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Achieving Sustainability Goals in Times of Uncertainty Pt. 3: What Will Happen to the Renewable Energy Market?

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Achieving Sustainability Goals in Times of Uncertainty is a blog series launched in response to an outcry for support from energy and sustainability professionals. The confluence of recent regulatory and trade restrictions at play in the United States, namely the Suniva solar trade case, proposed power market rule changes, and corporate tax reform, has led to uncertainty in the renewable energy industry as we enter 2018. The availability of renewable energy is critical for organizations to meet sustainability goals. In this series, we intend to provide guidance renewable energy buyers need in the face of an uncertain regulatory environment. While this series is directed at U.S. professionals coping with these changes, the content is intended for all. To begin with part 1 in this series, click here. To read part 2, click here.

On December 22nd, the U.S. Tax Cuts and Jobs Act was signed into law. For the renewable energy industry, there is good news, as well as continuing developments to keep an eye on. While the final tax bill is generally less threatening for renewable energy as originally predicted, the signing of the bill has left the market with continuing uncertainty around how these changes will play out.

As background, the U.S. renewable energy industry has been buoyed for several decades by tax credits that can be claimed based on investment in or production of renewable energy.  These tax credits make up a significant portion (up to 50+%) of the total return of a U.S. utility scale renewable energy projects in 2018.  This means that a change in or removal of said tax credits could have an adverse effect on the competitiveness of renewable energy projects (just as the removal of tax incentives for gas, coal, or nuclear generation would adversely affect their competitiveness).

The good news: Last-minute amendments to the final tax bill eliminate or amend many of the most damaging provisions to the renewable energy industry that were proposed in the House and Senate tax bills. A bill that once threatened to devastate the U.S. renewable energy industry may now potentially cause a temporary slowdown or reduction in renewable energy investment as developers, offtakers, and financiers adjust to the new incentive system. Though there are still possible repercussions for the industry, the effects are nowhere near the original bill’s impact. Below, you will find a summary of these developments and predictions on how this may affect the industry. This assessment is based off current information, which continues to evolve rapidly.

Renewable Energy Tax Credits are kept intact and unchanged in the final bill. This is a major relief for stakeholders in the renewable energy industry, as original proposals suggested making it harder for renewable energy projects to quality for the federal wind power production tax credit (PTC), rolling back the value of credits to 1992 levels, and eliminating the investment tax credit (ITC) that is commonly used by solar and geothermal projects. Both incentives were most recently extended at the end of 2015 with broad bipartisan support.

As it now stands, tax credits for wind and solar will remain on the current phase out schedule adopted in 2015, and the permanent 10% ITC will remain. Further confirmation indicates that the ‘start of construction’ provision in the PTC and ITC would remain unchanged (contrary to proposed language in the original House bill). That is good news for C&I buyers considering wind investments, as projects that finish construction by the end of 2020 still qualify for full value of the PTC.

The Alternative Minimum Tax that the Senate bill attempted to restore at 20% (equal to the then-proposed corporate tax rate) would have substantially reduced or eliminated the value of all tax credits, including the PTC and ITC. This provision was rejected and does not appear in the final bill.

The Base Erosion Anti-Abuse Tax (BEAT) remains in the final bill, but with adjustments that are more favorable to renewable energy investors. BEAT was designed to stop businesses from tax avoidance by moving money overseas, but the provision had (potentially unintended) side effects on the renewable energy industry. Most renewable energy developers do not have enough tax liability to fully monetize the PTC or ITC on a utility-scale renewable energy project themselves, so they bring in investors that lend cash in exchange for the tax credits (tax equity investors).  These are primarily big, multinational banks like Citi, JP Morgan, and Bank of America.

The original rule limited the tax credits that could have been claimed by some of these multinationals which could have caused deep reductions in the amount of tax equity available for renewable project investment. The amended provision in the final bill reduces the effect of BEAT on renewable energy by allowing companies to use PTC and ITC to offset up to 80% of the BEAT through 2025. This does reduce the potential tax equity pool for renewable energy, but the market expects there to still be substantial funding available through utilization of these tax credits in project financing.

Developments to Watch

  • Expired tax credits for renewable technologies left out of the 2015 tax package, including biomass, geothermal, and hydropower, were not extended in the current tax bill. There is potential that these credits will be addressed in a future tax extenders bill.
  • There are also persisting questions around the true effects BEAT will have in the market—what this really means for renewable energy investment is still unclear. As financial institutions respond to the new constraints placed by BEAT, we will gain a better understanding of how this will affect renewable project investment.
  • Finally, there is remaining legislation proposed under the DOE NOPR and the Suniva Trade Case, the outcomes of which will also have implications on renewable energy, and the electricity market at large.

Our Recommendations for C&I Energy Buyers

  • Continue to stay the course. Intense lobbying from stakeholders in the renewable energy market clearly had an impact on the final outcome of the tax reform bill. The preservation of the PTC and ITC, as well as the removal of other detrimental provisions, demonstrates the importance of asserting leadership, even in times of uncertainty. Though the means by which we meet our sustainability goals may need to adapt, even temporarily, our momentum towards meeting them should not be deterred by regulatory fluctuations.
  • Act quickly for wind. To earn the full value of the wind PTC, projects need to be fully operational by the end of 2020. It can take 15-24 months to finance and build a wind project once a PPA is signed, pinning the PPA signing target date to no later than the end of 2018 or very early in 2019.  It can also take 9-15 months once a company engages an advisor to find and negotiate an optimal wind PPA.  For companies who want to see the best possible wind power pricing, this constrained timeline makes the start of 2018 the key time to initiate a wind power PPA.
  • Don’t forget about the rest of the world. With a mostly neutral tax outcome, the U.S. renewable energy market remains one of the most attractive in the world for interested buyers—but the U.S. is not alone in this regard. India, Mexico, Australia, and markets throughout Europe have established or emerging economic opportunities in renewables.  Be sure to consult with an expert that is up to date on worldwide market opportunities, like Schneider Electric 
  • Consider how renewables fit into your overall sustainability goals and power purchasing strategy. Engaging in a comprehensive, portfolio approach to meeting sustainability goals takes more than renewables alone—working on energy efficiency, data enablement, and smart utility bill management in tandem with renewables will help any company diversify away from regulatory risks.
  • Keep your eyes on the market. The energy market, as always, is moving fast. New information often comes out before you have time to fully digest the last. Join us on January 25th for a webinar featuring energy market experts at Schneider Electric and Keith Martin of Norton Rose Fulbright, a guiding voice on the current regulatory environment, to gain a better understanding of what these movements in the market will mean for your company.

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