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.

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.

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”).[1]  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.[2]

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

Today, the House voted 227 to 303 in favor of the tax reform bill agreed to by the conference committee.  No Democrats voted for the House bill, and 12 Republicans from high tax states voted against it.  The Senate is expected to vote later this evening to approve it; it is possible that the president could sign the bill as early as tomorrow.

The enacted legislation is expected to be identical to the bill approved by the conference committee.  Our analysis of the conference committee’s bill’s impact on the renewable energy market is below, which is followed by a chart that summarizes the relevant provisions in each of the three bills. Continue Reading House Passes Tax Reform & the Impact of Tax Reform on the Renewable Energy Market

Our article Proposed GOP Tax Reform Would Curtail Tax Incentives for Wind and Solar is available from North American WindPower (no subscription required).  The article includes a discussion of the politics of the Senate passing tax reform and a discussion of market implications; however, the discussion of the specific changes to the Internal Revenue Code is similar to our blog post GOP Tax Bill Proposes Changes to the Renewable Energy Industry’s Tax Incentives of November 4.