Conditions are ideal for utility financing—but not forever. Although interest rates remain low, policy changes weigh on capital structures.
Renewable Spend & Tax (Credit)
For developers of renewable power projects, the regulatory landscape is always shifting. The American Recovery and Reinvestment Act of 2009, for example, added the option of a cash grant in lieu of an investment tax credit—a provision that was set to expire at the end of 2010, but that received an 11 th hour extension during the lame duck Congressional session. Keith Martin, a tax lawyer at Chadbourne & Parke who is co-head of the firm’s project finance group, describes why the cash grant was enacted, how long it will last, and its context in the current slate of tax incentives available to utilities.
GU: Why was the cash grant created, and how does it fit in with U.S. renewal incentive policies overall?
KM: There are two subsidies for renewable energy in the United States. They’re both provided through the tax code. One is a tax credit of some kind and the other is accelerated depreciation. The accelerated depreciation on most renewables is worth about 26 cents per dollar of capital cost in terms of the value the tax savings one gets from claiming it. The tax credit varies in value, but for most projects it’s a minimum of 30 cents per dollar capital cost.
The problem that most [non-utility] developers have is they don’t have enough tax base to use the tax subsidies, and so they have to enter into complicated tax equity transactions—essentially to barter the tax subsidies in exchange for capital to build their projects. [ EDITOR’S NOTE: In the video above, Martin tells Steven Andersen why utilities don’t face the same constraints that have kept many IPPs from financing renewable projects. ] There are 16 active tax equity investors in the current market, there are three structures in use. The market has largely recovered from its collapse in late 2008. After Lehman went bankrupt, the tax equity market largely disappeared. That’s one reason why in the 2009 economic stimulus bill, Congress directed the Treasury Department to pay owners of new renewable energy products that are completed in 2009 and 2010—or that start construction in those two years—30 percent of the project cost in cash, in exchange for which the developers would forgo any tax credit. They’d still be left with depreciation.
The tax equity market in 2010 came back pretty much to the same volume it had in 2007. But the cost of capital was much higher. Tax equity was running 270 to 400 basis points more than it cost developers in 2007. That’s a sign of a supply and demand imbalance compared to 2007. There’s just a lot more demand on the market than there has been increase in supply. This is pretty important to that market. Fortunately Congress extended [the cash grant] for another year in December, but when it goes away, and I think most people should assume it won’t be extended again, the tax equity market will have to double in size in order to cover the same volume of projects that it covered in the last year.
GU: So in all likelihood there won’t be another