Below are soundbites from panelists who spoke at Infocast’s Wind Finance & Investment Summit on February 6 and 7 in Carlsbad, CA.  The attendance at the event appeared strong, and the mood was generally optimistic.

Despite the title of the conference being wind, many of the panelists touched on solar and storage, so readers who do not work in the wind industry may nonetheless find some points of interest below.

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.

Topics covered below include the tax equity market, the 2020 soft deadline for the full production tax credit (“PTC”), the impact of the PTC phase out, PG&E’s bankruptcy, storage and more.

State of the Tax Equity Market

“There was $12 billion of combined wind and solar tax equity investment in 2018.  This up from $10 billion of tax equity investment in 2017; however, the actual new volume was down in 2018 as $3 billion of the $12 billion in 2018 was secondary market transactions” (i.e., one tax equity investor selling down to another tax equity investor).  Managing Director, Money Center Bank

“Tax equity has done well in terms of how it has worked out for the banks that invested in it.”  Tax Equity Head, Corporate Investor Continue Reading Infocast’s Wind Finance & Investment Summit Soundbites

Here’s a presentation that Joseph Sebik, CPA of Siemens Financial Services and I gave to the Energy Subcommittee of the Equipment Leasing and Finance Association on January 22: Tax Equity Energy Subcommittee 1-22-19 of ELFA.

Despite being to a leasing trade association, the focus of the presentation is the partnership flip structure.  The presentation includes appendices on the phase down of tax credits for solar and the phase out of tax credits for wind; the “start of construction” rules; and hypothetical liquidation at book value (HLBV).

I am pleased to announce that I will be speaking in an upcoming Strafford live webinar, “Tax Reform and Renewable Energy: Planning Techniques, 100% Expensing, BEAT, Tax Credits and Interest Deduction Limitations” scheduled for Wednesday, January 16, 1:00 pm-2:30 pm Eastern.

As a reader of this blog, you are eligible to attend this program at half off. As long as you use the links below.

Our panel will review the application and impact of tax reform on the renewable energy sector. The panel will discuss new tax law changes impacting renewable energy and provide planning strategies to optimize tax benefits, credits, deductions and avoid pitfalls.

After our presentations, we will engage in a live question and answer session with participants so we can answer your questions about these important issues directly.

I hope you’ll join us.

For more information or to register >

Or call 1-800-926-7926
Ask for Tax Reform and Renewable Energy on 1/16/2019
Mention code: ZDFCA

Below are answers to questions we received during our tax equity webinar of October 23.  These questions were submitted online during the webinar.  The presentation from the webinar is available here.

Question: Commercial and industrial (C&I) has higher returns but how many projects raise tax equity versus other segments of the solar market? What about the transnational/legal costs?

Answer: On a per watt basis, transaction costs are certainly higher for C&I than for utility scale or residential.  This is because C&I lacks the standardization of documentation that exists in residential.  For instance, no residential customer is able to negotiate customized PPA terms.  In contrast, C&I customers tend to be large enough and sophisticated enough to insist on bespoke documentation.  Then the project documents for each 200 kW C&I project have to be reviewed during the tax equity investor or lender’s due diligence process and, unfortunately, it takes as long to read and analyze the project documents for a 200 kW C&I project as it does a 200 MW utility scale project.  This dynamic makes the C&I diligence process expensive.  Nonetheless, C&I developers and their financiers have been finding it to be an attractive segment of the market that provides lucrative returns.

In terms of how many C&I projects are successfully financed, that is difficult question to answer due to a lack of publicly available data.  The difference in this respect between C&I and utility scale would appear to be that a utility scale project is unlikely to even reach notice to proceed (NTP) (i.e., the commencement of construction) without committed tax equity; in contrast, C&I projects are small enough that some developers will start building certain C&I projects without committed tax equity financing with the plan to raise it prior to the placed in service date; however, there is the occasional C&I project that the developer places in service without tax equity and then ends up retaining the tax benefits for its own account.  (One strategy when this happens is to execute a sale-leaseback within three-months of the original placed in service date as in such a transaction the lessor can claim the investment tax credit (ITC).)

Question: Can someone expand a bit more on the post-tax credit world. Do they see lenders stepping up to fill the gap left by tax equity? Going forward, will US renewables look more like the traditional project finance market that we see in other parts of the world?

