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Fitch Ratings: Lower corporate tax rates may hurt renewables' project financing


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Fitch Ratings: Lower corporate tax rates may hurt renewables' project financing

A lower corporate tax rate could hurt renewable energy projects and deter potential investors away, according to a new Fitch Ratings note on the U.S. tax reform bill that has now cleared the House.

On the positive side, the Republican tax bill leaves the existing renewable energy tax credits intact. Lowering the corporate tax rate from 35% to 21% could also boost after-tax profits for project owners and increase project values, but it throws a wrench for most wind and solar projects that need tax equity financing, Fitch Ratings' global infrastructure senior director Gregory Remec and senior analyst Robert Rowan wrote in the Dec. 19 note.

"This structure allows investors with significant tax liabilities to use a renewable energy project's non-cash tax benefits, such as tax credits and depreciation and also take the majority of cash distributions until they achieve their targeted return levels," the note said. "Lower taxes will lower the value of the tax credits and depreciation to investors, which will likely reduce the amount of tax equity available to finance new renewables projects."

In addition, the base erosion anti-abuse tax could complicate how tax equity investors would figure out if they will receive tax credits for renewable energy projects.

Tax equity project financing is more significant for smaller, single-megawatt renewable energy projects, usually making up for about 50% of a project's funding, Remec said in an interview with S&P Global Market Intelligence. It is hard to say how project developers will deal with tax equity investors backing out.

"The obvious choices are either more equity or more debt," he said. "They probably don't have more equity, so they're probably going to look at more debt."

Borrowing to develop renewable energy projects could also become costlier; unlike regulated public utilities, most energy companies with gross receipts of about $25 million or more cannot deduct interest on debt starting in 2018 if those companies' net interest expense exceeds 30% of their adjustable taxable income.

There has already been a pause in moving forward projects that were not already ready to finance, Remec added. The industry has taken a wait and see approach because "no one wants to be on the wrong side of that bet."

"In general, this will reduce the overall amount of tax equity that's available for new projects," he said. "The question becomes it is going to significantly reduce that volume or is it more for marginal types of projects."