A $12 Billion Clean-Energy Tool That U.S. Tax Reform Could Kill

The tax-reform proposal moving through the U.S. Senate would hobble — and potentially cripple — the supply of tax-equity investment, an esoteric but critical source of clean-energy finance.

About half the companies that invest in tax equity for solar farms, and a majority of wind investors, may find the new tax policies make these deals irrelevant, according to John Marciano, co-head of project finance at Akin Gump Strauss Hauer & Feld LLP.

That poses a threat to the tax-equity market, which is expected to reach $12 billion this year up from $7.3 billion in 2013, according to Bloomberg New Energy Finance. The financing format accounted for about 21 percent of the $58.5 billion of total U.S. renewable-energy investment in 2016.

“It literally will grind our industry to a halt,” Marciano said. “Developers would be fighting for the few remaining investors.”

Tax Credits

In tax-equity 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.

Most tax-equity investors are multinational companies and the issue now is that the Senate version of the tax-reform bill includes a provision that imposes a minimum tax on these companies’ foreign transactions. If they have to pay a minimum tax, they may no longer have any need for the credits acquired through tax-equity deals.

The wind and solar industries have been bracing for tax reform since President Donald Trump’s surprise election. Analysts initially warned that lowering corporate tax rates, still a key component of the bill, may deplete interest in tax-equity deals because companies with lower tax bills would have less interest in buying tax credits from renewable-energy developers. The proposal from Senate Republicans, with its minimum foreign tax provision, was something unexpected.

“It would be draconian for tax-equity investors with foreign parents,” said David Burton, who leads Mayer Brown LLP’s renewable-energy group in New York.

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