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In a letter dated May 8, 2018, Senator Rand Paul (R-Ky.), in support of his state’s coal industry, urges the U.S. Department of Treasury (“Treasury”) to make significant changes to the existing “beginning of construction” guidance issued by the Internal Revenue Service (“IRS”) in a series of notices (“IRS Notices”).  The IRS Notices include industry-friendly…

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…
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The full text of the article is below or it is available at Solar Industry Magazine:

The solar industry has undergone a tremendous evolution in the course of the last decade. Below we outline some of the more notable developments, with a focus on project financing in the U.S.

In 2007, the largest solar photovoltaic project in the world was an 11 MW project in Portugal, called Serpa, that cost EUR 58 million to build. Today, the largest solar PV project in the world is Tengger Desert Solar Park in China and is 1,500 MW, or more than 100 times the capacity of Serpa, and the cost of building a solar project is a fraction of what it was a decade ago.

In 2007, manufacturers of thin-film solar and manufacturers of crystalline silicon solar were battling to see which would be the predominant technology. Today, there are more manufacturers of crystalline modules than thin film and more projects using crystalline modules than thin film; however, First Solar appears to have found success with rigid thin-film modules.

In 2007, terms like “resi,” “C&I,” “DG” and “community solar,” which are now ubiquitous in our industry, were unknown to most energy financiers.…
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Below are soundbites from panel discussions at Solar Power International in Las Vegas on September 11 and 12. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or recording.

The topics covered are: Tax Reform  • Tax Equity Volume and Investor Mix • Tax Equity Structuring • Deficit Restoration Obligation Structuring and Senior Secured Debt in Partnership Flips • FMV Valuation Issues and Insurance  • Community Solar • Community Choice Aggregators  • Power Purchase Agreements • Residential and Community Solar Markets • State Policy • Department of Defense Procurement

Tax Reform

ITC has already gone through tax reform and already has a transition rule in place. These arguments resonate pretty well with Republicans. — SEIA, Gov’t Relations

Anyone who tells you where we are now in this tax reform debate, is lying to you. — Boutique Investment Manager

Low likelihood of comprehensive tax reform in 2017. Chances for a tax cut are pretty good. Indemnification for a tax rate cut is built into these transactions. — Boutique Investment Manager

We are using a 25% corporate tax rate in most deals. The specifics depend on allocation of risk [of change in tax law] and [the financial strength of] the counterparty. We are more likely to put in less capital now and contribute more later if there is not a tax rate cut. — Commercial Bank, Head of Business Development Energy Investing

Not one size fits all. We use a 35% tax rate for 2017 and a lower rate for 2018 and beyond. In our deals, for federal tax rates we use between 25 and 30% [for 2018 and later]. If rate reduction doesn’t occur, we then fund more. It frightened me when Paul Ryan said he was aiming for a 22.5% tax rate. [This was before the Republican Big 6 released their proposal with a 20% corporate tax rate.] — Money Center Bank, Managing Director

We have very flexible solutions in place now to address tax rate reduction risk in deals. It is not the headache it was six months ago. — Boutique Accounting Firm, Director

Since corporations generally pay less than 35% in federal taxes now, and $1 of tax credit is $1 of tax credit, it remains to be seen what a lower rate really means [for the solar tax equity market]. — Boutique Investment Manager

The potential change in tax rate means the potential for a cash sweep, which means sponsors can raise less back leverage. — Commercial Bank, Head of Business Development Energy Investing.…
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The National Renewable Energy Laboratory (NREL), a federally-owned laboratory that is funded through the U.S. Department of Energy, recently released a report titled Wind Energy Finance in the United States: Current Practice and Opportunities. The report provides a thorough overview of the capital sources and financing structures commonly used in wind energy finance. Below are quotes from the report that are of particular interest to tax equity market participants. We applaud the authors for writing a comprehensive report on a topic that is extremely technical.  Also, below we include comments clarifying certain tax or legal concepts referenced in particular quotes.

