The tax bill just passed by the Senate could have some unintended (or maybe intended) ramifications for the renewable energy industry. A popular tax credit that's used to fund billions of dollars' worth of projects could be undercut for those who use it most.
There's no final bill yet, but it's worth going over what the impact of this provision could be if it's implemented. It wouldn't be good for renewable energy, but it may not hit every company the same way.
The poison pill for renewables
A provision in the Senate's tax bill known as the Base Erosion Anti-Abuse Tax (BEAT) would make the solar investment tax credit (ITC) and wind production tax credit (PTC) unusable for multinational banks and other corporations who have low tax rates. Corporations would have to determine if they meet a minimum 10% tax rate on their taxable income, and if they don't, they would pay a 10% minimum tax, making renewable energy credits effectively worthless. It's not clear if this was an intention of the bill's authors, but it could have an enormous impact on renewable energy deployment.
The ITC and PTC are used by what's known as tax equity investors, who are investors who buy a portion of a renewable project with the intention of using the tax breaks that those projects generate. In solar, tax equity investors typically get the 30% investment credit and accelerated depreciation, while most of the project's actual cash flow goes to other investors. The wind tax equity is similar except it's a credit based on how much energy the projects produce.
Companies would be affected differently, but there are some clear losers if the BEAT provision stays in. Residential solar installers that rely on tax equity to make financing systems work will potentially need to rework their entire financing package. Sunrun (NASDAQ: RUN) and Vivint Solar (NYSE: VSLR) are two who sell most of their systems with lease or power purchase agreement financing, using tax equity on their end to make the economics of the solar system work.
Companies like First Solar (NASDAQ: FSLR), SunPower (NASDAQ: SPWR), and Canadian Solar (NASDAQ: CSIQ) primarily sell components, so they may not experience much direct impact. We may also see them shift some sales and development focus to international markets where the policy environment isn't as hostile.
For Vivint or Sunrun, which are dependent on the U.S., the shift may not be as easy, but they can make the adjustment if they're forced to.
Could financing renewables be easier without tax equity?
One welcome change to renewable energy financing could be less reliance on tax equity. With tax equity funds the ownership and cash flows of projects are split up into strange financing mechanisms rather than straightforward bonds or equity ownership of projects.
A simpler structure would also allow a new set of investors to buy projects even if those investors don't have profits to offset with tax credits. This could potentially include yieldcos, pension funds, and foreign investors. They can't compete with the cost of capital of tax equity financing, so this could make more buyers competitive.
One potential win for wind and solar energy
A provision in the current bill that may help renewable energy is full expensing of capital expenditures. This could effectively make an entire solar or wind installation deductible in the year it's built.
For companies looking at renewable energy, this could be an attractive tax structure and would also make financing projects extremely easy. The owner would get the expense of the project and long-term cash flows as revenue, no tax equity or other strange financings to deal with. Look for this to be effectively a new subsidy for renewable energy if it passes.
Is Congress going to kill renewable energy?
The renewable energy industry is up in arms about potential changes to the ITC and PTC subsidy, but I don't think the loss of tax equity would be a death knell to renewable energy. It may raise financing costs slightly, but we've seen wind and solar projects be built without subsidies around the world for very low costs.
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