Outlook on the Solar Tax Equity Market
Katherine Demetre | Infocast Events
Britta von Oesen, Director, COHNREZNICK CAPITAL MARKETS
Britta von Oesen is a Director with CohnReznick Capital Markets based in the San Francisco office. She has 10+ years of experience in investment banking, tax equity, corporate strategy, and development in the wind, solar, and broader environmental sector.
Britta primarily focuses on transaction management for the renewable energy sector including M&A, structuring, and negotiation of over $1B in tax equity.
She has previously been involved in numerous renewable energy transactions including utility-scale and distributed generation solar transactions in the US market and utility scale wind and solar transactions internationally. Before joining CohnReznick, Britta was Head of Corporate Strategy and Development for Gestamp Solar and Group Manager for Windkraft Nord AG. Britta received an MBA from Cornell University’s Johnson Business School and a B.A. in Environmental Biology from Colgate University.
Infocast: Our first question is going be around tax reform. Given the current market uncertainty, what would tax reform mean for solar?
Britta von Oesen: The form that any tax reform could take is currently looked at in a variety of ways. I think on the most extreme, any reform that impacts the ITC or the market’s depreciation would be extremely impactful and detrimental to the solar industry. I think in general though, most people are fairly comfortable with those two aspects remaining in place. There obviously is chance that they change but it’s not what is predominantly being talked about. The main aspect that people are talking about today is a change in tax rate. In general people are assuming something of a move from a 35% holiday at 20%, 25% corporate tax rate. And the biggest driver with this is just that they create uncertainty. It creates uncertainty around the lost profiles that solar assets are having over the first couple years of their life. And therefore it creates uncertainty in the benefits that tax equity investors can rely on for investing on those projects. And in general, we’ve found ways to work around that. CohnReznick Capital has certainly worked with our clients and tax equity providers throughout the board to come up with solutions to this. But it’s really more the uncertainty that is causing issues than actual reform.
Infocast: Keeping with the subject of the tax rate, you mentioned uncertainty related to tax equity investors, how are they, because of the impact of lower tax rate, how is that impacting the way that investors and sponsors are approaching the financing of projects?
BvO: There’s predominantly two ways of looking at it. One is the tax rates will stay the same in which case tax equity is usually structuring some type of indemnity payment in the event of a change in tax rate or they’re structuring some sort of cash sweep associated with the change in tax rate all to make sure that they maintain their expected economics and expected return that they made upon investing in a fund. An alternative approach to that is assuming that the tax rate is lower so investing in a fund now based on call it a 20% or a 25% tax rate and structuring a kind of true up additional contribution by tax equity that would occur at the end of 2018 or the end of 2019 once they’ve kind of realized the majority of their losses and once they are pretty comfortable that any future change in tax rates would not impact them adversely.
Infocast: If there were tax reform, what do you see is the biggest opportunity or challenge that would be created by tax reform in the renewables market and are you seeing any notable trends now in structuring transactions?
BvO: Yes. The biggest challenge is just uncertainty of any kind. Across the history of the solar industry, it was uncertainty about the cash grants and uncertainty about how the Safe Harbor panels back about four or five years ago. Now we’re seeing uncertainty around change in tax rates and it’s requiring a decent amount of creativity and kind of scenario analysis until all of the parties can get comfortable with that. And over the last year, I would say we’ve spent a considerable amount of our time running scenario after scenario. It doesn’t matter what kind of transaction we’re working on. It could be an asset sale, an asset acquisition, corporate sale, portfolio sale, tax equity, financing, back leverage financing, et cetera and you’re just seeing kind of scenario analysis after scenario analysis thinking about what could happen here. So it’s really it’s the uncertainty that causes more of an issue than any actual tax rate change.
Infocast: Speaking a little more to the tax equity market, who right now are the most active types of investors in the tax equity market and what sectors are they participating in?
BvO: So it’s an interesting time in tax equity. I mean, we have 10 to 15 kind of core financial institution tax equity investors and these are the guys who have been around for years and years and they’re investing across the range of different tax credits and are highly experienced. What’s really exciting is over the last call it year or two, we’ve seen a huge number of influx of non-traditional tax equity investors and these are insurance groups or corporate investors or high net worth family organizations, et cetera. And we’re seeing a lot of creativity and a lot of competition entering the market which is improving economics for sponsors and really is an exciting thing to see at the moment.
Infocast: How are investors allocating their investments between residential C&I and utility scale type of projects?
BvO: Yes. So again, from that core group of investors, you’re seeing most of them play and all of these aspects, resi, C&I and utility scale. I’d say the least favoured sector is probably the C&I sector still because of its non-conformity and the due diligence required for the variety of sponsors, the variety of contracts, the variety of asset locations, et cetera. Most investors have a preference for resi or utility scale just for the sure fact of the amount of dollars you can get out of the door for a comparatively limited amount of due diligence. I still think C&I is one of the most underserved sectors of the market.