Wind Expansion in 2016

• By the end of 2016, cumulative U.S. wind generation capacity stood at 82.2 gigawatts (GW), expanding by 8.7 GW from 2015 installations levels. Wind energy added the most utility-scale electricity generation capacity to the U.S. grid in 2015 and the second most in 2016. Project investment in wind in the United States has averaged $13.6 billion annually since 2006 with a cumulative investment total of $149 billion over this time period. The investment activity demonstrates the persistent appeal of wind energy and its significant role in the overall market for electricity generation in the United States.

Future Outlook

• Looking ahead, the near-term outlook for wind energy reported previously suggests a continued need for capital availability at levels consistent with deployment seen in 2015 and 2016. The market has shown the capacity to finance projects at this level using current mechanisms at economically viable rates; however, increased deployment could necessitate new sources of capital. Broad changes to the financial industry—such as the possibility of major corporate tax reform, the currently scheduled phase out of the PTC and ITC for wind, and, specifically, a change in the role of tax equity—could fundamentally reshape the predominant mechanism for wind energy investment. It is possible that financing practices may need to evolve, while the growing body of wind energy deployment and operational experiences could help to attract new market participants.

PTC and Accelerated Tax Depreciation

• The United States Federal Government incentivizes renewable energy projects principally through the tax code. As of this writing, wind technologies are eligible to receive either the production tax credit (PTC) or the investment tax credit (ITC) (one or the other, but not both) as well as accelerated depreciation tax offsets through the Modified Accelerated Cost Recovery System (MACRS).

The PTC

• The tax credit incentives (the PTC and ITC) provide an after-tax credit on tax liabilities (i.e., the taxes paid) and thus are often described as dollar-for-dollar tax incentives. As of this writing the PTC is currently worth $0.024 for every kWh generated over a 10-year period while the ITC is structured as a one-time credit valued at 30% of eligible system costs. For projects to claim the aforementioned full PTC or ITC values, however, the project is required to have begun construction prior to December 31, 2016. Projects that begin construction in 2017 through 2019 are available for a reduced-value PTC or ITC.…
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On July 11, 2017, the Connecticut General Assembly enacted H.B. 7208 (“Revised C-PACE Statute”) to make several minor changes to the existing statute governing the State’s commercial property assessed clean energy (or “C-PACE”) program.[1]  All of the changes are favorable.

Specifically, the Revised C-PACE Statute: (1) expands the program to include C-PACE financing for energy efficient new construction; (2) adds leases and power purchase agreements as permitted financing methods for third-party capital providers; (3) establishes the name “benefit assessment liens” for liens arising under the C-PACE program (referred to here as “Program Liens”) and specific provisions governing the operation of Program Liens (described below).  The bill repeals and replaces Section 16a-40g of the general statutes (the “Existing Statute”) effective as of October 1, 2017.

The most important change to the Existing Statute appears to be some minor wording changes to a section of the Existing Statute describing certain types of “energy improvements” permitted to be financed under the C-PACE program.   This category of qualifying “energy improvements” is described as including any renovation or retrofitting of qualifying property to reduce energy consumption.  The Revised C-Pace Statute adds the words “improvement” and “energy efficiency” such that the this category of financeable energy property is now described as “any improvement, renovation, or retrofitting to reduce energy consumption or improve energy efficiency. [2]

Under the Program Lien rules, there is a lien on the property for all amounts due and payable.  Noteworthy for creditors is that a property foreclosure to satisfy past payment obligations extinguishes the Property Lien only with respect to the payment obligations assessed through the foreclosure date.  The Program Lien continues to apply to the property with respect to any payments due to paid in the future. …
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Below is the text of an article we published in Law360 on September 14.  (The article is also available at Law360.)

On September 7, the Internal Revenue Service issued Revenue Procedure 2017-47 to provide a safe harbor for public utilities that inadvertently or unintentionally use a practice or procedure that is inconsistent with the so-called normalization rules. Before describing the revenue procedure, we first discuss the basics of normalization.

Normalization is an accounting system provided for by Treasury regulations that is used by regulated public utilities to reconcile the tax treatment of the investment tax credits (ITC) set forth in section 46 of the Internal Revenue Code of 1986 or accelerated depreciation of public utility assets under section 168 of the Code with their regulatory treatment.

