New Energy Finance Paper Discusses Tax Equity

by Akin Gump Strauss Hauer & Feld LLP
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America’s Power Plan describes itself as a “toolkit” for policymakers.  The information that constitutes the toolkit is available here.  Its energy finance paper was just published.  The paper is available here.  Below are key quotations about tax equity and tax policy.

  • Today’s electricity markets do not adequately compensate investors for the value provided by two critical services in a high renewables future – avoided pollution and system-wide grid flexibility services.
  • At present, compensation for pollution reduction benefits is primarily addressed by federal tax incentives (including production and investment tax credits) and indirectly through state renewable portfolio standards. The tax incentives also compensate investors for bearing risks associated with the scale-up and deployment of a new technology. They have played a critical role in enabling the scale-up of renewable technologies across the country. Along with global technology improvements and economies of scale, they have helped to drive steep cost reductions over the last few years, making wind and solar increasingly competitive. Many investors expect that with sustained policy to drive continued deployment and cost reductions, wind and solar generation will be cost competitive with traditional fossil fuel resources without federal support by the end of this decade.
  • Increasing [economics] rewards [for renewable energy] through temporary tax incentives creates additional risk associated with uncertainty regarding the future of the policy, and leads to financing barriers associated with the relatively small market of investors who can use them.
  • Financing for renewable generation relies on tax equity – investors who have enough tax liability to make use of federal tax incentives. However, in part due to the lack of political certainty associated with temporary renewable tax incentives, only 20 tax equity investors actively finance renewable projects in the U.S. today. The transactions are generally bilateral agreements that do not have as much transparency on prices or conditions as larger public debt or equity markets. Further, IRS rules require five years of continuous ownership to “vest” the investment tax credit, which restricts the liquidity of these investments.
  • The additional costs of bringing tax equity into a project consume some value of the tax incentives available to a project. The government can get a better “bang for its buck” by instead offering taxable cash or refundable incentives, as described by the Climate Policy Initiative and the Bipartisan Policy Center.
  • To provide investors with more certainty …, these tax credits should be extended for a significant length of time, rather than being allowed to expire every few years.
  • Though important to the success of renewable energy development, private equity is both expensive and relatively rare. Independent power producers would benefit from having better access to public markets as well. One way to do this would be by allowing renewables companies to organize as MLPs or REITs, both of which are currently off-limits to clean energy. These instruments are publicly traded and have a tax benefit, since MLPs don’t pay corporate taxes and REIT dividends are tax-deductible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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