Budget bill threatens renewables project finance market's depth

With the Inflation Reduction Act's green energy incentives facing an uncertain future, the renewables project finance market stands to lose the new structures and entrants it gained over the past few years, according to industry developers, experts and financiers.

House Republicans' phaseout approach to the landmark legislation would eliminate both the tax credits and the ability to buy and sell them. Those provisions have spurred record financing activity and enabled more billion-dollar transactions.

"In 2022 there was there was one construction financing that was a billion dollars-plus," Alok Garg, head of renewables and asset finance at Wells Fargo & Co.s corporate investment banking practice, said during a June 5 panel at the American Council on Renewable Energy's Finance Forum in New York. "Over the last two years, especially since the IRA has started to make an impact ... there have been 25 billion dollars-plus transactions" at Wells Fargo.

A new kind of deal structure has also emerged as banks provide loans to private equity-owned projects and are paid back in tax credit sale proceeds. These bridge loans enable project developers to secure funds for construction while waiting for tax credit transfer agreements to close.

"Before the transferability market and the IRA, it was unthinkable to close a financing without tax equity in place and committed at closing; banks would not take that risk," said Ines Serrao, managing director and head of renewables at CIBC Capital Markets. "The bigger shift … was that banks became comfortable bridging to uncommitted tax equity or transferability" because the market was so much deeper.

Corporate tax credit buyers that entered the project finance market through transferability are also expanding into tax equity, which "involves more diligence than a traditional tax credit transfer," said Nimmi Kavasery, managing director of project finance at solar and storage developer Arevon Energy Inc., during a June 4 panel discussion.

'It's like trying to look into a crystal ball'

With key policies in flux, getting new deals off the ground is more challenging, according to Udit Goyal, project finance lead at Ørsted A/S.

"You're sitting here trying to write out documents that cover every scenario … and it's like trying to look into a crystal ball," Goyal said during a June 4 panel. "We've actually spent a lot of time on some of our active deals negotiating these provisions with counterparties, with transfer buyers."

Mit Buchanan, JPMorgan Chase & Co. managing director of energy investments, added that discussions include "a lot of conversations about what triggers a cash step-up if changes to tax law occur."

If the US Senate does not soften language in the House budget bill that ends technology-neutral tax credits in 2029, the sectors that have benefited the most from the ballooning transferability market will face substantial roadblocks.

"Smaller developers, smaller offtakers, they all had a shot at getting a project done," Gaurav Raniwala, who heads global renewables for GE Vernova Inc.'s financial services segment, emphasized during a June 5 panel.

Losing transferability "creates some haves and have-nots," with community solar and smaller developers bearing the brunt of the impact, according to David Haug, CEO of private equity investment firm Bildmore Clean Energy.

While the Congressional Budget Office estimates that the House GOP budget bill's tax credit restrictions and phaseouts would yield about $522 billion in net additional revenue over 10 years, an immediate and full repeal of the IRA's tax credits would reduce clean energy deployment by 20% through 2040, according to recent modeling by S&P Global Commodity Insights.

PricewaterhouseCoopers managing director Mark Prater, however, is "somewhat optimistic" that the final budget bill will scale back the House GOP's language on clean energy tax credits.

"I do think policymakers have to be realistic ... because they can't avoid dealing with the demand," he said during a June 4 panel.