Clean-Energy Tax-Equity Investment Rising, But Not Fast Enough

  • Tax equity for renewable energy increased 14 percent in 2015
  • Small rooftop installers `will be at a growing disadvantage'

Investors are directing more money toward clean-energy tax equity deals. The amount of U.S. wind and solar projects looking for tax-equity investment is growing even faster, especially for residential rooftops.

“It’s nice that new tax-equity investors have come into the market, but they haven’t come in fast enough to meet solar’s demand,” said David Burton, a New York-based partner at the law firm Akin Gump Strauss Hauer & Feld LLP who specializes in such deals. “It gets more imbalanced every year.”

In tax-equity deals, renewable-energy developers that have little or no taxable income sell portions of their projects’ tax credits to investors -- typically financial companies, including JPMorgan Chase & Co. -- that apply the credits to their own tax bills. About $11.5 billion in tax-equity deals for wind and solar farms closed in 2015, up 14 percent from $10.1 billion in 2014.

That rise is outpaced by the growth of some rooftop solar companies, including industry leader SolarCity Corp., which increased installations 73 percent last year. Demand for residential solar in the U.S. is expected to climb 39 percent this year, with about 2,160 megawatts of new systems, according to Bloomberg New Energy Finance.

Rooftop Solar

That imbalance is more likely to affect smaller residential developers that are seeking tax-equity investment, not established rooftop companies, said Nathan Serota, an analyst at Bloomberg New Energy Finance. SolarCity, for instance, can assemble large enough portfolios of rooftop assets to justify investment, and announced Thursday a tax-equity fund to finance $249 million in solar projects.

“As demand for tax equity overall continues to increase as a result of wind projects, utility-scale solar and residential solar projects, residential players with smaller portfolios and lesser experience in the market will be at a growing disadvantage,” he said.

Tax-equity deals for residential solar systems typically are more expensive than for large-scale power plants, Burton said. That’s because buyers of electricity from rooftop systems are often consumers who are less sophisticated than utilities that purchase electricity from larger wind and solar farms.

“Investors want a premium,” Burton said.

New Investors

Arrangers of tax-equity deals have tried to attract new investors, with some success. There were 20 investors in wind in 2015 and 28 that participated in solar tax-equity financing -- some did both -- according to JPMorgan Chase.

But declining corporate tax bases, the increased use of foreign tax credits and complicated accounting for tax equity have discouraged some potential new investors. Efforts to convince small public companies to provide tax equity often fail after they learn of the complicated accounting required to close such investments.

“They turn green and say ‘no thank you,’” Burton said at a seminar Wednesday. “‘We have day jobs. We make widgets.’”

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