Written by Brian Eckhouse. This article first appeared in Bloomberg Markets.
The prospects for a broad tax reform with lower corporate rates has excited business leaders and boosted the stock market — except for renewable energy.
Tax reform “will make renewables more expensive,” Keith Martin, a partner at law firm Norton Rose Fulbright, said in an interview Tuesday at Infocast’s Solar Connect conference in San Diego.
The reasons: reducing corporate taxes would threaten a key source of clean-power financing. A broad reform of the tax code may also lead to pricier debt for new power plants and lower savings from depreciation. And some developers are concerned about the future of two critical U.S. tax credits. President Donald Trump campaigned on tax reform, and the S&P 500 Index has gained 18 percent since the election, while the Bloomberg Global Large Solar Energy index of 16 companies has slumped 13 percent.
The framework the White House proposed Sept. 27 “would disrupt the economics of clean energy projects as a consequence of making profound changes to the U.S. tax code,” according to a research report Monday from Daniel Shurey, an analyst with Bloomberg New Energy Finance.
Lower corporate tax rates would threaten the supply of tax equity, an esoteric type of financing that often accounts for half the cost or more of wind and solar projects. In these deals, renewable-energy developers sell portions of their projects’ tax credits to corporations — often banks and some insurance companies — that can apply the credits to their own tax bills. Lower tax rates for businesses would mean they need fewer write-offs.
Tax Equity
“Will CFOs say this isn’t worth it and pull out of the market?” David Burton, a New York-based partner at Mayer Brown LLP, said in a phone interview.
Developers may raise about $12 billion in the tax-equity market this year, $7 billion for solar and $5 billion for wind, according to New Energy Finance. That would be down from about $14.8 billion last year.
With less tax-equity financing available, chief financial officers might need to lean more on other — potentially pricier — sources of capital to make up the slack, Martin said.
Debt would be an obvious alternative. But some of the tax benefits of debt would be threatened if the deductibility of interest expense is revised, Shurey said. Power plants that are already financed may suffer if their deals include clauses on changes to the tax rate.
“If everything is priced according to the current price rate, then your calculations don’t work,” Shurey said. “The economics of that project could be in trouble.”
The federal investment tax credit for solar and production tax credit for wind have been key growth drivers, and some clean-energy executives are concerned that Congress may terminate them to boost revenue to offset a tax cut. They were extended or revived in 2015, but with step-downs over the next few years.
“They’re going to look under every rock for revenue,” said Greg Jenner, a Washington-based attorney at Stoel Rives LLP, in a phone interview. “Even the possibility of that will have a chilling effect on the marketplace.”