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What Engie's tax equity deal tells us about financing renewables

Last week, Engie North America announced what it dubbed as the largest tax equity deal of its kind in the United States — 2 gigawatts of renewables, including 1.5 GW of wind and 500 megawatts of solar, financed with $1.6 billion in tax equity commitments from Bank of America and HSBC. 

And that wasn’t the only renewable energy tax equity deal announcement. 

Days later, RWE Renewables disclosed tax equity financing for a 151-megawatt wind farm through Bank of America, and BayWa r.e announced it secured tax equity for a 133.6 MW solar farm, expected to be completed this summer. Interestingly, that solar farm will supply energy to four corporations (Bloomberg, Cox, Salesforce and Gap) that previously joined forces in an early aggregation deal

Is Engie’s tax equity deal as big as it sounds?

While Engie’s tax equity deal is impressive in size, it’s timing makes sense. 

The two main forms of tax credits for renewables — the Investment Tax Credit (ITC) for solar and the Production Tax Credit (PTC) for wind — are both coming to an end. Last year was the last opportunity to safe harbor projects for the ITC before it ramps down from 30 percent to 10 percent; this year is the last year to secure projects for the PTC. 

The sectors that are hurting are for projects that are more expensive to fund. And they’re more subject to COVID-19 shelter-in-place orders.
The Engie announcement, part of a deal that surely predates the economic crash, shows the developer’s ability to get financial commitments for projects already in the works. 

"It’s fairly normal after a year with a safe harbor event to see a lot of portfolio and financing structures receive tax equity financing in the first six months or so in the year, and even into the end of the year," said Elizabeth Crouse, tax expert and partner at K&L Gates, in a phone conversation.

I know what tax equity is, but why don’t you tell me so I know you know

As a person with a liberal arts degree, "tax equity" doesn’t mean much to me. It sounds like one of those terms that concerns people with second homes (or first homes). 

But when it comes to renewable energy, the importance of tax equity cannot be overstated. It is the primary federal incentive to drive investments into clean energy projects. Smart people tell me our renewable capacity likely would be less than half of what it is today without it. 

Simply put, a "tax equity investment" is a transaction; an investor puts money into a project in exchange for the tax credits. As a result, the investor is making money on the infrastructure — which offers a slow and steady return — and is able to reduce its income taxes. 

"The whole point is to try to increase the attractiveness of the deal so the deal can get done," explained Crouse. "If you increase the return profile by creating a tax credit, you’re increasing the likelihood of the solar facility getting built."

For renewable developers, this is a valuable tool to sweeten investments and open up new sources of capital — regardless whether that investor cares about climate change. It has been so effective, tax equity makes up between 40 and 60 percent of investments in most renewable energy projects

Is COVID-19 impacting tax equity for renewable energy?

Two factors may affect the availability and cost of tax equity financing.

First, tax equity benefits investors by reducing taxes — which means it requires organizations to pay taxes. With the contracting economy and corporate tax cut in 2017, there are fewer investors with less money going to taxes.

Second, delays in projects due supply chain disruptions and social distancing mandates may push project completion dates past the end of the year — meaning it is possible investors won’t be able to access the tax credits they were hoping for. 

So far, tax equity finance is still flowing to utility-scale projects — especially for developers that have established relationships with financial institutions. Customer First Renewables is seeing major tax investors — such as JPMorgan Chase and Bank of America — continue to invest in the near term. 

Next year will be the same. We don’t see a volume decreasing or an appetite decreasing.
Given Bank of America is tied to two tax equity projects last week, that appears to be empirically true. However, for projects in other sectors — residential, distributed solar, commercial and industrial, and community solar — finance appears harder to come by, according to Crouse. 

"Developers who didn’t have established relationships [with financers] are having trouble getting financing right now," she said. "The sectors that are hurting are for projects that are more expensive to fund. And they’re more subject to COVID-19 shelter-in-place orders."

Do renewables need tax equity to continue to grow? 

The economics of renewables have changed greatly in the last 10 years, when the ITC and PTC were adopted. 

The cost of solar has fallen 85 percent between 2010 and 2019, and wind fell 49 percent in the same period. And the costs keep falling: Bloomberg New Energy Finance found that in the second half of 2019, the cost of wind and solar fell 9 percent and 4 percent more, respectively. Today, renewable energy assets are cheaper than fossil fuels in two-thirds of the world.

What’s more, long-term power purchase agreements from both utility and corporate offtakers ensure a certain return on investment over a period of time. So while the wholesale power markets are crashing due to decreased demand associated with the coronavirus, utility-scale clean energy assets are seeing steady returns. 

The returns to capital for investments in clean energy have been running between 7 and 10 percent, whereas some of the investments that have gone into shale have been a doggone loser.
"The returns to capital for investments in clean energy have been running between 7 and 10 percent, whereas some of the investments that have gone into shale have been a doggone loser," said Amy Myers Jaffee, senior fellow and director of the energy and climate change program at the Council on Foreign Relations on The Interchange podcast. "So I think that when we come out of this crisis, institutional investors are going to remember that."

While clean energy advocates have been lobbying to extend the tax credits — especially given that COVID-19-related delays may result in projects not meeting the deadlines to qualify for the credits — as of now, there appears to be little traction to extend. 

Energy developers see a path to meeting 2020 goals 

Engie North America has a goal of adding 2 GW of clean energy in the United States in 2020 — which it says it is still on track to meet, despite disruptions from the coronavirus. Gwenaelle Avice-Huet, CEO of ENGIE North America, said in a phone conversation she doesn’t see a slowdown of the renewable deals into the future. 

"For the banks, it’s still in line with the strategy, and it’s secure, and it’s possible for them," said Avice-Huet. "Next year will be the same. We don’t see a volume decreasing or an appetite decreasing."

This sentiment is echoed by NextEra, a developer that says it is on track to deploy 5 GW of renewables this year, with no projects from this year delayed. John Ketchum, president and CEO of NextEra Energy Resources, said on an earnings call that he’s seen "no drop-off, no slowdown" in the company’s construction timelines or deal-making momentum, according to Greentech Media.

Likewise, 8minute, a solar developer, announced last week an additional 3 GW of solar in its project pipeline, bringing the company to a total of 18 GW in the pipeline.

This article is adapted from GreenBiz's newsletter Energy Weekly, running Thursdays. Subscribe here.

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