The second annual Solar + Wind Finance and Investment Summit was held in Phoenix from March 12 to 15. The venue moved from Scottsdale to Phoenix to accommodate the large number of attendees, reportedly 2,600 registrants, and the campus of the Biltmore Hotel had almost enough space for all of the scheduled and impromptu meetings.
Below are soundbites addressing tax issues from various panel discussions. They are organized by topic, rather than chronologically. They are edited for clarity. The topics addressed are:
- The State of the Tax Equity Market
- Prospects for Growing the Traditional Tax Equity Market
- Transferability
- ITC v. PTC
The State of the Tax Equity Market
“There was $18 to $19 billion of tax equity investment in 2022. It was spit 60 percent wind and 40 percent solar. The tax equity market was down from $20 billion 2021, which followed the decrease in new builds of wind and solar in 2022 from 2021.
Money Center Bank, Managing Director
“Now that solar qualifies for the production tax credit (PTC) and stand-alone batteries qualify for the investment tax credit (ITC), 2022 may be the last year these statistics are quoted by technology.”
Money Center Bank, Managing Director
“We are expecting in the next two years for the demand for tax equity to be two to 2.5 times what the market was in 2022.”
Corporate Conglomerate, Managing Director
“The renewables industry is at its most exciting time in the last 20 years.”
Western US Regional Bank, Head of Power & Project Finance
“The Inflation Reduction Act of 2022 (IRA) has created the greatest stimulus for renewables we have ever seen globally. It is a causing a big focus on the US market. We need to see new capital come into the market.”
Canadian CleanTech Company, CEO
“The tax equity market doubled from $10 billion in 2017 to $20 billion in 2021, so it doubled. But the traditional base of tax equity investors are maxed out.”
Money Center Bank, Managing Director
“Tax equity yield requirements are going up.”
Boutique Investment Bank, Founder
“Tax equity market is still a headwind for developers and still constrained. The IRA means there is going to need to be more tax equity, so that remains a constraining factor. How transferability plays out remains to be seen.”
Renewable Power Company, Chief Investment Officer
Prospects for Growing the Traditional Tax Equity Market
“Twenty billion or so is the maximum capacity the market will see from the base of traditional tax equity investors. The traditional tax equity investors are maxed out, so the path forward is transferability and new entrants.”
Corporate & Investment Bank, Head of Tax Equity
“One of the issues we have to be watching out for is regulatory capital, which can be a constraint on tax equity investments by financial institutions.”
American Multinational Financial Services Company, Managing Director
“There are things tempering potential growth. We had a pristine tax equity portfolio, but there have been some challenges. Transmission is a silent killer. We require a signed large generator interconnection agreement (LGIA) before committing to a deal. Then there’s negative pricing for selling power, basis risk in power purchase arrangements and curtailment. There are significant concerns in the property and casualty insurance arena. Hail insurance is front of mind for us. We had catastrophic damage to more than one solar project.”
Money Center Bank, Managing Director
“We are not the only users of the bank’s tax capacity.”
American Multinational Financial Services Company, Managing Director
“It becomes a multi-variable equation very quickly, when you look at the PTC deals in your portfolio and try to forecast what tax capacity they will need in future years.”
Money Center Bank, Managing Director
“We think investing in tax equity should be a measure of sustainability, just like renewable energy certificates (RECs) are.”
Corporate Conglomerate, Managing Director
Transferability
Background:
The IRA for the first time introduced “transferability” which is the ability to sell certain federal energy tax credits for cash. The IRA’s rules literally allow selling pursuant to a bill of sale, rather than a structured finance transaction using a partnership, lease or a combination thereof.
Transferability has no requirement that the buyer invest before the project is operational or that the buyer make an equity investment in the project. Rather, the credits merely need to be sold for cash before the seller and buyer each file their, respective, federal income tax returns for the year in which the tax credits accrued.
