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Tax equity in renewables falls to $11B in 2016


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Tax equity in renewables falls to $11B in 2016

Tax equity invested in renewable energy projects in 2016 totaled $11 billion, according to a senior banker active in the market, down from a level of almost $15 billion in 2015.

According to John Eber, managing director and head of energy investments at J.P. Morgan, the year-over-year decline was due in large part to the uptick in tax equity investments in utility-scale solar projects in 2015.

It was in 2015, Eber noted during a webcast Jan. 17, that the 30% investment tax credit for solar projects was expected to terminate at year's end. Because of that expectation, investors rushed projects through to completion.

However, Congress voted on Dec. 18, 2015, to both extend and make retroactive the ITC for solar projects as well as the production tax credit for wind. There was $9 billion in tax equity invested in solar projects in 2015, and roughly $6 billion in wind.

According to Eber, there was $6 billion in tax equity for wind projects in 2016, with approximately $5 billion for solar projects.

During the law firm Chadbourne & Parke's webcast on the cost of capital outlook for power projects this year, Eber and Jack Cargas, a managing director at Bank of America Merrill Lynch, said the percentage of the capital of a typical wind deal that tax equity covers is in the 50% to 60% range, while for a solar transaction, which tends to be more complex, the percentage is 40% to 50%.

In terms of current supply of and demand for tax equity, Cargas said that while demand on the solar side "spiked in 2015," it is now relatively stable, as is demand for tax equity by wind developers.

Eber said during the webcast that he is hearing many active in the wind industry who are commenting that the number of "safe harbor" wind turbines totals anywhere between 30,000 MW and 58,000 MW over the next four years, or as much as 40,000 MW to 70,000 MW.

He said what that means is that as much as 10,000 MW of wind generation has already qualified to receive the PTC in each of the next four years. That suggests "a very healthy" tax equity market for wind, Eber said.

Where corporate tax reform could be felt

In the December 2015 legislation extending the ITC and PTC, it included a five-year extension of a bonus depreciation, which incentivizes capital investment by accelerating the depreciation schedule. In the years 2015 through 2017, investors can apply a 50% bonus depreciation. Starting in 2018 it goes to 40%, in 2019 to 30% and in 2020 and beyond it goes to zero.

According to Chadbourne & Parke's Keith Martin, to elect to use the bonus depreciation is to take advantage of high corporate tax rates "while they are still there."

If the Trump administration lowers corporate tax rates significantly then use of the bonus depreciation will decline.

The question, according to the bankers, is what the effective corporate rates will be, and when will they go into effect. If new, lower rates do not become effective this year, there will be limited impact on those who elect to take the bonus depreciation.

Jeffrey Ryser is a reporter for S&P Global Platts which, like S&P Global Market Intelligence, is a division of S&P Global Inc.