On May 30, A Word About Wind held its first annual Financing Wind New York conference.  Tickets to the conference sold out and the attendees were generally wind pros with considerable experience.  The panelists provided many useful insights regarding the wind industry.

Below are soundbites from the conference.  They are organized by topic, rather than chronologically, and were prepared without the benefit of a transcript or a recording.

Offshore Wind

“Right now, globally there is 18 GW of offshore wind.”  — North American Leader, European Based Offshore Wind Developer

“Expecting 20 to 30 GW of offshore wind by 2030.  So that means a couple of gigawatts a year of offshore wind.”   — North American Leader, European Based Offshore Wind Developer

“Offshore wind can be very close to the load centers, 20 to 30 miles away from where people are actually using the electricity.  That makes offshore wind easier than onshore wind, which is now facing transmission challenges to get their power to where people actually use it.” — North American Leader, European Based Offshore Wind Developer

“The European model has been to have the local utility build out to the offshore wind.  In the US, the trend appears to be wind generators are responsible for getting their wind to shore.  I expect wind developers will end up paying for the grid connection.  There is a discrete set of permitting and risks building that connection 30 miles out in the water to the project.” – President, Transmission Developer

“Energy is politically driven, so having manufacturing facilities set up here in the US is very important.”   — North American Leader, European Based Offshore Wind Developer

“Energy policy is very much driven by the states.  However, the federal government under Trump has been supportive of offshore wind.  The Trump administration has taken on board streamlining the offshore wind permitting process and has been supportive of new offshore wind leases.”  — North American Leader, European Based Offshore Wind Developer Continue Reading Financing Wind New York Soundbites

In a recent case, the Tax Court ruled in the taxpayer’s favor as to three California distributed generation solar projects’ eligibility for the energy credit under Section 48 and bonus depreciation under Section 168.  However, the Tax Court did reduce the taxpayer’s basis in the projects, and the taxpayer in the case enjoyed significant procedural advantages due to mistakes by the IRS.

In Golan v. Commissioner, T.C. Memo. 2018-76 (June 5, 2018), in late 2010 a solar contractor installed solar equipment on the roofs of three host properties and entered into power purchase agreements (“PPAs”) with the property owners.  The PPAs provided that the hosts would purchase electricity generated by the solar equipment at a discount to utility rates, while the solar contractor would retain the ownership of the equipment, including the right to any tax or other financial benefits, and would service and repair the equipment.

Mr. Golan, the taxpayer, in 2011 purchased the solar equipment, subject to the PPAs, from the solar contractor for a purported purchase price of $300,000, which was the sum of a purported $90,000 down payment, a $57,750 credit for certain rebates, and a $152,250 promissory note (which the taxpayer was the obligor under but the taxpayer also provided a personal guarantee thereof).  The solar projects were not connected to the grid until after the taxpayer acquired them in 2011.  The IRS unsuccessfully sought to disallow the taxpayer from taking energy credit and depreciation deduction with respect to the solar equipment. Continue Reading Tax Court Sustains Energy Credit and Bonus Depreciation for Distributed Generation Solar Projects

Below are soundbites from panelists at Infocast’s Solar Power Finance & Investment Summit from March 19th to 22nd in Carlsbad, CA.  It was an extremely well-attended event and the mood of the participants was generally upbeat.  Many people observed that there was more capital for projects under development or to buy operating portfolios than there was such supply of projects available to meet that demand.

The soundbites are edited for clarity and are organized by topic, rather than in chronological order.  They were prepared without the benefit of a transcript or recording.

Impact of Tax Reform on the Tax Equity Market

Impact of the Corporate Tax Rate Reduction on the Supply of Tax Equity, Yields and the Capital Stack

“This year we can do $9 million in tax credits; before we could do $15 million.”  [The implication is that a 21 percent federal corporate tax rate is 40 percent less than a 35 percent corporate tax rate, so the tax appetite has declined by 40 percent.]  Vice President, Industrial Bank

“The [supply side of the] tax equity market has declined by 40 percent; some tax equity investors are taking a pause.”  Vice President, Regional Bank

“Our bank this year is slightly below the billion dollars of tax equity it originated last year for its own book.” Vice President, Midwestern Bank

Some “mainstream tax equity investors have taken a pause [from investing] to figure out what the 21 percent corporate tax rate means for them.  It is an investors’ market, but we nervously see a sponsors’ market ahead.”  Managing Director, Financial Advisory Firm

Traditionally, rates for tax equity have been a function of supply and demand, but now we are seeing real pressure on rates.”  Managing Director, Money Center Bank

[It is difficult to jibe this banker’s quote regarding pressure on tax equity rates with the quotes above regarding the supply of the tax equity market being smaller due to tax reform.  Possibly, tax equity investors are agreeing to share some of the yield detriment of the depreciation being less valuable and that has resulted in reduced after-tax yields.]

