The Stratton Report has published an interview with me that discusses the pending tax reform legislation: http://strattonreport.com/longforms/davidburtonmayerbrown/.
The US tax reform bill that the Senate passed on December 2, 2017—along partisan lines in a 51 to 49 vote—is a mixed bag for the tax equity market. The bill is now headed to the conference committee, consisting of House of Representative and Senate leaders, to be reconciled with the tax reform bill passed by the House on November 16.
Below we describe the five differences from the House bill that are of greatest significance to the renewable energy tax equity market. (See also our prior analysis of the ramifications for the tax equity market of the House bill.)
Amounts of and Eligibility for Tax Credits
First, the amount of renewable energy tax credits available and the rules for qualifying for those credits are unchanged from current law under the Senate bill. Specifically, the inflation adjustment that applies to production tax credits is left in place and the “start of construction” rules are unchanged. The fact that the Senate bill left these provision alone is positive for wind and solar, which are in the midst of a phase-out, for wind, and a phase-down, for solar.
However, the Senate bill also left alone the lapsed tax credits for the “orphaned” renewable energy technologies that were inadvertently omitted from the 2015 extension that benefited wind and solar. The orphaned renewable energy technologies are fuel cells, geothermal, biomass, combined heat and power, landfill gas, small wind, solar illumination, tidal power and incremental hydroelectric.
Proponents of those technologies may have more negative views of the Senate bill. There is still discussion of the tax credits for the orphaned technologies being included in an “extenders bill” to possibly be taken up after the tax reform process is over. Continue Reading Senate’s Tax Bill’s Impact on the Tax Equity Market: Five Differences from the House Bill
Mayer Brown has launched its US Tax Reform Roadmap. The Roadmap includes a timeline of legislative events related to the current tax reform efforts and links to the documents that were passed, approved or introduced on those dates as well as links to Mayer Brown’s analysis regarding pertinent documents. It should be useful to have all of the legislative documents, and Mayer Brown’s analysis thereof, in one place and organized chronologically.
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.
On Thursday, November 2, Republicans in the US House of Representatives released their proposed tax reform legislation, providing for massive alterations to tax law. The proposed legislation would trim tax benefits applicable to the wind and solar industries, while broadening the scope of the application of the “orphaned” energy tax credit. Further, it would eliminate the tax credit for electric vehicles starting in 2018. The proposed legislation is subject to further amendments and may not be enacted into final legislation.
Continuity of Construction. Pursuant to current law, the production tax credit (PTC) and investment tax credit (ITC) phase out over time, with the level of credit for which a renewable energy project qualifies being based on when the project began construction relative to various deadlines that determine the level of PTC or ITC. Under the proposed legislation, for any renewable energy project to qualify for a specific level of PTC or ITC, there would need to be continuous construction on such project from the deadline for the specific PTC or ITC level through the date the project is placed in service.
The concept of continuous construction does not exist in the current PTC and ITC provisions of the Tax Code. It was adopted by the IRS as an administrative matter in Notice 2013-29. However, the IRS later, under Notice 2016-31, created a safe harbor to enable projects to avoid application of the IRS’s “continuity” requirement. To qualify for the safe harbor, a project must be placed in service within four calendar years after the end of the calendar year in which construction began. The proposed legislation would effectively codify the continuity requirement and eliminate the safe harbor. Further, these changes appear to apply to all projects that have not been placed in service as of the date of enactment of the proposed legislation, regardless of whether construction of such projects began before enactment. Continue Reading GOP Tax Bill Proposes Changes to the Renewable Energy Industry’s Tax Incentives
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. Continue Reading Solar Industry Magazine Publishes – A Decade of Evolution In U.S. Project Financing
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
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. Continue Reading Solar Power International 2017 Soundbites
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.
• 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 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. Continue Reading NREL’s Wind Finance Report Highlights
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. Continue Reading DOE’s 2016 Wind Market Report – Tax Equity Highlights
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.
“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 Continue Reading WindPower 2017 Soundbites