Answer:  First for solar, there is no post-tax credit world on the horizon.  That is because even after 2023 solar has a ten percent investment tax credit.  When the solar investment tax credit declines to ten percent, it seems likely that tax equity financings will continue unless projects are so profitable (i.e., the pricing of PPAs is relatively high versus the cost of modules and construction) that the projects can efficiently use the investment tax credit and depreciation deductions themselves.  If that is not the case, project sponsors will continue to look for tax equity investors.  However, what may change is that tax equity investors may have less influence in the tri-party negotiations among sponsors, lenders and tax equity investors, as tax equity investors will be funding a smaller portion of the capital stack.  Therefore, we may see a decline in back-leverage in favor of senior-secured loans.

For wind projects that “start construction” after 2019, there will not be any tax credits, absent a legislative extension.  Once the tax credits for wind are over, it appears likely that wind financing will shift to a sale-leaseback model.  There are two reasons for this shift: the efficient monetization of deprecation and the limitation on interest deductions that was enacted in tax reform last year.

Sale-leasebacks are the most efficient structure to monetize depreciation as the lessor is provided all of the depreciation (not 99 percent); there is no capital account constraint; and there is no partnership that has a short first tax year and a resulting haircut in deprecation (other than 100 percent bonus deprecation that is all deductible in the first year regardless of a short year).  There will still be 100 percent bonus depreciation until 2023 with the “bonus” percentage ratcheting down from 2023 to 2027.  Further, even without tax credit or bonus depreciation, the five-year MACRS depreciation that a wind project normally qualifies for is relatively accelerated.  For instance, rolling stock and commercial aircraft only qualify for seven-year MACRS depreciation and each of those industries have a history of tax-motivated sale-leasebacks.

Second, tax reform resulted in the expansion of Section 163(j) of the Code to limit how much interest can be deducted by taxpayers.  The full effect of this new law are still phasing in, so much of the pain is yet to come.  A discussion of the impact of tax reform’s limitation on interest deductions is available in the following blog post: https://www.taxequitytimes.com/wp-content/uploads/sites/15/2018/03/2018-and-Onward-The-Impact-of-Tax-Reform-Energy-Law-Report-tax-reform.pdf (pages 95 to 96).  However, the limitation does not apply to “rent.”  Thus, project owners are likely to opt for sale-leasebacks as all of the rent will be deductible, while interest payments may not be, and the lessor should factor the depreciation deduction it is entitled into the calculation of the rent payment, so that the lessee (i.e., the sponsor) sees the benefit of the lessor’s depreciation benefit in the form of lower rent payments.   A discussion of sale-leasebacks as a planning technique with respect to the is available in the following blog post https://www.taxequitytimes.com/wp-content/uploads/sites/15/2018/02/TaxReform_Article-for-ELFA_02162018.pdf which includes diagrams.

 Question: What is BEAT?

 BEAT stands for “base erosion anti-abuse tax.”  It was enacted as part of tax reform in 2017.  It is still being phased in.  A discussion of the implications of BEAT for the renewable energy industry is available in the following blog post  https://www.taxequitytimes.com/wp-content/uploads/sites/15/2018/03/2018-and-Onward-The-Impact-of-Tax-Reform-Energy-Law-Report-tax-reform.pdf (pages 92 to 93).  BEAT is intended to insure that multi-national corporations pay a minimum level of income tax in the US. BEAT has caused a handful of tax equity investors to either exit the tax equity market or shift to a strategy of “originate to syndicate.”  Fortunately, that slack has been picked up by new entrants who are attracted to the high returns available in tax equity transactions and the fact it is considered a socially responsible investment.

Question: Regarding the graphs on the last slide, a panelist mentioned during the call that the primary financial statement earnings from solar tax equity investment in the first year or two and driven largely by the ITC. The panelist noted that solar makes sense for a public company to make a tax equity investment in, if the public company is investing in renewables over the next 3-5 years? Would it be possible to elaborate on that?

Answer:  For a tax equity investor, the financial statement benefit of a solar tax equity investment is recognized mostly in the first year with some in the second year.  Therefore, a public corporation investing in solar one time would have a nice benefit in the first year that would not be reoccurring in subsequent years.  This could lead the Wall Street analysts that follow the corporation’s stock to ask why that earnings benefit could not be repeated, and generally Wall Street analysts place less value on a one time increase in earnings than something like a new product or strategy that will lead to higher earnings for years to come.  This dynamic can be avoided if the corporation invests in solar tax equity every year (e.g., from 2018 to 2023); however, for projects placed in service after 2023, only a ten percent ITC will be available, unless, the 30 percent ITC is extended legislatively, so then there would be a decrease in the financial statement benefit that is available.  That decrease could be addressed by a public corporation in 2024 investing a smaller dollar amount for each watt of solar but investing in many more watts (i.e., projects); however, that may be a difficult strategy to sustain over the long term.

Question: Is there any interest in tax equity investing in section 45Q carbon capture credits?