“Some utilities that had tax appetite no longer have tax appetite and need to raise tax equity for their projects.”  Director, Money Center Bank

“We are trying to get back to the same all-in return where we were before tax reform.”  [As the depreciation is less valuable at a 21 percent tax rate than it was at a 35 percent tax rate, this means either (i) contributing less for the same 99 percent allocation of the investment tax credit or (ii) contributing the same amount and requiring a distribution of a larger share of the cash.]  Vice President, Midwestern Bank

“Tax reform helped us because it means tax equity contributes less to the project, so it makes our loan product more necessary.” General Manager Renewable Energy Finance, Small Business Bank

“The debt market has come in and is filling the decline in tax equity.” Executive Director, Manufacturing Corporation

“The buyouts of [tax equity investors’ post-flip interests] are more valuable because of the lower tax rate.”  Partner, Big 4 Firm

“We see sponsors’ financial returns over a 35-year project life increase due to the tax rate reduction.”  ” Managing Director, Structuring Advisory Firm Continue Reading Infocast’s 2018 Solar Power Finance & Investment Summit Soundbites

In a recently released private letter ruling (available here), the IRS confirmed that residential solar energy batteries are eligible for the tax credit under Section 25D of the Code (the “Residential Solar Credit”), subject to an important and unexpected caveat.

In Priv. Ltr. Rul. 2018-03-009 (Mar. 2, 2018) (the “PLR”), the taxpayers had previously installed a solar energy system on their home and claimed the Residential Solar Credit.  The taxpayers were now purchasing a battery to integrate into their existing solar energy system.  The battery was designed such that charging would only occur when the solar energy system was producing energy and only up to the instantaneous solar power, thereby ensuring that all energy that was used to charge the battery would come from the solar energy system. The remaining useful life of the solar energy system was expected to exceed the useful life of the battery.  The taxpayers posed two questions to the IRS: (1) Is the battery a type of property that is eligible for the Residential Solar Credit and, if so, (2) will the battery remain eligible for the Residential Solar Credit even though it was installed subsequent to the year in which the solar energy system was installed. Continue Reading Residential Solar Storage is Eligible for Tax Credit, Subject to a 100% Cliff

Pratt’s Energy Law Report has published our article 2018 and Onward: The Impact of Tax Reform on the Renewable Energy Market. We are pleased to be able to make a PDF version of the article available.  (The article starts on page 6 of the PDF).

The Bipartisan Budget Act of 2018 (H.R. 1892) (the “Act”) was enacted on February 9, 2018.  The Act is a two-year budget agreement that includes a number of provisions extending lapsed renewable energy-related tax credits; however, the Act does not change the amount or timing of the tax credits for utility scale wind or for solar.

The Act retroactively renews the tax credits for the so-called orphaned technologies that were left out of the 2015 extension for wind and solar, but for some of the orphaned technologies the tax credits are only available for projects that started construction prior to 2018; thus, limiting the tax planning opportunities, while rewarding bold developers that started construction in 2017 while the credits were lapsed.

Excise tax matters and energy related tax credits for homes, buildings, vehicles, nuclear power plants, Indian coal, biodiesel and biofuel are beyond the scope of this blog post. Continue Reading Bipartisan Budget Act Partially Reinstates Orphaned Energy Tax Credits

The Equipment Leasing and Finance Association has published our article The Impact of Tax Reform: What Leasing Companies Need to Know (subscription required).  We are also pleased to be able to make the article available in PDF format.  The article addresses equipment leasing generally, rather than being renewables or tax credit focused.

A Word About Wind has published our article What Is the Impact of Tax Reform on US Wind Tax Equity Deals? in its blog (subscription required) and newsletter.  If you are unable to open the blog post, the text of the article is available below:

On 22 December 2017, President Trump signed the first major reform of the United States tax code since 1986. Here are some of the ramifications of the reforms on wind tax equity transactions.

Corporate Tax Rate Reduced to 21%

In 2018, the corporate tax rate has been reduced from 35% to 21%. The rate reduction means that US corporations will pay significantly less federal income tax, so the supply of tax equity will decline. However, most tax equity investors are expected to still pay enough tax to merit making tax equity investments.

Importantly, the rate reduction means sponsors of wind projects will be able to raise less tax equity as depreciation deductions are worth only $.21 per dollar of deduction rather than $.35 per dollar.

100% Bonus Depreciation

A partial mitigant to tax rate reduction is that the act provides the option of claiming 100% bonus depreciation (i.e. expensing), so depreciation deductions can be available in the first year (rather than over multiple years). However, the partnership tax accounting rules hamper the efficient use of 100% bonus depreciation. Continue Reading What Is the Impact of Tax Reform on US Wind Tax Equity Deals?

On December 22, 2017, the president signed the tax reform bill.  It is generally identical to the conference committee bill discussed in our blog post of December 19, and specifically there were no changes with respect to renewable energy, corporate income taxes, partnerships or expensing.  Therefore, our analysis of the conference committee bill holds true for the enacted bill.

The changes that were made to the bill were minor and were required by the Senate’s parliamentarian to comply with the “Byrd rule” in order for the bill to be passed with only a simple majority of the votes in the Senate.  First, the parliamentarian objected to the “short title” of the bill being “Tax Cuts and Jobs Act.”  The enacted bill does not have a “short title”, so it is being colloquially referred to as the act formerly known as the Tax Cuts and Jobs Act.  The parliamentarian’s other two objections related to aspects of the new tax on large endowments of colleges and universities and changes to the section 529 tuition reimbursement account program.

I suspect that as the act is studied by tax professionals that traps for the unwary, unexpected planning opportunities and technical glitches will be identified.  To the extent they relate to the renewable energy industry, they will be covered in this blog.