Climate bill opens spigot on tax-equity finance
America's solar and wind energy sector has relied for years on a relatively obscure form of investment called tax equity finance. Thanks to the climate bill, which President Biden is expected to sign this week, the small universe of investors who play in the tax equity space should be getting bigger.
Why it matters: The bill's tax equity tweak opens the funding spigot further to U.S. renewable energy projects, especially smaller ones that have historically struggled to raise capital.
How it works: Tax-equity investors provide upfront cash, and are repaid with a project's tax credits. Bank of America and JPMorgan Chase are among the financial firms that have done these deals, along with big corporate investors such as Google, Facebook and Starbucks.
- The climate bill includes a provision that is meant to broaden the appeal of the tax equity scheme to smaller investors.
Catch up fast: Solar and wind developers often can't take full advantage of the lucrative investment tax credit and production tax credit.
- As a result, developers assign their credits to tax-equity investors. So far, mostly larger projects have used the vehicle.
What's happening: Congress previously put a key restriction on the credits — they could only be assigned to a project "owner," aka, an entity that is also an investor in the underlying solar or wind farm.
- That curtailed the pool of investors to big players (BofA, JPM, Google) not only willing to invest in hard assets, but also with the capital and know-how to navigate complex tax transactions.
- The climate bill eliminates that ownership requirement.
- Now, if I'm a smaller player, I can provide capital through the credits without the obligation of being a project investor as well.
Bottom line: The move should open up these credits to smaller investors. Whether they take the bait remains to be seen.