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. The topics covered included tax equity structuring, tax reform, tax equity syndication and the challenges and opportunities associated with distributed generation solar. We are pleased to be able to make available to our readers PFR’s report: PFR Tax Equity.
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. Topics addressed, included: The latest industry trends such as, the feds raising interest rates; the increase in project M&A activity for both development and operating assets; plans for large offshore wind projects in several east coast states; changes in PPA’s and revenue models; compressed margins and why developers and investors are moving towards commercial and industrial (C&I) solar projects. Additional topics, included:
- New bonus depreciation rules and impact on tax equity transactions and modeling;
- Compressed financing margins for wind and solar;
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects; and,
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies.
Over 480 clients and contacts registered for the co-hosted webinar. Due to the volume of interest and post-presentation questions, we would like to share the slides from the presentation: webinar presentation.
We are reviewing and preparing responses to all of the questions that were submitted electronically during the webinar. We will be sharing those questions with our answers in a subsequent blog post.
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 solar
- Strategies for “starting construction” to qualify for the maximum investment tax credit and rules for transferring safe harbored equipment between wind projects
- An overview of HLBV GAAP accounting for tax equity investments as a challenge for public companies
CLE credit is available.
Tuesday, October 23, 2018
1:30 p.m. – 3:30 p.m. EDT
12:30 p.m. – 2:30 p.m. CDT
11:30 a.m. – 1:30 p.m. MDT
10:30 a.m. – 12:30 p.m. PDT
8:30 p.m. – 10:30 p.m. CEST
7:30 p.m. – 9:30 p.m. BST
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.
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 the special report; alternatively, if you are not a member of A Word About Wind, we are pleased to make the offshore wind article available.
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 safe harbors that provide wind developers with more certainty in determining the beginning-of-construction date of a project, which is relevant for determining the amount of the tax credit for wind production (“PTC”) for which a project may be eligible. The changes advocated for by Sen. Paul are intended, in his words, to be a “step toward a more competitive energy market” and reverse the “expansion of the [PTC] far beyond the text and intent of what Congress passed.”
The proposed changes include:
- Requiring a project to be placed in service within two years from the beginning of construction, rather than within the four-year window under the current guidance.
- Prohibiting a project from establishing an earlier beginning-of-construction date through the use of “safe harbor” turbines that were relocated or transferred to the project.
- Requiring continuous construction from the beginning-of-construction date until the project is placed in service.
- Requiring physical work to establish the beginning of construction that is “significantly beyond” beginning excavation for a foundation, setting anchor bolts into the ground, pouring concrete pads into the foundation or building onsite roads.
- Update the list of acceptable delays to the continuous construction requirement, perhaps by requiring an explicit waiver from Treasury.
- Prohibit wind energy from qualifying for the PTC if the energy is sold into the market at a negative value.
- Although we have no reason to think that any of these proposals will gain traction with Treasury, it is worth noting that at least one member of Congress has the PTC in his crosshairs.
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
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
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?