David Feldman and Paul Schwabe of the National Renewable Energy Laboratory (NREL) have published their annual solar PV financing report: Terms, Trends, and Insights on PV Project Finance in the United States, 2018. I am pleased to have been invited to comment on a draft of the report and find the final version to
We were pleased to participate in Power Finance & Risk’s (PFR) Tax Equity Roundtable. We were joined in the roundtable discussion by Rich Dovere of C2 Energy Capital, Marshal Salant of Citi, Kathyrn Rasmussen of Capital Dynamics Clean Energy and Infrastructure, Pedro Almeida of EDP Renewables North America and as moderator PFR’s editor, Richard Metcalf. …
Mayer Brown’s David K. Burton and Jeffrey G. Davis both Tax Transactions & Consulting partners and part of the firm’s Renewable Energy group co-hosted a heavily attended webinar on how tax reform is impacting the tax equity market and certain renewable energy structures with Vadim Ovchinnikov, CFA, CPA and Gintaras Sadauskas of Alfa Energy Advisors.…
I was a panelist at an event held at Mayer Brown’s New York office addressing Environmental, Social and Governance (“ESG”) investing on October 4. On the panel, I addressed the tax benefits associated with certain ESG investments, with a focus on Qualified Opportunity Zone Funds and solar investment tax credits (ITC). Here are the slides…
Please join Mayer Brown and Alfa Energy Advisors for a webinar. The webinar will address how tax reform is impacting the tax equity market and certain structures in particular. Additional topics include:
- The latest industry trends
- New bonus depreciation rules and their impact on tax equity transactions and modeling
- Compressed financing margins for wind and
Below are soundbites from panelists from the Renewable Energy Finance Forum (“REFF”) Wall Street on June 19 and 20. The mood was upbeat. There were many references to a “wall of cash chasing projects” as a metaphor for how competitive it is to win bids to finance or purchase projects.
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.
The topics covered include the tax equity, debt and M&A markets, C&I solar, offshore wind, bonus depreciation, storage, YieldCos and others.
Tax Equity Market
“Solar tax equity is 30 to 38 percent of the capital stack of a project. Wind tax equity is 47 to 62 percent of the capital stack of a project.” – Managing Director, Boutique Investment Bank
“We are seeing a lot more wind. We are using our tax equity capacity in wind in 2018. Solar is looking good for 2019 and beyond.” Managing Director, Trust Company
“This year we will invest more in wind than in solar.” – Managing Director, Money Center Bank
“We are seeing tax equity portfolios that are seasoned trade in a secondary market. [Generally These are tax equity portfolios] that haven’t flipped on time or that [have the benefit of material cash distributions] but not tax” credits. – Managing Director, American Multinational Financial Services Company
“There is more tax equity now than there was before tax reform.” Managing Director, REIT
“2018 is a slow down due to tax reform and tariffs.” Managing Director, National Bank
“There is a lot less tax equity capacity due to the lower tax rate.” – Managing Director, American Multi-National Investment Bank
[Explained: there may be more tax equity investors in the market than last year; however, last year the corporate tax rate was 35 percent, and this year it is 21 percent, so a typical tax equity investor has 40 percent less tax appetite (and ability to invest in tax equity) in 2018 than it did in 2017.]
“If you are in BEAT [(i.e., the base erosion anti-avoidance tax in enacted as part of 2018 tax reform)], you cannot compete in tax equity. A couple of investors were hit with BEAT and exited.” – Managing Director, American Multi-National Investment Bank
“We get ten requests for tax equity a week and say ‘yes’ to less than one a week. We have to prioritize opportunities.” – Managing Director, American Multi-National Investment Bank…
Continue Reading Renewable Energy Finance Forum Wall Street Soundbites: the Tax Equity, Debt and M&A Markets, etc.
