Finding New Ways to Cash In on Renewables

Corporate investors that traditionally were awarded hefty tax breaks for wind and solar financing will have to rethink their plans after credits ce...
Kathy HoffelderJune 5, 2012

As longstanding renewable-energy credits expire starting this year, companies that have taken advantage of those hefty tax breaks will have to consider new alternatives to fill the void.

Wind-project developers or solar-facility owners typically have tax-equity partnerships with large-company investors such as Google or Chevron, where both sides benefit: the developers get necessary capital and the investors get the big tax write-offs.

Corporate investors in wind, solar, geothermal, and bioenergy projects are still eligible for the production tax credit (PTC), which provides a 2.2 cents per kilowatt hour income-tax credit for up to the first 10 years a facility is open. Similarly, the investment tax credit gives investors a one-time tax break of 30% on their investment or a cash payment from the Treasury Department.

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But that’s all going to change. The PTC for wind projects, which allows companies to exchange the credits for cash based on production levels, is set to expire at the end of 2012, while the geothermal and other bioenergy PTCs will remain until the end of 2013. Solar tax credits expire in 2016. The 1603 grant, named after Section 1603 of the American Recovery and Reinvestment Act of 2009, is also phasing out.

The uncertainty surrounding the renewable-project market after the tax credits expire is already affecting project development, though some participants are hopeful of an 11th-hour save by Congress extending the credits. Until now, as the programs’ expiration dates near, lawmakers have tended to extend them for no more than one or two years.

Only $3.6 billion in tax-equity financing will be available for renewable-energy projects in 2012, while the demand for renewable-energy project financing in 2011 was $7.5 billion, according to an American Council On Renewable Energy survey last year.

“That source of capital that is helping the industry grow is going to slow down if those incentives are not there,” says Brent Stahl, principal and partner at law firm Stahl, Bernal & Davies.

In fact, that’s already happening, as only those projects already under way are still receiving the tax credits. “Right now we are very busy, because people started construction last year and they are all rushing to get their projects done by the end of this year,” says Mark Regante, a partner at Milbank, Tweed, Hadley & McCloy. And, he cautions, “if you have a [large wind] project that hasn’t already started construction, you are not going to get it built by the end of this year, so new projects are basically stalled.”

Investors have been particularly lured to the projects in the past few years, when the tax savings increased dramatically. “The cash-on-cash return that a firm is paying a tax-equity investor may be 3%, but in substance the tax-equity investor is earning a very high return because it’s using these tax attributes to shelter or reduce the tax burden on [its] other income,” says Regante. “In the case of accelerated depreciation deductions, the benefit is like an interest-free loan from the government.”

Before the recession, investors in solar facilities were earning 6% to 8% aftertax internal rate of return, and now they can earn more than 10% IRR on the renewable deals. With the tax credits expiring, however, other potential alternatives for soundly investing in renewable projects could catch on. For example, says Stahl, interested parties have started to discuss a master limited partnership as a financing vehicle, similar to pipeline businesses.

The concept would be a first for the renewables sector. “There’s hope and discussion out there that maybe at worst some of the things that are available in other energy sectors will become available even if some of the production tax credits no longer are,” he says.

Also, some already-existing tax-equity structures could draw new interest. Sale-leaseback structures, where the developer sells the project to the investor, could prove useful for short-term-horizon investors. And inverted-lease structures, which let the investor actually lease the project from the developer, could also become more popular, say market participants.

Similarly, accelerated-depreciation federal-tax incentives, such as for solar-project investments over a five-year period, are not expiring yet and could be more appealing with the traditional credits going away, notes Stahl. So far, relatively few companies have taken advantage of them.

Interest does vary by market, however. The wind sector may need more investor support, but the solar industry can stand more on its own because of its retail appeal, says Milbank’s Regante. There are more tax-equity investors in the solar market now than a year ago, he says, and developers are finding ways to get their projects financed.