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Current trends in tax equity for the wind industry
Written By: Jen Neville
February 20, 2018
At Infocast’s Wind Power Finance & Investment Summit in San Diego, Stratton Report had the privilege to sit in on the “Current Trends in Tax Equity” panel.
At the panel, Jeffrey A. Chester, partner at Morrison & Foerster, acted as the moderator. The esteemed speakers at the panel were Jack Cargas, Managing Director, BANK OF AMERICA MERRILL LYNCH; John DiMarco, Senior Director, CCA CAPITAL LLC; John M. Eber, Managing Director Energy Investments, J.P. MORGAN; Kenji Ogawa, Managing Director, MUFG UNION BANK; Santosh Raikar, Managing Director, STATE STREET BANK AND TRUST COMPANY; and Kevin Walsh, Managing Director, Renewable Energy, GE ENERGY FINANCIAL SERVICES.
The wind finance experts provided an update on the key trends in tax equity and deal structuring. Read their insights below:
The new tax law has impacted upfront investment available by 8 percent
“We ran a couple of examples. There are four or five deals in the shop, so we ran them both ways in terms of if we optimized the tax equity on both wind and solar, how much would be raised? The average of those four… The 35 percent rate was about 61 percent or 61.5 percent. And then when we dropped the rate to 21, we lost the percentage points on that. So on average, it’s dropping from about 61 percent down to like 53 percent,” said John M. Eber, Managing Director Energy Investments, J.P. MORGAN. “On solar, we only had a couple deals for utility-scale, we ran those and it was something like 42 percent was the average raise over the old rate and new rate. The new rate dropped down to 39. That’s the magnitude that we’ve seen so far when we try to optimize these small samples of deals.”
Kenji Ogawa, Managing Director of MUFG Union Bank, sharing his insights during the ‘Current Trends in Tax Equity’ panel.
Corporate PPAs in the wind industry is a “good, thriving market”
“We’re seeing a lot of corporate PPAs and it’s good for the market, let’s start with that. It’s certainly creating a lot of demand for the products, especially on the wind side. Unfortunately, many of them are structured like hedges, so there’s basis differential risks coming with a lot of those PPAs. Some of the basis differentials are easily quantified and measured and accounted for in searching the transaction, and some of it is a little bit more challenging. It’s all vocational specific. It really depends on you know where the settlement points are,” said John M. Eber, Managing Director Energy Investments, J.P. MORGAN.
“We’re getting a lot of build in Texas and a lot still in the Panhandle and West Texas. Those seem to be two very volatile areas for basis differential. we’re also seeing a lot in Oklahoma and we’re concerned that that might become problematic at some point as well but other than those two areas, the corporate PPAs that we are seeing scattered around the country are quite easy to work with. Most of them are big clients of [JP Morgan] and clients of other people here, so we’re we’re happy to see them in the market. It’s good thriving market.”
The wind industry will continue to thrive in the face of the tax law change
“From our perspective, we think this is going to be a very vibrant market this year. It wouldn’t be surprising to us to see volumes at similar levels to each of the last four years, which have been in a 10-11-12 billion dollar range,” said Jack Cargas, Managing Director, BANK OF AMERICA MERRILL LYNCH.
Overall, the panel was a very thorough discussion and touched upon many trends. For renewable professionals looking to tap into the solar tax equity market, Stratton Report recommends the upcoming Solar Power Finance & Investment Summit in San Diego, CA from March 20th through March 22nd.
Santosh Raikar, Managing Director at State Street Bank and Trust Company, lending his expert insights on tax equity in the wind industry.
Morrison & Foerster
Stratton Report caught up with Jeff Chester to get his insights on the wind industryand how the tax reform legislation will impact wind financing. We also gained his perspective on corporate offtake agreements, how the industry has evolved and what players will be the primary buyers.
Winston & Strawn LLP
Stratton Report caught up with Michael O'Brien to get his insights on the wind industry, plus alternatives that are available to project developers to both hedge the merchant risk of the projects once commercial operations commence and how to demonstrate financial viability to potential investors and lenders.