Answer: Section 45Q was first enacted in 2008 and was most recently amended by the Bipartisan Budget Act of 2018, P.L. 115-123 (Feb. 9, 2018).  Section 45Q now provides for a tax credit for each metric ton of qualified carbon oxide (i) sequestered (i.e., captured) by the taxpayer and (ii) (a) disposed of in secure geological storage, (b) used as a tertiary injectant in qualified enhanced oil or natural gas recovery project and disposed of  in secure geological storage or (c) used in certain other ways specified in section 45Q(f)(5).  There are formulas for calculating how much the tax credit is, but it varies from $12.83 to $50 per metric ton of sequestered carbon oxide.  Previously, section 45Q was unappealing to tax equity investors because after the EPA and the IRS determined that credits had been earned for the 75 million metric tons of captured carbon oxide the credit ended, so tax equity investors could not tell how long the credit would be available.  Thus, the credit was previously enjoyed mostly by the major oil companies who engaged in credit eligible activities in the ordinary course of business.  The 2018 amendment removed the cap on the tons of eligible captured carbon dioxide, so that obstacle to tax equity investment has been eliminated.  However, we have seen some discussion of section 45Q by tax equity investors but are not aware of any transactions that have been executed.  That could be because it is a technology and process that is neither familiar to tax equity investors nor that attracts much media attention.  Further, there are so many solar projects in need of tax equity financing, that tax equity investors may have little motivation to take a risk on something new.  That said it could be a highly lucrative area for a tax equity investor willing to invest the time in learning about it.  The credit is available for twelve years with respect to carbon oxide sequestered by each carbon oxide sequestration facility in the United States that captures carbon oxide; provided, the construction of such facility must begin construction prior to 2024 and on or after February 9, 2018.  Accordingly, this could be an area that attracts more attention from tax equity investors in future years.

Question: You mentioned the possibility of utilities rate basing wind projects using PTC.  How does a utility sponsor avoid the requirement that electricity be  “sold by the taxpayer to an unrelated person during the taxable year,” requirement under Section 45(A)(2)(B)?

Answer: The IRS, in Notice 2008-60, has stated: “Electricity . . . will be treated as sold to an unrelated person . . . if the ultimate purchaser of the electricity . . . is not related to the person that produces the electricity . . . .  The requirement of a sale to an unrelated person will be treated as satisfied in these circumstances if the producers sells the electricity . . . to a related person for resale by the related person to a person that is not related to the producer.”  The guidance was issued specifically to address the situation where a utility that owns an interest in a wind farm purchases the electricity from the wind farm, which it then sells to its customers.

Question: Do you expect the IRS to issue favorable guidance allowing a non-utility lessor to claim bonus depreciation for property leased to a utility lessee?

Answer: We are hopeful that IRS will issue favorable guidance because Congress knew how to reference other depreciation rules that limit the acceleration of depreciation deductions for lessors leasing to certain types of lessees and Congress did not make any effort to do that. If Congress wanted to exclude property leased to a utility from bonus depreciation, one would have thought that it would have provided some statutory text addressing how the rules would work, which it did not.  For instance, how much use (i.e., renting) by a utility would have to result in ineligibility for bonus depreciation.  If Hertz purchases a new car and leases it for one day to a utility, is it ineligible for bonus depreciation?  What about one week? One month?  Since Congress did not draw these lines, it appears that Congress did not intend to exclude property leased to utilities from eligibility for bonus depreciation, and given the many variations of leasing arrangements it would require considerable drafting from whole cloth for the IRS and Treasury to attempt to write regulations that limit bonus depreciation for property leased to utilities.  This issue is discussed in the article available at https://www.taxequitytimes.com/wp-content/uploads/sites/15/2018/02/TaxReform_Article-for-ELFA_02162018.pdf in the text associated with notes nine and ten.

Question: If a developer purchases equipment with the intention of satisfying the five percent start of construction safe harbor, is the developer allowed to subsequently contribute some or all of that equipment to a subsidiary and preserve the safe harbor?

Answer: According to section 4.02 of IRS Notice 2013-60, a developer may purchase equipment under a master contract with the intention of satisfying the five percent  safe harbor, subsequently assign its rights to such equipment to affiliated special purpose vehicles, and still take the costs of such equipment into account in determining whether the five percent safe harbor has been satisfied.  According to section 4.03 of IRS Notice 2014-46, if a developer transfers solely equipment to an unrelated person, the costs of such equipment incurred by the developer may not be taken into account in determining whether the five percent safe harbor has been satisfied.

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

Register Here >>

CLE credit is available.

Tuesday, October 23, 2018          

United States

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

Europe

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.