Infocast: What are lender’s views on offsite corporate structures, community solar and other emerging structures and what new issues are these structures creating and how they’re being addressed? It’s a long winded one but…
BvO: Community solar is really exciting right now. We’re starting to see a number of programs call it in the northeast or Minnesota or Colorado that investors are getting comfortable with and are starting to really understand the actual risks associated with the credit profiles associated with these portfolios and so we are seeing a huge amount of increase in the community solar portfolios that we’re seeing across the board. I also would say from a corporate structure, in 2018 it’s going to see more and more of these and we’re going to see more and more going forward. The corporate procurement is becoming a huge industry. There’s massive conferences to build into it. There’s gigawatts and gigawatts of procurement that needs to occur and the biggest issues with these are making sure that it’s structured in a way that is financeable. So whether or not there is basis risk, whether or not there are purchase options and when those occur and what those look like and a variety of issues that come up with any corporate structures. We’ve been doing a ton of work in both of these spaces and it’s not easy. I mean, you’re seeing products like the proxy revenue swap, et cetera. You’re seeing hedges, you’re seeing all of these things and it’s a really exciting time for solar projects to find creative offtakes and continue to build out the gigawatts that are expected. But it is complicated from a financing perspective and that’s something that we’re working really hard with our clients and with investors to make sure everybody understands and that they’re getting optimal financing.
Infocast: What are the most common deal structures today that you’re seeing and what are the current obstacles in those most common deal structures, I would say?
BvO: I would say in solar, we’re still predominantly seeing the partnership flip for the larger solar projects and the larger solar portfolios. Smaller assets or one off, you’re certainly seeing a lot of sale lease backs and you’re seeing the in avertedly so the least factor still a fair amount but it’s probably not as common as the partnership flip at the moment.
The biggest obstacles that we see that our clients are facing at the moment, the two kind of main points that all tax equity or all lenders are asking about immediately is how to approach the potential change in tax rate and the other is the Suniva 201 filing which we got the results on recently. And so I think it will be very difficult to get deal financed going forward without being able to point to procurement of panel at a specific price and without exposure to any of the trade issues.
Infocast: Yeah, Suniva definitely came through all of the news recently, so definitely one of the challenges.
BvO: And not unexpected. I mean, we’ve seen that has been hurdle since it was filed a couple months ago so that’s not new for tax equity to put those requirements on but we do expect it to continue being a hurdle.
Infocast: How can we bring greater efficiency to the tax equity financing in general?
BvO: I think as we continue to see consolidation in the solar market and continue to see kind of the rise of some of these larger IPPs that are able to bundle significant number of megawatts into one portfolio and get that financed either in a single or a club deal with tax equity. I think from a sheer megawatt perspective that’s really helpful. That being said, we are also seeing a lot of these interims that are willing to take 20 megawatt, 5 megawatt, et cetera clips as far as they’re kind of first forays into tax equity and I think that is actually fulfilling a very strong need especially in the C&I sector. That’s really great to see a lot of those projects be able to come to fruition.
Infocast: Right, uh-hmm. Okay. And thinking a little bit more about tax equity investors. What are these types of investors’ views on offsite corporate PPAs community solar projects and CCA structures and what new issues are these structures creating and how are they being addressed?
BvO: So we touched on the corporate PPAs and community solar, I think CCAs are another aspects that we’re going to see more and more of. I mean, in California alone they are becoming a very serious contender as far as taking off take contracts and being the off takers for these projects. It’s taking tax equity a bit of time to get comfortable with us. We’ve seen a handful of them financed and I think tax equity is incentivized and working very hard to get comfortable with this and certainly the sponsors are working with them kind of deliver those comforts that’s needed around there and I think we’ll see a lot more CCA projects in the next couple years.
Infocast: There are approximately three years or less on 30% of the ITC and then I believe it comes down to 10%. What do you see as the greatest challenges or opportunities during this time period?
BvO: So I think the two that we’ve mentioned, the Suniva and the next was kind of looming uncertainty associated with change in tax rates are probably the two that most people are talking about at the moment. We haven’t quite gotten to the point where Safe Harbor becomes a huge topic of discussion but I think we’re not far from it and we’ll certainly over the next couple years do something that they’re looking at in front to get comfort around.
Infocast: Is there anything that I haven’t given you the opportunity to share, that you think is important for our audience?
BvO: Well, I just think it’s a really exciting time to be a part of the solar industry. With all of this influx of new investors and kind of the competitive increase in tax equity and in lending markets across the variety of solar projects, resi, utility or C&I. It’s a great time to be developing assets, selling assets or owning and financing assets so we’re really excited to be a part of it and continue to work with our clients to make sure that they are optimizing their tax equity structuring and their financing capabilities to make sure these deals are as valuable as possible.