For decades, big banks and investors have ploughed tens of billions of dollars into US renewable energy projects through a section of the tax code enabling them to offset income with solar and wind investments.
But the incentive is weakening as the pandemic cuts corporate profits, making deals under the financing system known as “tax equity” harder to strike.
Now renewables companies are lobbying for direct cash payments from the federal government instead of allocating tax credits to outside investors. The push comes during a burst of bills on tax credits for energy and capturing carbon dioxide late in the US congressional session.
“The market isn’t iced but it’s not completely liquid. It’s more like walking through Jell-O to get stuff done,” said Conor McKenna, senior managing director at CohnReznick Capital, an investment bank that advises clients in the tax equity market. “Everything just takes more time.”
The US government has been granting tax credits for renewable energy developments since the 1970s. Because new projects often have no tax liabilities, developers turn for funding to deep-pocketed institutions such as JPMorgan Chase, Bank of America and Berkshire Hathaway, which can claim the credits against their own tax liabilities.
Some project developers complain that tax equity investors have become harder to find. Of the 24.5 gigawatts of wind projects scheduled to start construction in 2020 or 2021, as much as 16.6GW were still in search of a tax equity partner as of October, said Stephen Munro, policy analyst at BloombergNEF, a clean-energy research group. For 34GW of scheduled solar projects, 20GW still needed tax equity.
“Our markets right now are somewhat frozen,” said Tom Buttgenbach, chief executive of California-based 8Minute Solar Energy, one of the largest developers in the country. He said banks were hesitant to commit while they were unsure of the size of future profits.
The chill is hampering growth in wind and solar projects just as the climate crisis calls for overwhelming investment in zero-emissions resources, renewables executives contend. They support legislation allowing developers themselves to collect tax refunds for projects, which would bypass tax equity investors.
Abigail Ross Hopper, chief executive of the Solar Energy Industries Association, said changing the recipient of the credit would be “the most elegant and the most simple solution”.
Tax equity for renewable energy is a $12bn-$13bn market, with JPMorgan and Bank of America each investing about $3bn in 2019, said Keith Martin, a lawyer at Norton Rose Fulbright in Washington. The top five investors hold 80 per cent of the market, one banker said.
Some investors deny they are withholding tax equity. Yale Henderson, head of energy investments at JPMorgan, said the bank was going to have its “biggest year ever” in tax equity transactions. He did not anticipate any slowdown in 2021 and he believed the same held true for other leading investors.
“I would argue that there’s sufficient tax equity to allow all the good projects to get financed,” Mr Henderson said.
Philip Hopkins, head of renewable energy and environmental finance at Wells Fargo, said his bank had “a very strong year in 2020, and in fact invested significantly more than we had in the past,” and looked forward to a “busy 2021”.
Avangrid — a US utility and renewable energy developer controlled by Spain’s Iberdrola — recently told investors it had issued $600m in tax equity financing. The company “has been able to execute the tax equity needed for our projects and has not experienced constraints”, a spokesman said.
However, business at Bank of America had been slow, said a person familiar with the matter. The bank declined to comment.
Smaller banks including First Horizon, M&T Bank and SunTrust, part of Truist Financial, have either paused or decelerated investment, according to executives who spoke on a panel hosted by Mr Martin.
The tightening market is hitting developers without the scale or banking relationships to command attention. When developers first contemplated a shortfall last spring, it set off a rush to secure financing that squeezed less-nimble companies, bankers said.
“The midsized developers are shut out,” said Jim McGinnis, managing director in the infrastructure, power and renewables group at PJ Solomon, an investment bank.
Responding to industry pleas, four congressmen — two Democrats from California and New York and two Republicans from Arizona and California — introduced a bill last month to allow tax refunds to be paid directly to solar projects that broke ground by the end of 2021.
The renewables industry has also asked Congress to stretch out scheduled expiry dates for the credits. The wind tax credit ends after this year and the solar credit is gradually decreasing.
One banker warned that paying cash refunds directly to developers could create incentives to build “not great projects” in poor locations or with inferior designs. Tax equity investors “evaluate the quality of projects before investing”, a system that “outsources a portion of the oversight and compliance monitoring to investors in exchange for a financial return”, according to a report by the US Congressional Research Service.
Bill Parsons, head of policy at the American Council on Renewable Energy, warned that there was no time to waste.
“The climate clock is ticking, and 13 per cent of clean energy workers are still out of work due to the pandemic,” he said. “We need to get them back on the job building America’s clean energy future, and that’s precisely what these renewable credits are designed to do.”