The proxy revenue swap (PRS) is a burgeoning financial product that supports renewable energy projects that sell electrical energy into the wholesale electricity markets. The PRS is typically used by renewable energy project sponsors, financing parties, and investors that transact opposite a handful of insurance companies specializing in risk transfer. The goal of the PRS is to stabilize variable cash flows that beset renewable energy projects that operate within the wholesale electricity markets.
At its core, the PRS is a financially settled fixed-for-floating swap. However, the structure of the PRS and the risks it is intended to mitigate set it apart from more traditional energy-related hedges. For renewable energy projects that sell electrical energy into the wholesale electricity markets and take merchant price risk associated with those sales, the PRS provides revenue stabilization necessary to obtain project financing. In essence, the PRS tries to simulate the effects of contracted offtake (for example, a power purchase agreement) for the term of the PRS, which is typically equal to the term of the project financing.
This report examines the federal income taxation of the PRS as applied to renewable energy project owners and insurance companies or other hedge or swap providers, and it highlights areas in which the rules governing the taxation of financial products fall short in their application to the PRS.