Cover Your Eyes: RE Financing May Be In For a Scary Ride Once the Treasury Grant Terminates

Michael Mendelsohn's picture

Just ask a renewable energy (RE) project developer: acquiring financial capital can be one frightening experience.  A key source of financing for RE projects is tax equity, which monetizes the tax-related stimulants offered by the federal government.  Unfortunately, attracting tax equity is a complex and expensive endeavor

Even more unfortunate, the demand for tax equity is expected to increase significantly in 2012, potentially freezing out or increasing the cost of RE projects. That’s because the investment tax credit—worth 30% of eligible project expenses—hasn’t needed to rely on the tax equity market recently due to the existence of the 1603 Treasury grant program. 

A picture of a merry-go-round, spinning quickly.

Figure 1. Tax equity markets could be in for a stomach-churning ride

Source: Mike Mendelsohn

According to Mintz Levin, there were 17 national investors in the tax equity space in 2010, up from 11 in 2009, for the RE industry [1].  That’s pretty good, but according to a recent survey of these investors, the quantity of tax equity currently available is only about $3 billion, less than half its peak of 2007 [2]. Further, the investment group indicated they expect the level of tax equity to remain static at $3 billion for 2011 and 2012.

So, what happens when the 1603 program ends? In 2012, as the 1603 program wanes, demand for tax equity is expected to roughly double to meet the needs of the investment and production tax credits currently covered by the Treasury grant. Beyond 2012, the demand will continue to increase as state renewable portfolio standards require significant capacity additions. 

Over the past several weeks, colleagues and I spoke to financial executives at prominent solar firms, including SolarCity, Amonix, BrightSource Energy, and the accounting firm Reznick Group. We discussed the cost of money and the financing terms a developer could expect to receive.  We also asked our interviewees how they saw the tax equity market shaking out. Several of the financiers were concerned required yields for tax equity could increase substantially. Mike Niver of SolarCity predicted tax equity yields could increase 200–400 basis points. 

To put that in perspective, I conducted an analysis in NREL’s System Advisor Model (SAM) to assess the impact on the price of power from a generic photovoltaic system. Using SAM’s new capability to assess advanced financial project structures, a 200 basis point increase in tax equity yields will cause first-year power purchase agreement (PPA) prices to increase about 29%, from $0.177/kWh to $0.228/kWh (assuming an all-equity investment, $3.70/W installed for a Phoenix-based system with single-axis tracking).  A 4% change in the cost of tax equity would cause prices to increase 55% to $0.275/kWh according to the SAM calculations!

Now let’s take a macro look at the issue. According to a draft analysis by Lawrence Berkeley National Lab, from 2013–2020 approximately 6,100 MW of new RE capacity will need to be developed annually to meet the requirements of state renewable portfolio standards currently on the books [4].  Figure 2 provides the expected capacity additions through 2020. 

 Graph showing a comparison between cumulative RPS requirements and annual incremental capacity expected to reach these requirements
Figure 2.  RPS requirements will increase the need for RE capacity additions

Assuming a portfolio mix of 50% wind and 50% remaining RE technologies as outlined in Table 1, roughly $8.1 billion in tax equity will be needed annually, 2.7 times the quantity supplied in 2010. 

Technology % of Assumed Portfolio Annual MW Needed Avg. Cost per Watt [5] Total Investment Required ($M) Tax Equity Required (55% of total)
Table 1. Potential Tax Equity Required
Wind 50% 3,050 $1.91 $5.83 $3.20
Solar 30% 1,830 $4.00 $7.32 $4.03
Biomass 10% 610 $1.86 $1.13 $0.62
Geothermal 10% 610 $0.64 $0.39 $0.21
Total 100% 6,100   $14.67 $8.07

But not all financial experts we talked to saw any great threat.  According to Matthew Meares, Director of Project Finance, with Amonix — a manufacturer of concentrating photovoltaic systems — the size of the tax equity market for renewable energy projects pales in comparison to the competing markets for equipment leasing, low income housing, and “new markets” tax credits.  A slight shift in return, according to Meares, could bring a substantial shift in supply.

But there was general consensus among the experts — many projects may simply not be able to attract tax equity, regardless of price.  According to Meares of Amonix, only the strongest projects (i.e., very mature developers, mature technologies, and power purchasers with excellent credit) will be able to attract tax equity. Projects by second-tier developers or utilizing newer technologies may watch from the sidelines.  Further, the industry could see a fair amount of consolidation as smaller players simply won’t have the scale to attract tax equity and thus utilize the federal incentives that make renewable energy affordable. 

And if the worst predictions are accurate, the cost of tax equity—even for the best projects sponsored by the strongest developers—may incease substantially, driving up the cost of financing renewable energy projects.    Admittedly, our crystal balls are all a little fuzzy.  But at this juncture, it looks like things may get a little bumpy once the Treasury grant runs out. 


[1] Levin, M. “Renewable Energy Project Finance in the U.S.: An Overview and Midterm Outlook”, 2010,

[2] U.S. Partnership for Renewable Energy Finance. “2010–2012 Tax Equity Market Observation,” 2011.

[3] Chadbourne & Parke, LLP. “Update: Tax Equity Market.” Project Finance Newswire,  2010.

[4] Barbose, G. RPS projection data, LBNL, Berkeley, CA, 2011.

[5] Bollinger, M., “Preliminary Evaluation of the Impact of the Section 1603 Treasury Grant Program on Renewable Energy Deployment in 2009”, Lawrence Berkeley National Lab.  Report was source for all data except assumed cost of solar which was reduced from $6.33/W (PV) and $13.03/W (CSP) to $4.00/W to generally reflect significant cost-cutting trends in the United States and to introduce a measure of conservatism in the analysis.

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