Structuring renewable energy projects that provide acceptable investment returns is often helped by using feed in tariffs in European and other markets, but tax equity vehicles are more common in the US. Tax equity arrangements can be structurally complicated and difficult to administer, but can also provide double-digit returns when done properly.
These were some of the issues discussed by an expert panel at the AGRION Energy Summit and Sustainability Meeting held this week in New York City. The production tax credit for wind projects – recently extended for one year after much controversy – and the investment tax credit for solar are two tax equity vehicles commonly used in the US to help finance projects.
Regulatory uncertainly has been a major complaint among renewable energy project developers and investors, who find it difficult to commit millions of dollars when there is a risk that policies will change during a project’s lifetime and jeopardize ROI. This remains a concern and limits the universe of active tax equity investors.
“There are about 15 to 20 active tax equity investors right now,” said Albert Luu, Vice President of Structured Finance at SolarCity. But there are fewer in reality because they each have very strict investment criteria, Luu said.
Finding an appropriate partner is the first step, said Matt Haskins, Partner at PricewaterhouseCoopers: but who are these partners if not banks?
While banks still play a large role, large developers are increasingly working with third party investors as well, said Jonathan Plowe, Managing Director of New Energy and Infrastructure Solutions at Bank of America. Educating treasuries and other non-traditional investors about tax equity arrangements is one of the challenges.
These investors often do not want to be tied to a project for the entire 15 to 20 year life of a power purchase agreement and structuring deals so these parties can exit after 5 or 6 years is perhaps more desirable said Luu.
Tax code reform is another considerable barrier to expanding the tax equity investor community. Insurance companies and high net worth investors cannot come in as tax equity investors due to the current tax code and they only play on the debt side right now, said Haskins.
Master Limited Partnerships, which have become popular in the oil and gas markets, would also require broader US tax code reform in order for them to play a similar role in the renewable energy space. “The advantage of an MLP is that it combines the tax benefits of a limited partnership (the partnership does not pay taxes from the profit – the money is only taxed when unitholders receive distributions) with the liquidity of a publicly traded company,” according to Investopedia.
“Tax equity is complicated, but the returns [10% – 14%] are unmatched,” Luu said.