Amidst the current competition in the tax equity market space, developers are increasingly turning to preferred equity to support financing renewable projects.

The industry requires approximately USD 60bn in tax equity financing in 2026 to support projects, yet traditional tax equity investors are projected to provide only half of that, according to Crux’s recent State of Clean Energy and Clean Finance report.

Crux expects that the growing hybrid tax equity structure market and the transfer market will fill some of the gap between the USD 60 billion the industry needs and the USD 30-35 billion tax equity providers are able to provide.

However, with approximately 86GW of new capacity from projects in 2026, and just a small number of traditional tax equity players, not every project will be able to tap into the tax equity market, said Nimmi Kavasery, Arevon’s managing director of project finance, in an interview with NPM.

“It’s a pretty limited capital pool for tax equity, and here is where preferred equity can fill in,” she said.

Rising Costs

Preferred equity is defined differently by various project finance leaders, though it is generally defined as financing that sits between senior debt and common equity. Its use within projects has been growing over the last couple of years, especially as the cost of projects has risen, due to among other things, interconnection costs, tariffs, as well as the overall scope of the projects has increased as developers add storage components and/or pursue repowering opportunities for older onshore wind farms.

The wind industry in particular has seen a rise in project costs – Lazard’s 2025 cost of energy analysis, published in June 2025 found that the average MWh cost for wind projects increased to USD 37-to-86 MWh from USD 26-to-50 MWh in 2021.

The same report noted that the base cost for solar projects increased to USD 38-to-78 MWh in 2025 from USD 30-to-41 in 2021.

Developers say that using preferred equity in deals is a good way to address the rise in costs, while maintaining flexibility around the deal structure when traditional tax equity isn’t available. This is because preferred equity investors are more flexible in the ways they are able to participate in a project. Developers say they are also using preferred equity to increase the valuation of project, so that they can obtain the highest Investment Tax Credits (ITC) for projects which, in turn, helps execute tax credit transfers at a better rate.

Several developers tapped preferred equity as a component to their project’s financing plans.

BayWa recently closed a USD 416 million investment for its Jacumba Valley Ranch (JVR) Energy Park in San Diego, which included a preferred equity investment from Wafra Inc. and Acadia Infrastructure Capital.

Arevon secured USD 920m in financing for the 300M/1200MWh Nighthawk energy storage project in San Diego County, California, including a USD 482m in bank financing, a USD 169m preferred equity investment with Goldman Sachs Alternatives with a USD 268m tax credit transfer commitment to a corporate buyer. The preferred equity and transfer components added up to approximately 47% of the total financing package.

Nimmi Kavasery said that the team turned to preferred equity for the deal as the project would not satisfy the risk appetite of traditional tax equity buyers.

The California Public Utilities Commission approved Pacific Gas & Electric’s request this past January for a third amendment for its Mid-Term Reliability Contract (MTR) on the project. The amendment, amongst other things, amended the project’s price and delayed the delivery date of the project to mid-2026.

“At the time we brought it to market, it was not sufficiently contracted in a way that would satisfy most traditional tax equity players,” she said.

“So we had to get creative,” she added, noting that turning to preferred equity allowed the project to achieve a “step up” in valuation to USD 268m worth of investment tax credits that will be transferred to an undisclosed corporate buyer over 10 years.

As ITCs are issued based on total capital investment in a project, an extra equity addition in the form of preferred equity helps the project generate higher ITC credits for the transfer to a corporate buyer.

Kavasery said that this is how preferred equity is typically leveraged in deals on the market – to “improve the base of the project” for ITCs.

Evan Speece, the Chief Financial Officer at Doral Renewables agrees to a certain extent.

He said that using preferred equity can certainly help leveraging the ITC value of the project but is also used for so much more.

In particular, he said he sees developers turn to preferred equity to support the development and/or construction phase of projects when tax equity isn’t able to fill the gap.

Speece added that the equity preferred equity investors can provide is typically more flexible than tax equity investors – some can commit large amounts of funds to a project and can valuate a project up to 20% beyond its base capacity.

“Investors in the space are a lot more flexible in terms of the amount they’re able to funnel in and with their exit strategy as well,” said Speece in a separate interview with NPM.

In terms of exit, he said that preferred equity investors are also more flexible during exit and can get out of the deal before or after the typical five-to-seven-year time horizon for a tax equity investor.

“You may be able to get like ten years or something like that, but you’re probably not going to be able to get much more than that because they do want to get out at some point,” Speece said.

While it seems that there is generally a decent amount of flexibility when working with tax equity investors, there are some challenges to working with the preferred equity stack.

Challenges

Some challenges with using preferred equity is that a developer has to juggle multiple deals at a time compared to a traditional tax equity deal that just includes the tax deal and the project.

“When you’re doing preferred deals, you also have to do the tax credit transfer or purchase, right? And that’s not easy either,” said Kavasery, noting that developers often have to take an extra step to secure a tax equity buyer as the sponsors typically can’t use all the tax credits generated from the dollar investment.

Plus, Speece warned that when engaging in traditional tax equity deals, developers should be careful about the progress of their projects, as options for additional financing are limited if the project runs into headwinds.

“With banks in traditional deals, if a project runs into problems, it’s very unlikely that a bank is ever going to want to take over the project, right? With preferred investors, these are super sophisticated private equity firms in a lot of cases. You have to be careful when you’re structuring deals with them because in some cases, if a project is going badly, they have an incentive to take it over in a way,” said Speece.

“As a sponsor, that’s possibly the worst thing that can happen to you,” he concluded.

*This story was originally published exclusively for NPM subscribers.

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