Although the ITC generally was repealed with respect to “public utility property” (i.e., property that earns a regulated return set by a public utility commission (PUC) (which has different names in different states)) that was placed in service after 1985, normalization remains relevant with respect to the ITC due to the long economic useful lives of much public utility property. Thus, Revenue Procedure 2017-47 addresses the ITC, not because solar projects (or other renewable projects) that earn a regulated return would currently qualify for the ITC, but because public utility property up until 1985 qualified for the ITC and some of that property is still being used and included in utility rate-making calculations as described below.

Understanding normalization requires an understanding of certain fundamentals of rate-making for regulated utilities. As a general matter, a regulated utility is entitled to earn an after-tax return on its investments in its utility system. The PUC that regulates the utility then sets the rates paid by customers for the utility service (e.g., electricity) to allow the utility to earn that after-tax return on its investments. In setting those rates, the PUC must determine economic depreciation for the utility’s assets and “tax expense.”…
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The U.S. Department of Energy recently released its 2016 Wind Technologies Market Report (available here). The 94-page report provides an in-depth review of the current health and direction of the wind industry, replete with data, analysis and projections. Below are quotes from the report that are of particular interest to participants in tax equity transaction.

Tax Equity Economics in 2016

• [According to AWEA in U.S. Wind Industry Annual Market Report: Year Ending 2016], [t]he U.S. wind market raised more than $6 billion of new tax equity in 2016, on par with the two previous years. Debt finance increased slightly to $3.4 billion. Tax equity yields drifted slightly higher to just below 8% (in unlevered, after-tax terms), while the cost of term debt fell below 4% for much of the year, before rising back above that threshold towards the end of the year.
• According to AWEA [in U.S. Wind Industry Annual Market Report: Year Ending 2016], roughly $6.4 billion in third-party tax equity was committed in 2016 to finance 5,538 MW of new wind projects. This total dollar amount is slightly higher than, but largely on par with, the amount of tax equity raised in both 2014 and 2015. Partnership flip structures remained the dominant tax equity vehicle, with indicative tax equity yields drifting slightly higher in 2016, to just below 8% on an after-tax unlevered basis.…
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The American Wind Energy Association’s (AWEA) annual conference, WindPower, was held in Anaheim, California. Below are soundbites from panel discussions on May 24, 2017. The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity. Further, they are organized by topic, rather than appearing in the order in which they were said.

Each year WindPower seems to devote less space on its schedule to topics related to tax equity. This year there was only one panel that purported to address tax equity; it was a panel about tax reform.  It also appeared that there were fewer conference attendees who work in the tax equity space.

Tax Reform

“There’s lots of tax equity in the market today. Deals are getting done regardless of uncertainty [with respect to tax reform].” Managing Director of a Money Center Bank

“There’s so much tax equity capacity right now that should there be tax reform [with a reduction in the corporate tax rate] there should [still] be enough tax equity out there.” Managing Director of a Money Center Bank

“A lot of people are handicapping [tax reform] as rate reduction that is less severe than what’s in [any of the Republican] proposals.” Managing Director of a Money Center Bank

“Tax reform will have a negative net present value impact on projects’ economics. To maintain the same return level, sponsors will need to drive down costs or increase revenue. Revenues have been going down, but costs have been going down faster. If we can keep that up, [the wind industry] may be able to absorb the cost of a change in the corporate tax rate. Managing Director of a Money Center Bank

“The cost of tax law change will not be as high as some people have projected.” Managing Director of a Money Center Bank

“Our intelligence shows support [on Capitol Hill] for maintaining the PTC phase-out as it is today, but we don’t take that for granted.” SVP Federal Legislative Affairs of AWEA

“The general consensus among tax equity investors and sponsors is [any tax reform would include] minimal change to depreciation benefits and no change to the PTC phase-out.” Managing Director of a Money Center Bank

“For now, people are making [tax reform assumptions in financial models] and getting deals done, but that could change with more tax reform proposals. What the market wants is certainty.” Managing Director of a Money Center Bank…
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