November 9, 2016 Read More →

On the Blogs: ‘Why Wall Street Thinks Renewables Could Be Better Off After Tax Credits Expire’

Peter Maloney for Utility Dive:

Financiers are beginning to ponder what life without the production tax credit (PTC) might look like, and it might not be so bad.

The PTC has been a mainstay of the renewable energy industry and a catalyst for renewable project deal flow for decades. So it would seem that its eventual demise – it is scheduled to be phased out by 2020 – would have bankers worried, but some seem, instead, to welcome the prospect.

“The phase out of tax equity makes for a healthy industry in the long term,” Jonathan Fouts, a managing director in Morgan Stanley’s global power and utilities group said at a recent finance conference in New York.

Renewable energy projects have dominated power sector deal flow for years. About 75% of all new capital is going into renewables, mostly from private equity and renewable energy funds, Fouts said at the recent Platts’ Financing U.S. Power conference.

That boom has been driven by several factors, including concerns and perceived risks about coal-fired generation, declining costs for wind turbines and solar panels, and the financial engineering that enabled the monetization of the PTC via what is known as the partnership flip structure.

The partnership flip requires the developer of a wind project to transfer nearly all the equity in a wind project to a financial institution. Tax credits follow equity ownership, so the financial institution collects the tax credits that the wind farm generates over a 10 year term. At the end of the term, or when the wind farm “earns out,” the structure flips and most of the equity reverts back to the developer.

Eventually the market will be better off without tax equity, said Greg Wolf, CEO of Leeward Renewable Energy, a development company backed by ArcLight Capital Partners. Taking tax equity out of the mix could lower the cost of capital for renewable deals, hex said.

The most obvious post tax equity option would be for renewable power development to move back to a more traditional project finance structure, said Timothy Page, managing director at Whitehall & Co.

Fouts said he would expect to see a resurgence of the mini-perm financing structure, a form of short-term loan used to pay construction costs and bridge a funding gap until a project is operating and can be refinanced.

The market has been good at coming up with new products to meet evolving market needs, moving from power purchase agreements to hedges such as revenue puts. The next evolution is a proxy revenue swap where a reinsurance company takes the wind risk. “That is where we see the next wave of offtakes,” said Fouts.

Full article: Why Wall St. thinks renewables could be better off after tax credits expire

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