Wind Energy, Tax Equity, and Policy Certainty
This article was distributed in the Summer 2014 issue of REsource: Business and Financial Insights for the Renewable Energy Industry
Certainty in Federal renewable energy tax policy remains a pressing issue for the industry. While 2014 has been challenging for the tax equity market in renewables generally, it has been particularly tough in the wind sector, where the Production Tax Credit (PTC) awaits extension and its rules regarding continuous construction need additional clarification. While solar has its own pending tax credit expiration concerns, the solar market is, relatively speaking, more stable than wind. The tax equity market for both wind and solar is dominated by the same two dozen investors, so the tax equity market remains something of a zero-sum game between the two sectors. As a result, it was significant but not surprising that in 2013, as the PTC expired without extension, the total amount of tax equity investments in solar surpassed wind for the first time (see chart below); in the U.S., we see little to reverse this trend in 2014. If Congress does extend the PTC, we expect to see a rebound in wind in 2015--and indeed, a multi-year extension can be expected to generate an even longer uptick. However, even if some tax policy certainty is restored, the on-off history of the wind tax equity market is expected to cast a continuing shadow over smaller projects, which already carry an extra level of risk due to their size.
When and how Congress resolves the PTC extension is likely to impact investor yields in the long term (PTC yields have been hovering around 8%). Despite this uncertainty, there is an ongoing demand for tax equity; and we project that clarification by the Internal Revenue Service of the PTC continuous construction requirements alone could stimulate investment for projects totaling up to 10GW. However that ongoing demand for investment opportunity combined with a limited supply of PTC projects (due to the start-stop tax environment) suggests higher prices and a corresponding reduction in yield. At the same time, we anticipate some balancing of yield due to the lack of a well-defined tax equity environment, which is itself likely to result in upward pressure on yields due to increased investor risk.
For more information, please contact Timothy Kemper, CohnReznick’s Renewable Energy Industry Practice Co-National Director, at 404-847-7764.
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