Fundamental Renewables origination head discusses IRA2022 impact on project finance

Fundamental Renewables’ Mark Domine thinks the Inflation Reduction Act of 2022 will help projects both under construction and under development get realized sooner with maintained or greater value in spite of the inflationary effects and supply chain issues that have recently challenged solar development activity.

Domine is Fundamental Renewables’ Managing Director and Head of Origination, an organization that has financed 7 GW+ of solar capacity and over USD 5bn in loans in the past seven years, primarily as a development and construction phase capital lender. The model results in Fundamental Renewables financing early-stage development costs, such as those related to interconnection and permitting, largely on a non-recourse basis for projects or portfolios.

He sat down with NPM to review his views on the Inflation Reduction Act.

“Projects under construction through the end of 2022 will be allowed to retroactively set the ITC tax credit to 30% (from its pre-bill rate of 26%),” said Domine, who said this has led some projects in the short-term to reassess their capital stack. Developers normally size a non-recourse project-level construction loan (or in some case a separate bridge loan) to cover the tax equity portion of the project as the solar or wind farm is getting built. The tax equity then gets distributed upon the close of the project that takes out the construction of tax equity bridge loan.

“The IRA 2022 tax changes would result in the tax equity tranche getting upsized and reliance on sponsor equity would go down which ultimately creates a slightly lower takeout risk profile as a result,” said Domine, adding that the lenders bridging to tax equity, typically the same as the project finance lenders would see a resulting increase in value for the projects. There is also some wiggle room to re-negotiate that same deal in projects which closed their ITC at the original rate.

Solar developers will also have the ability to utilize a production tax credit (PTC) which will advantage smaller scale developers, according to Domine.

Getting newer and upgraded transmission systems, such as the USD 10.3bn in upgrades that MISO is pursuing in Minnesota, is a critical component to getting these newer projects built. Domine pointed out that there have been significant grants that have come out of both the USD 1.2trn Infrastructure bill which passed in November 2021 and the Inflation Reduction Act of 2022 for transmission, just no ITC, which had been included in the failed Build Back Better Act.

However, at the same time, states are going to be the ones that are going to enable transmission capacity to get done. There certainly is plenty of equity capital at work, particularly amongst larger European funds and corporates such as Pattern Energy, NextEra and Invenergy trying to get bigger transmission built.

“Statewide policy is more influential for that capital to come in,” said Domine.

Business model

Fundamental Renewables, the clean energy investment arm of Fundamental Advisors LP, offers three main verticals: development, development-to-construction, and permanent back-leverage debt.

While the IRA2022 offers a suite of tax credit incentives to a variety of less traditional clean energy developers and/or technologies, Domine said if anything, the greater flow of requests for its services from solar and wind developers with storage as a growing outlier will keep them focused on these verticals for quite some time.

“It really expands our ability to provide more capital in each of these phases,” said Domine, adding that it may bring increased competition.

This will come from private equity or infrastructure fund managers supporting sources of capital from a higher risk perspective, adding that it could also come from other providers of debt with equity-like characteristics.

“Our goal is to provide the most efficient capital to bring the broadest value to market participants,” said Domine.

As for what comes next, Domine said Fundamental Renewables anticipates seeing more activity in storage, while also starting to expand into newer industries such as electric vehicle (EV) charging and green hydrogen.

“Over time as those markets start to mature, I can see us as an early adopter of financing for some of these transactions, but our focus is not there yet,” said Domine.

*This story was originally published exclusively for NPM subscribers last month.


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