My colleague Gabriel Jacques prepared a table summarizing which tax credits qualify for transferability. Also, our Q&A on the IRA addressed certain transferability details.
The IRS has yet to publish its guidance on transferability to address questions like whether the buyer or seller suffer recapture if the project is destroyed or sold and to what extent individuals can purchase tax credits.
“We expect to see a surge in tax credit transfer market. My company thinks it can advise on a sale of a billion dollars of tax credits a year.”
Tax Credit Syndicator, Director
“I have one large client that wants to take advantage of transferability. We were asked how much we could advance as a bridge loan to transferability, and it came to about 65 percent of the anticipated transferability proceeds. In contrast, tax equity bridge loan advance rates are at 98 percent of the anticipated tax equity investment. Once the transferability guidance is out, I think the transferability bridge loan advance rates will be in the low 90s and then go up from there.”
Japanese Lender, Managing Director Americas Project Finance
“We are seeing a spectrum of prices. For instances, solar ITCs are selling for 90 to 92 cents on the dollar. Biogas ITCs are selling in the 80s cents on the dollar.”
Tax Equity Investor, Managing Director
“Transferability gives us the gift of time because the tax credit investor does not have to be in the deal at placed in service.”
National Bank, Business Development Officer
“Transferability is under different accounting treatment and different regulatory capital treatment, so transferability could have a different bucket of tax capacity. Sponsors should pursue that with their tax equity partners.”
American Multinational Financial Services Company, Managing Director
“The accounting for transferability is three journal entries; it is simpler than the accounting for tax equity partnerships.”
Tax Equity Investor, Managing Director
“I am excited about transferability. We are modeling how it will play out.”
Project Based Debt Financing Provider, Co-CEO
“Transferability is just an alternate structure. We are agnostic about structure. We run a rack and stack analysis and make a recommendation.”
Boutique Investment Bank, Founder
“Transferability may be suitable for risky projects, for instance projects with transmission issues.”
Money Center Bank, Managing Director
“Transferability opens the door for small deals.”
American Multinational Financial Services Company, Managing Director
“Now, we can run a downside scenario of transferability of selling the credit, if the sponsor cannot raise traditional tax equity. That scenario does not look that bleak.”
Specialty Finance Company, Senior Vice President
“We are using transferability to sell six year strips of PTCs. We are doing it for wind. We think it is a great opportunity and an alternative to tax equity PTC paygo structures,” [in which the tax equity investor contributes 25 percent of its capital as the PTCs are generated].
Tax Equity Investor, Managing Director
“Transferability is a cleaner capital stack with less moving parts than tax equity. If a sponsor forward sells the PTCs, it is going to be easier for the sponsor to sell the project or an equity interest in the project.”
Financial Advisory Boutique, Senior Managing Director
“Transferability brings to the table the ability of developers to try their own thing. You no longer have to listen to what the top four tax equity investors tell you about how to manage your project.”
Energy Transition Investment Firm, Partner
“Transferability allows some creative offtake solutions.”
European Bank, Managing Director
“We see both transferability and tax equity expanding.”
Tax Credit Syndicator, Director
“The further out in time a seller is looking for a forward commitment from a buyer to purchase tax credits the large the discount will be.”
Multi-State Bank, Managing Director
“You can’t re-sell tax credits purchased under transferability, but maybe you could do a series of options. The options could even be in the money because a transfer only occurs when the seller makes the election to transfer on its tax return.”
Boutique Investment Bank, Founder
“Regulated utilities are going to use transferability to avoid normalization of the ITC for ITC eligible projects on their balance sheet.” [Normalization is a requirement in the tax code that when a utility submits a ratemaking request to its regulator it must recognize the value of ITC over the regulatory life of the project. The benefit of tax depreciation must be shown over that life too.]
Financial Advisory Boutique, Senior Managing Director
“If the buyer is relying on the seller for a tax credit indemnity, the higher the seller’s credit rating the better the pricing should be.”
