent Engineer

“We are seeing co-located solar and storage in Hawaii, Colorado and the Northeast. Hawaii’s grid cannot handle more generation during the day, so it needs battery storage to be able to move power to the peak demand hours.”

Independent Power Producer, Executive

“Every ISO and every geographic area is completely different as to the rules for co-located solar [and storage]. The rules for storage are localized within an ISO and even within a state.”

Solar Developer, Executive

“You can have a battery that will last two years given one use case and 20 years given another use case.”

Independent Engineer

“The main driver of co-located solar and storage is to take advantage of the investment tax credit, but we are seeing more and more need for storage as more intermittent sources come on-line. Utilities need to be able to shift when power is dispatched.”

Independent Power Producer, Executive

“Over time grid congestion is going to become more of an issue. The expansion of battery storage is going to change the way we think about pricing and price projections.”

Energy Information Firm, Executive

“Arbitrage is charge the battery when electricity prices are cheap and dispatch when electricity prices are high.”

Consulting Firm, Appraiser

“When looking at storage you have to decide if you are going to play the arbitrage side or the ancillary services side. That is a question that is market by market. In ERCOT, it is largely ancillary services.”

Energy Information Firm, Executive 

“If we overbuild storage, there is not going to be value for storage.”

Energy Information Firm, Executive

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Tax Equity News reports on issues where renewable energy meets tax policy in the United States.

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