The photo voltaic trade will require $7 billion to $Eight billion of tax capability from exterior traders in 2020, in response to a brand new Wooden Mackenzie analysis perception. However the competitors to safe that funding is tighter than ever. 

Tax fairness for photo voltaic initiatives has gotten a whole lot of consideration this 12 months. When the coronavirus pandemic first hit, there was widespread concern that an financial downturn would end in much less tax fairness accessible for photo voltaic initiatives. The largest traders within the area, resembling JPMorgan, Financial institution of America, or USBank, would have much less tax legal responsibility to dedicate to photo voltaic investments.  

However the full story is extra nuanced. Much less tax fairness accessible for initiatives is actually a priority. However heightened competitors for tax fairness and a rising photo voltaic trade are the extra essential drivers.  

It’s not all about much less tax legal responsibility 

As the top of 2020 has approached, photo voltaic builders are reporting that much less accessible tax fairness from main traders is slowing down offers.  

In fact, the full tax liabilities of the foremost photo voltaic tax fairness traders dwarf the $7-Eight billion required by all of the photo voltaic initiatives coming on-line this 12 months. However these traders sometimes allocate a certain quantity of tax fairness to any given funding. And below the present financial local weather of 2020, that allocation is experiencing extra strain than ever.   

Utility photo voltaic is forecast to develop by 66 p.c this 12 months in comparison with 2019. Traders are reporting that extra offers are coming throughout their desks than ever earlier than. In conversations with Wooden Mackenzie, one even characterised it as like “ingesting from a firehose.”  

The financial local weather this 12 months has additionally restricted the variety of new traders coming into the market, with Franklin Park the one new investor this 12 months, in response to kWh Analytics’ Lendscape. If it weren’t for the pandemic, extra traders may need entered the market, following the pattern of the final a number of years.  

With out new market entrants, progress in tax fairness provide has not stored up with photo voltaic market progress. That has constricted the tax fairness provide accessible to builders.   

As photo voltaic expands, investor time is at a premium 

Conducting due diligence and vetting credit score necessities takes substantial staffing time, which was in tight provide this 12 months, significantly on the peak of financial panic through the second quarter. Which means that traders are prioritizing solely essentially the most favorable photo voltaic initiatives, to the detriment of economic photo voltaic and initiatives that carry extra service provider threat. 

Given these circumstances, Wooden Mackenzie expects just a few key impacts for photo voltaic tax fairness going ahead: 

• Tax fairness traders now closely favor bigger transaction sizes. 

Something under $50-75 million is probably going going to be a harder promote. This has already made it tougher for smaller business photo voltaic sponsors to supply exterior tax fairness capital.  

• Competitors for tax fairness inside utility photo voltaic is extra intense. 

Tax fairness traders are capable of choose for the best high quality initiatives and usually tend to reject offers with increased ranges of service provider threat or weaker financials. 

• Bankability is the whole lot. 

Tax fairness traders are prioritizing initiatives with respected, bankable sponsors, significantly if they’ve already finished enterprise collectively.  

Wild card: The November election 

Naturally, a rise within the company tax fee would enhance photo voltaic tax fairness traders’ tax liabilities. 

If Joe Biden wins the U.S. presidential election, and his administration efficiently will increase the company earnings tax fee from 21 to 28 p.c, as has been recommended by the marketing campaign, extra main traders could be amenable to growing their photo voltaic tax fairness investments.  

If Biden have been to win the election and the Democratic Social gathering have been to win a majority within the Senate, there would additionally be extra momentum behind varied proposed adjustments to the ITC. One potential situation may see the ITC modified to a “refundable” credit score that may go immediately to the sponsor, decreasing the necessity for sponsors to monetize the tax advantages by means of exterior tax fairness traders. 

There are nonetheless many unknowns with both of those coverage proposals. 

Market steadiness is sooner or later

Regardless of the election consequence, the high-level pattern is evident: After the short-term crunch, photo voltaic tax fairness will seemingly change into much less essential for photo voltaic challenge financing beginning in 2022. 

Because the funding tax credit score decreases, corporations deploy restricted safe-harbored tools, and photo voltaic prices proceed their downward pattern, demand for photo voltaic tax fairness will lower.  

The period of tax credit score monetization dictating photo voltaic challenge financing is slowly drawing to an in depth. 


Michelle Davis is a senior photo voltaic analyst at Wooden Mackenzie and writer of ‘Photo voltaic tax fairness in 2020: Clarifying the constraints’

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