Multi-State Bank, Managing Director
“I am seeing developers using transferability to sell PTCs to corporates and then sell the RECs generated by the project to the same corporate.”
Energy Transition Investment Firm, Partner
“We should try to get as much tax equity into this market and then think about transferability. Transferability comes at a cost.”
Corporate Conglomerate, Managing Director
“A lot of corporates that have been on the sidelines because of complexity with ‘hypothetical liquidation at book value’ [technique of financial statement accounting] or not having project finance expertise, and transferability should help get them into the market.”
National Bank, Business Development Officer
“There are some concerns about whether the purchase of renewable energy tax credits should be viewed as an investment in renewable energy for ESG purposes because there the tax credit purchaser has no ownership in underlying the project.”
National Bank, Business Development Officer
“You don’t get an ESG benefit for just buying a REC because of a lack of additionality, so we don’t see transferability resulting in an ESG benefit. We are not a purchaser of tax credits. For now and the foreseeable future, we are a traditional tax equity investor.”
Multi-State Bank, Managing Director
“We are not a buyer under transferability, but we may be in the future.”
Corporate & Investment Bank, Head of Tax Equity
ITC v. PTC
Background:
Wind and solar projects have the choice of the PTC or the ITC. The base amount of the ITC is 30 percent of the eligible tax basis of the project. While the base amount of the PTC, for new projects, is $27.50 per megawatt hour generated and sold to unrelated parties over the first ten years. Project using either type of credit can qualify for various “adders” that can increase tax credit amounts significantly.
The policy advantage of the PTC is that the project owner receives the tax credit as the project generates clean electricity, so the interests of the project owner and the federal government are aligned. Further, the amount of the credit is objectively determined as it is merely $27.50 multiplied by the number of megawatts generated and sold during the year. The disadvantage of the PTC is that incentivizes project owners to sell electricity for negative prices to a point because even a negative sale generates $27.50 per megawatt hour; such economic behavior can make it less attractive for new projects to be built in the same market as the financiers of those projects will fear the prospect of negative electricity pricing.
The policy advantage of the ITC is that it fully accrues when the project is placed in service, so it more easily translates into investment in new projects. The disadvantage of the ITC is that it encourages neither more efficient nor lower cost projects. Further, there have been costly disputes between project owners and the federal government about how the ITC eligible tax basis is determined, which has an element of subjectivity to it.
“PTCs have been better from a return on investment perspective rather than the ITC. Also, the PTC is a less lumpy use of tax appetite.”
Money Center Bank, Managing Director
“An ITC tax equity investment translates to requiring $1 of tax capacity in the current year, while $1 of PTC tax equity investment translates to requiring only $.1 of tax capacity in the current year.”
American Multinational Financial Services Company, Managing Director
“If you look at the broader market and try to expand the universe of buyers, you will see more demand over time for PTCs because you can look at a meter and know how much the PTC is and there is no recapture.”
Financial Advisory Boutique, Senior Managing Director
“More than likely new solar projects in Texas and California will opt for the PTC. How is that going to work when you have existing ITC solar projects, that won’t sell power for zero negative prices, and new PTC solar projects that will sell power at zero or negative prices.”
Sustainable Energy Investment Firm, Country Head
“We used to only look for negative pricing in areas with wind projects; now, we need to anticipate negative pricing in areas with solar projects to.”
Energy Transition Investment Firm, Partner
“The PTC really eats into a financial institution’s ‘tier 1’ capital.”
Corporate & Investment Bank, Head of Tax Equity
“I think the proposal by the FASB to move from the ‘hypothetical liquidation at book value’ [technique of financial statement accounting] to the ‘proportional amortization’ [method] could cause some investors to prefer PTCs rather than ITCs.”
Corporate Conglomerate, Managing Director
“For an onshore wind deal, over 50 percent of the project’s after-tax internal rate of return comes from the PTC.”
Corporate Conglomerate, Managing Director