Tax fairness: an important funding mechanism
DOE loan program being improved
U.S. federal tax regulators and Congress have looked into the needs of the offshore wind industry to make equity financing more tax efficient, while the Department of Energy revamps its loan program to return $ 3 billion available to help develop the offshore wind industry, experts said on April 8.
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Tax capital investments have become popular in the United States as a way to finance renewable energy projects, with $ 13 billion completed in 2019, Scott Zimmermann, partner at law firm Wilson Sonsini Goodrich & Rosati, said during a webinar on the opportunities and challenges of the offshore wind supply chain. .
The webinar was hosted by the National Offshore Wind Research & Development Consortium, a nonprofit organization supported by the US DOE and the New York State Energy Research and Development Authority.
Tax equity investors are primarily large financial institutions, with JP Morgan and Bank of America accounting for 50% of the renewable energy tax equity market in 2019, Zimmermann said.
Tax capital investors must be shareholders of the project and they must be for-profit companies that pay US taxes and have US tax liability. And although Google was one of the first companies to invest in solar power a few years ago, the tax capital investors are mostly big banks, he said.
For offshore wind, tax fairness can provide 50% or more of a project’s upfront costs, Zimmerman said.
A production tax credit has also been extended to offshore wind as part of the federal government’s COVID-19 stimulus efforts, but the investment tax credit has always been more lucrative for wind offshore. Even if the PTC were to be extended, the ITC will likely attract more attention from offshore wind developers because the technology has higher capital costs and, per unit of power, offshore wind is more expensive. than other renewable energy technologies, he said.
Supply chain implications
To meet tax fairness requirements, customers will need proof of binding contracts, payment, serial numbers, equipment delivery and other details to prove that construction has started, according to the submission of Zimmerman.
Suppliers of offshore wind projects should know that meeting construction deadlines is important, he said, because construction start times and continuity of work are necessary to qualify for tax fairness. Developers must pass a physical labor test showing that labor of “a significant nature” has started, the presentation said.
The other way to qualify involves a 5% safe harbor: where at least 5% of the total cost of the energy project has been paid or incurred. Many developers prefer the physical labor test because they don’t have to spend so much up front, Zimmerman said.
The Internal Revenue Service and Congress have taken into account the unique needs of offshore wind development to make tax-based equity financing work, according to the presentation. But the process still requires considerable tax and legal support as the requirements are numerous. In addition, tax fairness agreements are often audited due to the large sums involved, highlighting the need to meet all required qualifications, he said.
The federal government is also trying to accelerate investments in the offshore wind industry through DOE’s energy loan program, said Todd Glass, also a partner of Wilson Sonsini.
DOE’s Office of Loan Programs began issuing loan guarantees, senior secured debt, and other products in 2005, initially supporting 30 energy projects. But only one project has been funded in the past six years, as the demands of the program have become more onerous, Glass said. The program still has a lending capacity of $ 40 billion.
One problem is that the “reasonable prospect of repayment” requirement has become “overly conservative” in forcing developers to enter into long-term contracts for the full volume of energy for their project. The filing fees also hit $ 400,000, which reduced interest, Glass said.
However, the Biden administration is working to improve the program, after appointing Jigar Shah as executive director of the DOE’s loan programs office. Shah founded solar energy company SunEdison and most recently served as co-founder and chairman of Generate Capital, a sustainable infrastructure platform.
“If I know anything about Jigar, he’s going to find a way to really kick this off,” Glass said.
On March 29, the administration set a national target of deploying 30 GW of offshore wind power by 2030 and on the same day, the Office of Loan Programs released a backgrounder highlighting how $ 3 billion of dollars available in the loan guarantee program can be leveraged to build a commercial offshore. wind industry, depending on presentation.
It appears that the loan office will expand the traditional view of “the reasonable prospect of repayment” to include supporting infrastructure like foundation fabrication facilities, turbine blade fabrication and support vessel construction, Glass said. .
“I would bet DOE will try to get most of the money out in the next three years,” he said.
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