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Tax equity investors have mostly kept quiet on how the Republican tax bill, which President Trump signed into law in December, may impact their participation in the clean energy market.
During a Thursday webinar from law firm Norton Rose Fulbright, investors emphasized that the market remains in limbo. However, big financial entities are attaining more clarity about the future of tax equity, which makes up 40 to 50 percent of financing for solar projects and 50 to 60 percent for wind projects.
“We’re in a moment of reset, and investors are evaluating their positions,” said Jack Cargas, managing director of renewable energy finance at Bank of America Merrill Lynch. “We haven’t really come down with a specific position. Part of the problem here, with all of this conversation, is there has been such a significant change in the marketplace.”
That said, some of the biggest players said project finance will likely fare fine.
“We are expecting steady state after the recalibration we’re also expecting,” said Cargas. “One of our observations over the years has been that the only constant in our marketplace has been constant change. That was certainly true in the case of 2017.”
The recalibration follows passage of the tax bill with a provision, the Base Erosion Anti-Abuse Tax (BEAT), that limits the credit benefits that corporations can use to lower their tax bills. Under the final law, companies and banks can use 80 percent of federal Investment Tax Credit and Production Tax Credit values to calculate tax liability.
According to John Eber, managing director and head of energy investments at J.P. Morgan, tax equity accounted for $10 billion -- $6 billion for wind and $4 billion for solar -- in renewable project finance in 2017. That’s down from about $11 billion in 2016 and a high of about $13 billion in 2015.
Eber said he expects deal volume to hover around the same $10 billion to $11 billion range in 2018. But he was less optimistic about the overall state of the tax equity market.
“I expect the market to tighten on the tax equity side. There are just a lot of changes, and they’re all to the negative,” Eber said during the webinar. “Keep in mind, it’s just a limited number of investors, so all it takes is a few [to leave]. More importantly, there may be investors that are still in the market but they may moderate how much they might put into renewable energy versus some of these other markets.”
“Only time will tell for sure,” he later added.
The 2017 market included about 35 investors for both wind and solar. Since the details of the tax bill emerged, Cargas said one or two tax equity investors have exited the market, at least for the time being.
Keith Martin, a transactional lawyer at Norton Rose Fulbright, said many tax equity investors deducted as much as possible in 2017 to insulate against the impacts of a lower tax rate. According to Cargas, some “structural techniques” in deals made after the 2016 election protected many projects through 2017 from “the possibility of post-funding changes in tax rates or other matters.”
“We were a little surprised that the market remained so competitive throughout the year in the face of prospective change in tax law,” said Cargas. “There was a lot of competition for specific transactions, even though people knew the hammer was going to fall...late in the year.”
But those protections did not account for BEAT, which Cargas called a “late curveball.”
Under the current scenario, Eber’s team at J.P. Morgan estimates the amount of project finance from tax equity could drop by about 8 percent for wind projects and by about 3 percent for solar projects in 2018.
It’s still early to fully distinguish the ultimate impact.
“The reality is that investors this early in the year are still answering these questions,” said Cargas. “We do expect this tax equity market to continue to function well, and we expect to remain a significant player in the space.”