Navajo Power breaks down barriers preventing tribal participation in capital markets

With the renewable energy market exploding across the U.S., it can be easy to overlook the challenges that some communities face in getting involved and receiving equitable returns on their contributions to the space. This is perhaps most true among Native American tribes that lease their land for renewable project development.

In a broad ranging discussion panel hosted by Navajo Power last week, a group of project finance professionals and Native American tribal members and stakeholders met to discuss the barriers preventing tribes that lease their land from receiving fair compensation and other barriers to participation in the project financing market by native tribes, as well as what can be done to turn things around.

During the discussion, Thomas Steirer, the founder of Native Star Inc. and member of the Tanawanda band of Seneca – Turtle Clan helped illustrate the barriers preventing Native American tribes from participating in project finance, even when their own land is housing the projects in question.

“Project finance is a very complicated piece of the puzzle that presents a lot of challenges for a lot of tribes,” Steirer said. “They simply don’t have the relationships necessary to really be involved in the market. And it is not easy to make those connections, because there are several different sets of players. There are private companies that have a lot of capital available for the types of developments like those on tribal lands, but a major challenge is the very high cultural barrier between the tribes and those financial sources.”

While Clean Energy Advantage Partners Co-Founder Peter Liu noted that there has been a rise in equity preference among some sponsors and financiers toward achieving social equity goals, he also cautioned that Native American tribes should get involved with project development as early as possible as the continued rise in the number of projects being developed would further strain already existing interconnection issues across the Southwest. However, Steirer explained that preparedness to take advantage of these types of opportunities, particularly under short notice, is also an issue.

“Preparedness has been a major challenge with tribes, unfortunately,” Steirer said. “I’ve had projects blow up on me because development time was too long. But now that we have a solid friend in the DOI and all the positive words moving toward a renewable energy future, the wind is in the sails. So, we need to be adept at navigating the steps to market.”

There is another significant barrier that often prevents native tribes from fully engaging in the market that is currently a core tenet of project finance: tax equity. While Liu says that the market’s reliance on tax equity is already a bottleneck by itself, native tribes have no ability to participate in the tax equity market themselves despite the value they bring as landowners. This has prevented U.S. tribes from participating directly in project development on their own land unlike in Canada, which does not have a tax equity component to project finance. However, AES Energy Treasurer Bryan Cassutt says that the direct pay provision currently circulating in Congress could have the potential to break down this significant barrier for tribes and increase the cash equity that is available to them.

“The most attractive part of the capital stack to be a part of when you are in the position of land control is equity,” Cassutt said. “Direct pay, which has been a hot topic, is essentially a payment in lieu of a tax credit for owners who do not have tax appetite. This has the effect of essentially replacing a big portion of the capital stack that is currently filled with tax equity with more traditional cash equity and debt. I think the best place to play in the capital stack for Native American tribes is in equity. So, if you can decrease the importance of tax equity, you increase the importance of cash equity. If direct pay is passed, it is going to impact the industry in a lot of ways, but it will critically democratize the solar capital stack.”

Steirer agrees that this potential policy movement could be critical for getting Native American tribes more involved in the project financing space, which he says is a critical step beyond the current norm of tribes participating simply as land leasers without many contractual protections or returns.

“I’d like to see tribes get away from the model of just being a land lesser,” Steirer said. “Indian country has a long history of non-equitable positions in many transactions historically. That is kind of a nice way of saying it, right? So, I would like to see tribes take advantage of some of the financial mechanisms to be more of a plyer in the capital stack and owning more of that transaction. It breaks my heart when I hear about these transactions when tribes are paying for their power when they have wind farms operating on their own land. So, I look forward to a future when tribes are more adept at structuring these terms and building these relationships.”

Dr. Michael Dorsey, a partner at Spanish-based solar developer Ibersun Solar which has recently begun its push into U.S. markets, agrees that the number of resources available to U.S. native tribes is increasing from the potential for federal direct pay to the growing number of firms interested in investing in early-stage investment when native tribes are often the most involved. But he cautions that while much of the national conversation surrounding policy changes appears positive, native tribes along with their representatives and stakeholders will need to take steps to ensure that they are getting what they are promised.

“The current administration at least has the language right,” Dorsey said. “But whether they deliver on the scope of what they are talking about remains to be seen. In the meantime, tribes can begin to hold the administration accountable for these deliverables. For example, Executive Order 14008 cuts out a 40 percent allocation of the upsides of the infrastructure bill to go to tribes and other marginalized communities. With moves like that, this administration has been talking some of the most progressive talk that we have seen in a generation. But how they deliver on that is going to be a biproduct of Indian tribes and others keeping their feet to the fire.”