We have published our Legal Update on the Federal Circuit’s opinion in the Alta Wind case involving the calculation of eligible basis for 1603 Treasury cash grant purposes. The 1603 Treasury cash grant rules “mimic” the investment tax credit (ITC) rules, so the case has implications for ITC transactions being structured and end executed today. …
A Word About Wind has published my article about offshore wind in the United States as part of its Legal Power List 2018 special report. The article discusses how offshore wind projects, such as Vineyard Wind, have certain advantages over onshore wind, particularly with respect to tax credits for storage. Here is a link to…
Many developers of renewable energy projects have experienced higher than expected transaction costs. There can be a wide range of reasons for such overages. One all-too-common reason is project documents that cause tax tensions. These tax tensions lead to more lawyer time, which leads to higher transactions costs. Thus, developers concerned about transaction costs should negotiate “tax-friendly” project documents to streamline the tax equity investor’s diligence process.
Project documents are typically presented by the developer to the tax equity investor’s counsel in executed form. Counsel then reviews these to ensure consistency with the tax analysis of the transaction and for other issues. When counsel identifies an apparent glitch, she typically tries to rationalize or mitigate it without requesting an amendment to the project document in question. That analysis can take some time. If she cannot find another solution, she will propose an amendment. It takes time to prepare the amendment and often more time to persuade the applicable counter-party to sign it. That request can then lead the counter-party to propose alternative language and a time-consuming (i.e., expensive) back and forth process.
Below is a list of tax issues for developers to keep in mind as they negotiate project documents. The list is intended to provide trail markers for the most direct path for developers who would like to streamline the tax diligence process (and the associated costs) for their project documents. The list is not intended to be all-inclusive. Further, the list is not to suggest that missing one or more of these is necessarily fatal to the tax analysis because (i) there are often multiple paths to reach the desired tax outcome and (ii) some of these are best practices, rather than fatal flaws. Below is generally intended for wind or ground mounted solar projects, as roof-mounted solar is a somewhat different animal.
There are typically five “project documents” (i) the power purchase agreement (“PPA”) or other revenue contract; (ii) the site lease or other right (which is sometimes combined with the power purchase agreement) to use the ground or roof on which the project is constructed; (iii) the interconnecting agreement that enables the project to transmit its power to the grid; (iv) the operations and maintenance agreement; and (v) the construction contract.…
Continue Reading Lower Transaction Costs with Tax-Friendly Project Documents
On June 22, 2018, the IRS released Notice 2018-59 (the “Guidance”). The Guidance provides rules to determine when construction begins with respect to investment tax credit (“ITC”) eligible property, such as solar projects. The Guidance was much awaited by the solar industry because the date upon which construction begins governs the determination of the percentage level of the ITC, which is ratcheted down for projects that begin construction after 2019.
In addition to applying to solar and (fiber-optic solar), the Guidance applies to the following energy generation technologies: geothermal, fuel cell, microturbine, combined heat and power and small wind.
Overview of Beginning of Construction
The ITC percentage for a solar project is determined based on the year in which construction of the project begins, provided the solar project is also placed in service before January 1, 2024, as follows: (i) before January 1, 2020, 30%, (ii) in 2020, 26%, (iii) in 2021, 22% and (iv) any time thereafter (regardless of the year in which the solar project is placed in service), 10%.
The Guidance is quite similar to existing guidance for utility scale wind projects. The utility scale wind guidance is discussed in our 2016 Update. As expected and consistent with the wind guidance, the Guidance provides two means for establishing the beginning of construction of a solar project (and other ITC technology projects): (i) engaging in significant physical work either directly or by contract the “Physical Work Method”) or (ii) paying or incurring (depending on the taxpayer’s method of accounting) five percent of the ultimate tax basis of the project (the “Five Percent Method”). As is the case with wind, the Guidance provides that the IRS will apply strict scrutiny of the facts and circumstances to determine if the project was continuously constructed from the deemed beginning of construction date through the date the project is placed in service.
Four Year Placed-in-Service Window
The wind guidance provides a four year window for the project to be completed and to avoid the scrutiny as to whether the construction was continuous. There had been speculation that the window for solar (or at least some classes of solar) would be shorter because the time to construct solar projects (especially rooftop solar) is generally shorter than the time to construct a wind project. In what is a relief to the solar industry, the Guidance provides solar, and the other ITC technologies, a four year window as well. …
Continue Reading Beginning of Construction Guidance for Solar and Other ITC Technologies