Tax equity – understanding the evolution
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Tax equity – understanding the evolution

Northern entrance of the US Treasury building, Washington D.C., USA

The broad benefits of the Inflation Reduction Act of 2022 (IRA) has meant tax equity has never played a more crucial role in driving investment in renewable energy projects in the US. Yet, while many project finance practitioners have been busy readying themselves to take advantage of this new and improved tax equity regime, the devil – as always – remains in the details. To shine some much-needed light on the evolving space PFR has brought together a panel of experts on tax equity to review the latest developments and innovations in this fascinating area of renewable energy finance, as well as the outlook for the coming years.

Below is an excerpt [edited for brevity] of the upcoming roundtable discussion that will be available online and to download in early August.

PFR: On transferability, the Treasury issued the highly anticipated proposed regulations for the transfer of certain income tax credits under Section 6418 of the tax code last month. Where do we have certainty that we didn’t before? What remains a grey area?

David Burton - partner, Norton Rose Fulbright US

We have certainty that the buyer does not have taxable income for the difference between the face value of the credit and what it paid. We also have certainty that if a partner sells its interest in the project that owns a partnership that that partner suffers recapture, not the not the buyer of the credit. And if a project suffers a casualty, or the whole project is sold, the buyer of a credit does suffer recapture. There’s not a whole lot that that remains uncertain.

There are some questions about exactly how partnership allocations work when a partnership sells the credit and gets cash and also gets tax exempt income. They still left it a little bit grey as to how that tax exempt income would be allocated amongst the partners for tax accounting purposes. But they generally filled in most of the questions the industry had. The industry doesn't necessarily like all the answers, but the answers are relatively clear.

Julian Torres - chief investment officer, Scale Microgrids

From the commercial perspective it seems that the guidance allowed more dynamic and more confident discussions and allowing greater specificity in negotiations.

Having said that, there's still a few items yet to be clarified, pending the final rules, but we're seeing better engagement within the investor groups, and I think the conversations are proving much more fruitful, and that's been just observations from the last few weeks.

People have been clearly very responsive in thinking ahead about the positions they'll be taking in advance of the guidance coming out.

Andrew Warranch - founder, president, and chief executive, Spearmint Energy

Here we have actually seen deals that were – I want to say held pending guidance or closed pending guidance – all of a sudden move forward. We saw one very small announcement in the press the other day, very small.

I would expect a bit of an avalanche over the next week or two of announcements as people either fund or close on transactions now that guidance is in place.

I do think the more and more we talk to new players in this space and what I mean by new players in this space is financial counterparties who have always been around tax equity but never been able to participate, really digging in and focusing on new hybrid structures that will allow.

Patrick Klein, director, MUFG’s Project Finance – Americas team

I think the transferability rules that were provided were relatively concise and clear, and I think the markets are that were already forming will really open up now that we have this guidance. I think that there are certain challenges that are provided by the guidance, not that they were unexpected, but knowing the boundaries will be helpful in terms of folks being able to figure out the way forward as the market develops.

Spencer Tweed, VP of Project Finance, Foss & Company

I would add to that, at Foss, we've been having lots of conversations with financial institutions and corporations who are looking to get into tax equity but haven't participated in a partnership flip or an inverted lease structure before. Folks are very, very interested in transferability and now that we have this guidance it just reaffirms the conversations that we've been having, and you know I think that moving forward this is going to become a major portion of the market.

I can say at Foss we've been a little bit more focused on PTC transactions so far in the transferability space where we buy one more year of transferable PTC's.

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