By Antony Joyce ,
Senior Vice President, Tax Insurance Specialist
03/16/2022 · 6 min read
The financing of renewable energy projects is a critical risk in the ongoing transition to a low carbon future. When investors agree to finance a solar, wind, or other renewable energy project in the US, tax credits play a key role in their decision-making. Because tax credits form a large part of a project’s economic value, financing parties need to be comfortable that the credits will actually be there down the road, including potential implications of legislation such as Build Back Better.*
Tax credits have played a major role in the US in the development of renewable energies. The Investment Tax Credit (ITC) has helped the US solar industry grow by more than 10,000% since its introduction in 2006. While there have long been plans to phase out the credits, the ITC, along with the onshore wind-related Production Tax Credit (PTC), have to date been renewed, albeit at varying percentage eligibility. (The PTC for 2022 is an exception as it has not been renewed at this writing.)
The administration of President Joseph Biden does not seem likely to reverse the trend of renewing these tax credits. In fact, many are looking ahead to possible expansion of the credits in the administration’s Build Back Better program, for which the green provisions may pass Congress this year as a separate piece of legislation.
As currently written, Build Back Better’s green provisions would simplify the ability of developers to finance renewable energy projects; however, gaps remain, meaning that risk mitigation tools will continue to be important. Build Back Better’s green provisions, if passed in substantially their current form could, among other things:
Build Back Better should not be viewed as a holistic solution; challenges would remain, including the following (as the program is now written):
Financing projects with one or more of the above items often cannot simply be addressed by “should” level tax opinions, appraisals, and broader insurance packages. Tax equity has been slower to commit to financing in this context, which will continue to be a challenge even after Build Back Better’s green provisions. A weak balance sheet from an indemnity provider exacerbates the challenge.
The demand for tax equity commitments exceeds supply, and is likely to continue to do so as additional large-scale offshore wind, carbon sequestration, and potential new assets — such as transmission and hydrogen — are added to the mix alongside solar/storage, onshore wind, biofuels, and others.
The high demand from developers for investment in renewables allows financiers to be selective. Tax equity providers typically prefer developers with large pipelines and a proven track record and/or projects that are safe-harbored, which can put lesser-known developers and smaller projects at a disadvantage.
Tax insurance can facilitate project financing. It supports tax credit eligibility and credit enhancement by transferring the risk of a lesser quantum of tax credit to a diversified pool of highly rated insurers that supplement the developer’s or sponsor’s tax indemnity.
Common areas of coverage include:
Project developers have an intimate understanding of tax credit use for energy projects. Tax insurance is a risk mitigation tool that can help overcome financing constraints for projects that do not fit squarely and unambiguously within the scope of tax legislation and IRS guidance.
Renewable energy companies can find value in working with specialized advisory services that bring thorough knowledge of changing and new tax credits — including issues likely to arise even if the green provisions of Build Back Better pass — to provide protection required by capital providers.
Tax credits for new technologies are still in development, so it is important to seek specialist advice on appropriate risk management tools. As with any tax issue, it’s important for developers and investors to obtain qualified tax expertise regarding tax credits.
If you have questions or want more information about tax insurance for renewable energy projects, contact your Marsh representative.
* This article is based on the legislative environment as of the date of publication, March 16, 2022.
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