[BETA] Fortnightly

With the expiration of the Section 1603 cash grant program, tax equity likely will re-emerge as the investment vehicle of choice for renewable finance. But the tax equity market is tightening.

European banks are exiting the U.S. project finance market due to the financial crisis in Europe, and other established tax equity providers simply lack sufficient tax capacity to pick up the slack. Many within the renewable development community are looking for alternative structures, and alternative sources of funding. Domestic technology companies, large industrials, and utilities are frequently cited as promising new sources of tax equity supply, and a number of these companies have actually availed themselves of the opportunity. Google, for example, has invested almost $850 million in clean energy, mostly in the form of tax equity investments in projects such as the Shepherds Flat wind farm in Oregon. Several utility holding companies have likewise made tax equity investments in distributed solar through unregulated affiliates. ¹

Yet by and large, corporate participation in renewable tax equity finance has been limited. There are a number of plausible explanations. First and foremost, the business interest of many companies is far removed from renewable development, and even farther removed from renewable finance. Even those that have adopted aggressive corporate sustainability objectives find it easier to buy renewable energy than to finance it. According to the most recent CREX survey, which measures corporate renewable energy procurement, renewable energy accounted for 12.1 percent of total consumption of surveyed companies in 2010, up from 8.2 percent in 2009. But only a limited amount of this energy was purchased from projects that were directly financed by the company—1 percent in 2009 and 0.6 percent in 2010. Tax equity investment might appeal to some these companies in time, but today project finance is considered relatively time-intensive and costly when compared to other forms of renewable energy procurement. ²

Figure 1 - Utility Renewable Investment Proposition

Conversely, for companies whose business interest is more closely aligned with renewable development, particularly those in the energy and utility sectors, tax equity investment is seen as contrary to their financial interests. Many of these companies are themselves engaged in owning and operating energy assets. In the electric sector, independent power producers, both foreign and domestic, are actively engaged in so-called utility-scale renewable development projects. They don’t see themselves as being in the business of financing competitors or competing technologies. Except in an unusual case, they wouldn’t seem to be likely sources of tax equity investment.

There is one group of companies, however, that would seemingly benefit from the tax equity investment opportunity. In the 30-plus jurisdictions that have adopted renewable portfolio standards, local electric distribution companies are the initial point of regulation. These companies are required by statute to ensure that a designated percentage of the load they deliver is derived from renewable resources.