The "Build Back Better" plan being debated in Congress would allow production tax credits to be claimed instead. Solar companies have been restricted since 2006 to claiming an investment tax credit that is a percentage of the amount the owner paid for the project and is claimed entirely in the year the project is first put in service. The three are partnership flips, inverted leases and sale-leasebacks.Įach of the tax equity structures raises a different amount of tax equity, allocates risk differently and imposes a deadline on when the tax equity investor must fund its investment.Ībout 80% of solar tax equity deals are structured currently as partnership flips. There are three main solar tax equity structures with two significant variations.
They must thread passive loss and at-risk rules that make it harder for them to use tax benefits from such investments. Individuals, S corporations and closely-held C corporations, meaning corporations with five or fewer individuals owning more than half the stock, have a harder time than large companies acting as tax equity investors. A theory that internet retailers who have made huge profits since the start of the pandemic would be future sources of tax equity proved unfounded, as such companies can earn higher returns by reinvesting earnings in their own businesses. Most tax equity investors are banks and insurance companies for whom a 6% to 8% yield is attractive compared to alternative uses of money, like making loans. Tax equity investors charge structuring and unused commitment fees and price to a second all-in yield 50 to 100 basis points higher to be reached in many transactions around year 20 to 25. After this yield is reached, the investor's economic interest in the project drops usually to 5%. Tax equity yields this past year have been mainly in the 6% to 8% range. It had been expected to hit $20 billion in 2021 before supply-chain difficulties began causing projects to slip into 2022. Renewable energy tax equity was a $17 to $18 billion market in 2020. Roughly 50% of tax equity last year was supplied by just two large banks: JPMorgan and Bank of America. More than 40 tax equity investors invested in the solar market in the 18 months before COVID-19 hit. Competitive pressures mean back-levered lenders are not charging higher interest rates than they would charge for senior debt at the project level.
Most debt is back-levered debt, meaning it sits behind the tax equity in terms of priority of repayment. The solar company must cover the rest of the project cost with some combination of debt and equity.
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Tax equity covers 35% of the cost of a typical solar project, plus or minus 5%. Therefore, finding value for them is the core financing strategy for most solar companies. They amount to at least 44¢ per dollar of capital cost for the typical solar project.įew developers can use them efficiently. The US government offers two tax benefits for renewable energy projects: an investment tax credit and depreciation.
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