Investors and Developers Debate the Tax Equity Market

Since the creation of the solar ITC, tax equity has been a critical, and unique, piece of the complicated puzzle that is project finance. However, with the solar ITC scheduled to decline and the makeup of the U.S. Senate still up in the air heading into 2021, many industry analysts, lenders and developers are considering whether tax equity may be a sunset industry.

This was a topic of conversation at the ongoing Solar and Storage Financing Summit as lenders, tax equity investors and developers debated the future of tax equity, what can be done to preserve it, and whether it’s worth preserving at all.

While these solutions varied, the panelists were all in agreement about one thing: tax equity availability took a hit this year even as demand continued to surge. RadiantREIT Co-Founder Jeff Just said he is prepared to see tax equity becoming less important for projects going forward. Whereas tax equity has traditionally accounted for up to 45 percent of a project’s construction costs, Just predicts this margin could decrease to as low as 20 percent if the ITC continues to ratchet down.

“These changes that we’ve seen in the tax equity market this year, which, from our vantage point, appear to be fairly significant do have meaningful impact on our financing alternatives and, ultimately, the economics of our business,” Encore Renewable Energy President and CFO Blake Sturcke added. “What we’re seeing is high quality sponsors still have access to tax equity, but the raising of it has become more difficult and expensive. As a result, we’ve seen a bit of a widening of project prices. A year ago, we would’ve seen a 20 percent spread from our high to low bidders. This year, we’re seeing 30 percent. What that means is we need to have a dialog with a broader group of investors than we typically would.”

Just says he is still holding out hope that direct cash grants of tax equity for renewable energy projects, a measure that Democrats have expressed interest in, will pass Congress next year. But others, like Investec’s Co-Head of Power and Infrastructure Finance Michael Pantelogianis, are less positive on this potential outcome.

“I’ve had the benefit of doing quite a few cash grant projects in the past and, while it definitely did provide liquidity during the [2008] financial crisis, I get the willies when they’re brought up,” Pantelogianis said. “I know some of my parties are still litigating their cash grants with the government to this day.”

Instead, Pantelogianis argues, the industry should evaluate whether the ITC is still necessary and if policy efforts could be better concentrated elsewhere.

“I think subsidies need to be economically based,” Pantelogianis argued. “The scaling back of the ITC was largely a hope that capital costs would continue to be reduced. My view is there are ways beyond the tax code to work with this. We see it at the state level with RPS standards. If there’s a shortfall with what tax equity can support, utilities and state governments have the ability to influence what amount of PPAs go out there and what price needs to be in order to justify a project being built.”

While the necessity of the solar ITC remains up for debate, all of the panelists agreed that a storage ITC is far more necessary. Eric Heintz, M&T Bank’s Director of Energy Finance, noted that his firm had never even closed on a single standalone storage project to date.

“[Storage] is a sector that needs tax equity,” Pantelogianis said. “The cost is still substantial. If we’re going to do legislation around the tax code, the idea of giving an ITC to a battery when it’s paired with a solar facility but not on a standalone basis doesn’t make sense. If you want to see more batteries, which should ultimately lead to capital cost reduction, that dynamic can be favorably impacted by federal support. I don’t know why batteries can’t get more support today.”

The outcome of a potential storage ITC and the revitalization of the solar ITC hinges on January’s upcoming election in Georgia which will decide the makeup of the U.S. Senate. While all of the panelists agreed that they would be watching the outcome of that election with great interest, most also believe the industry will continue to thrive regardless of the outcome, especially with president-elect Biden in the White House.

“We have a number of projects that were initially slated for 2021 that we’re thinking of sliding into 2022,” Sturcke said. A lot of that is because we think things could get better. The ITC could step back up to 30 percent, panel prices may continue to decline, and tariffs could be eliminated. So, the sentiment with some of these more marginal projects is, let’s wait.”

“The scenario for the next several years, even in a worst-case scenario in Washington, is quite good,” Pantelogianis said. “We could see Democrats take the slim majority in the Senate, or we could see Republicans move forward with renewable industry policies that their constituents want. Should either of these happen, we’re looking at a very exciting environment.