Article
Green-energy boom hinges on obscure tax rules
Wall Street Journal|Ed Ballard|Dec 29, 2022
This year’s climate and spending legislation has already triggered an investment spree. Whether the new rules launch a green-energy revolution in the U.S. depends on a little-understood market for tax credits. The Inflation Reduction Act extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and batteries for the electric grid. But important details about the implementation of the different credits—which are tied to criteria such as the use of U.S.-made equipment and the location of a project—are still being thrashed out.
This year’s climate and spending legislation has already triggered an investment spree. Whether the new rules launch a green-energy revolution in the U.S. depends on a little-understood market for tax credits. The Inflation Reduction Act extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and batteries for the electric grid. But important details about the implementation of the different credits—which are tied to criteria such as the use of U.S.-made equipment and the location of a project—are still being thrashed out.
Companies see boosts in cash flow and lower prices for customers if plan works
This year’s climate and spending legislation has already triggered an investment spree. Whether the new rules launch a green-energy revolution in the U.S. depends on a little-understood market for tax credits.
The Inflation Reduction Act extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and batteries for the electric grid.
But important details about the implementation of the different credits—which are tied to criteria such as the use of U.S.-made equipment and the location of a project—are still being thrashed out. The Treasury Department issued guidance on labor requirements in November and …
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Companies see boosts in cash flow and lower prices for customers if plan works
This year’s climate and spending legislation has already triggered an investment spree. Whether the new rules launch a green-energy revolution in the U.S. depends on a little-understood market for tax credits.
The Inflation Reduction Act extended and increased tax credits for wind and solar projects and introduced new incentives for green hydrogen and batteries for the electric grid.
But important details about the implementation of the different credits—which are tied to criteria such as the use of U.S.-made equipment and the location of a project—are still being thrashed out. The Treasury Department issued guidance on labor requirements in November and is expected to release more early in 2023.
“I’ve been practicing law for 26 years and I’ve never seen a bill that was so vague,” said David Burton, a tax partner at Norton Rose Fulbright.
The official estimate for the value of the climate and energy package signed into law this year is $369 billion, but much of the spending isn’t capped and some analysts say the total will be higher. Credit Suisse estimated in September that it could exceed $800 billion.
An important uncertainty is who will claim all these freebies? Tax credits only have value to companies that have taxable earnings. But profits at most clean-energy companies are too small and too unstable to take full advantage of the credits.
The simple solution would be to pay those companies directly. That didn’t fly for legislators concerned about the appearance of spending too much. The government will give refunds to companies that can’t claim tax credits, but only for certain types of projects, such as carbon capture and green hydrogen.
For the rest, the Biden administration’s proposed solution illustrates the challenge of using sometimes-unwieldy policy tools to unlock the vast investments that are needed to switch the economy over to low-carbon energy.
The plan allows companies that are eligible for tax credits to sell them. The ultimate financial impact of the Inflation Reduction Act depends in part on that provision creating a new market for tax credits and making it easier for renewable developers to raise money.
The Inflation Reduction Act extended and increased tax credits for wind projects.
Companies are quantifying what this could mean for them. Minneapolis-based utility Xcel Energy Inc. said in October that being able to transfer tax benefits from its renewable-energy assets could improve its cash flow by $1.8 billion over five years, “assuming constructive regulatory outcomes and the development of a market.” Several big utilities, including Xcel, have already announced they will use the extra cash to cut rates for customers.
Brian Van Abel, Xcel’s chief financial officer, said the company is talking to potential corporate buyers of the tax credits. Lawyers, bankers and financial advisers also say they are in talks about arranging transactions for third parties.
Some renewables executives say a market for tax credits could be similar to that for renewable energy certificates, which clean-energy facilities sell to companies that want to hit their climate targets. That market was worth over $11 billion in the U.S. in 2021, according to S&P Global.
Depending on how it works, the transferable-credits system could reduce the industry’s reliance on a key element of project finance called tax equity.
To tap these tax breaks, renewable-energy developers in the U.S. generally raise much of their capital by selling stakes in projects to investors who get the stream of tax credits and the chance of equity gains.
Clean-energy executives say tax equity was a financing bottleneck in the U.S. even before the Inflation Reduction Act because the business is dominated by a few large financial institutions able to structure these complex transactions. The expected increase in clean-energy projects will likely outpace tax-equity providers’ own appetite to invest.
Rubiao Song, head of energy tax-equity investments at JPMorgan Chase & Co., said the tax-equity market is currently worth $20 billion to $22 billion a year. He said he expects demand for this kind of financing to rise to $50 billion in the next three to five years, boosted by all the new types of tax credits. He said JPMorgan, one of the major providers of tax equity, and its peers can’t meet all that extra demand because their funding is limited by their own taxable earnings.
Whether credit transfers fill the gap depends on whether they make it simpler for less tax-savvy companies to invest.
A plan to create a new market in tax credits is a shift in the U.S. strategy for attracting capital to renewable-energy projects.
“There are a lot of ‘hopefullys’ here,” said Marshal Salant, head of clean-energy finance at Citigroup Inc. He said many developers are deferring financing decisions until seeing the Inflation Reduction Act guidance.
Scott Wiater, president and chief executive officer of Standard Solar, a developer of midsize solar projects that was recently acquired by the renewable-power unit of Brookfield Asset Management Inc., said he expects tax equity to remain the preferred option for companies that can secure it. Transferred tax credits would likely have to be sold for a discount, while accelerated depreciation, a benefit available to tax-equity investors, can’t be transferred.
Mr. Wiater said he believes some developers are planning new energy projects based on optimistic assumptions about how the legislation will work and how easy it will be to attract capital in the future.
Tax credits come with a down side for the industry, he added, because earnings-sapping recessions shrink the pool of available capital.
“I believe there’ll be distressed assets in the future that will bring a lot of opportunities,” he said.