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Renewables would be better off without extended tax credits, investor says

As the U.S. solar industry presses lawmakers to continue supporting the market with federal tax incentives, Jeffrey Eckel, CEO of investment firm Hannon Armstrong Sustainable Infrastructure Capital Inc., argues that the sector would be better off if the subsidy unwinds as planned.

The Solar Energy Industries Association, a trade group, has said project development could get a significant boost if Congress were to extend the investment tax credit, which over the next few years is scheduled to fall in value for businesses and to phase out entirely for individual tax filers.

However, Eckel contends that the industry is already awash in cheap capital as institutional investors hunt for long-term yield, and that the tax equity the credits attract is a costly source of financing.

"You have players like us who have actual capital to invest. We can go much faster without a layer of tax equity making what is already complex exceedingly complex," Eckel said Sept. 26 at a clean energy conference in Washington, D.C.

According to the Congressional Research Service, the rates of return demanded by tax equity investors are 7% to 10% higher than the return on a "comparable debt product."

"If the price of capital is falling, it's because there is more supply of capital than there [are] available projects," Eckel said. "So, to me, this is not a finance problem or a shortage of capital problem."

Clean energy investment in the U.S. rose 12% last year to $64.2 billion. Despite the year-over-year increase, however, the amount invested in 2018 was in line with 2011 levels, noted Alex Kragie, director of the American Green Bank Consortium, who said much more investment is needed to curb the effects of climate change.

"[There's] a strong argument for using public capital where available to … draw in the private sector, and also to be the bubble gum and baling wire that holds together these otherwise unfinanceable projects," Kragie said at the event in Washington.

José Ramon Mas, CEO of infrastructure builder MasTec Inc., said the tax-credit debate has split the market. "[Some] of the big guys would rather the tax equity not be there because they have got significant competitive advantages over the smaller producers or builders" that rely on that form of financing, Mas said at an investor conference in May.

The production tax credit for wind farm developers is also being phased out. The American Wind Energy Association, a trade group, has pushed to extend the incentive for the nascent offshore market.

Jay Bartlett, a senior research associate at Resources for the Future, said reducing the amount of tax equity that is used to finance renewable energy would lead developers to pursue safer projects, since debt investors, who tend to be more risk-averse than equity investors, would have to play a bigger role.

Utilities are decarbonizing "with or without a federal production tax credit," Steven Lockard, CEO of TPI Composites Inc., which makes wind turbine blades, told analysts in June. "The U.S. market is maturing into a really nice unsubsidized, stronger set of demands for economic reasons."