Kate Aronoff explains how Wall Street is the big winner of Clean Energy Tax Credits. In the 1970s, renewable tax credits were introduced, but …“in recent years they have also created opportunities for a small handful of major investment banks to skim billions off the top, extracting lavish fees and control over clean energy projects as part of deals shrouded in secrecy. Public power providers—who serve nearly a third of retail electricity customers—have trouble accessing clean energy tax credits at all.”
Take a deep dive into Aronoff’s story to best understand the current environment and how the Biden Administration could change that:
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“That means those benefiting most directly from policies encouraging renewable energy through tax credits are a highly concentrated set of tax-equity investors at major banks, insurance companies, and even companies like Amazon and Google looking for opportunities to shrink their tax bill. Demand for these tax shelters has grown rapidly, up to as much as $18 billion in 2020 from $13 billion in 2019. In both years, JP Morgan Chase and Bank of America accounted for more than half the market. Ironically, the Biden administration raising taxes would be expected to further boost demand for tax-equity deals, with more companies seeking relief.
To put it another way: By offering tax credits as a delayed refund for renewable energy projects—rather than offering the cash up front as federal grant money that companies can use immediately to build wind turbines, for example—current policy directs a significant portion of the money intended to encourage clean energy projects toward Wall Street instead. Last year, for instance, Engie North America struck a $1.6 billion tax-equity deal with HSBC and Bank of America to develop 2 gigawatts’ worth of wind and solar for the Electric Reliability Council of Texas; Southwest Power Pool; and Pennsylvania, New Jersey, Maryland Power Pool.
As geographer Sarah Knuth, who researches tax-equity investors’ role in clean energy development, told me over Zoom, the sector operates less as a market than a series of “boutique and disparate insider deals.” Since 2008, tax equity has been more than twice as expensive as debt financing—i.e., the way power providers would get much more of their financing if they didn’t have to lean on tax-equity investors. The Congressional Research Service finds that tax-equity investors require rates of return that are 7 to 10 percent higher than the return on comparable debt products.
Besides charging a premium, those doling out those deals can also hand-pick projects they want, leaving investment decisions for the clean energy future up to a handful of unaccountable bankers. “Effectively, the tax equity mechanism outsources a portion of the oversight and compliance monitoring to the investors in exchange for a financial return,” the Congressional Research Service report found. As an anonymous managing director for one “American Multi-National Investment Bank” (as they were opaquely referred to in the minutes) told an investor forum in 2018, “We get ten requests for tax equity a week and say ‘yes’ to less than one a week. We have to prioritize opportunities.”
These arrangements aren’t unique to energy. The Low-Income Housing Tax Credit, New Markets Tax Credit, and Historic Rehabilitation Tax Credit instituted by the Reagan and Clinton administrations are structured similarly.
Tax credits became popular, Knuth noted, in the wake of the anti-tax revolt that swept California in the late 1970s. High property taxes in the Golden State helped fuel a right-wing populist wave that ushered in one of the most regressive state tax regimes in the country and (arguably) Ronald Reagan’s presidency. Once he got to the White House, Reagan discouraged direct federal spending on social and environmental programs and erected an array of elaborate new tax shelters for corporations and the wealthy.
There’s been pushback to this model from both renewables developers and the Biden administration. Besides extending tax breaks, Biden’s infrastructure proposal calls for clean energy developers to use a refund process to get paid the cash value of the tax credits rather than selling them off to tax-equity investors—similar to programs rolled out as part of the American Recovery and Reinvestment Act that Biden oversaw as vice president. This would allow clean energy developers to finance more projects directly on their balance sheets, rather than turning to Wall Street middlemen.
The plan also calls for a new range of tax credits, without specifying whether those breaks would be refundable, too. One measure in the plan aims to incentivize the buildout of at least 20 gigawatts of high-voltage-capacity power lines and “mobilizes tens of billions in private capital off the sidelines—right away.” It outlines a set of similar, tax-credit-based incentives for building electric vehicle charging infrastructure and “hydrogen demonstration projects in distressed communities.”
Tax-equity investors have been eager to snap up new agreements as the Investment and Production Tax Credits are scheduled to wind down over the next several years. Right now, they’re eager to take advantage of the recently expanded 26 percent tax break on offer for solar projects started by the end of 2022, before those ramp down to 22 percent in 2023. But the same small collection of firms churning a profit out of tax-equity markets may also have wandering eyes. The American Jobs Plan does outline that its proposed expansion of an existing tax credit for carbon capture and storage (CCS), 45Q, should have a direct-pay option. For now, some tax-equity investors seem eager to take advantage of a potentially growing market in CCS.
So while tax equity investors could be shut out of renewables tax credits in Biden’s infrastructure proposal, should it pass, they may find new opportunities in other green infrastructure. If a big role for tax-equity investors is preserved across the board, clean energy firms could be competing for attention among the same highly concentrated set of fickle investors.
Nonprofits, for example, are tax exempt, which makes them ineligible. A national Clean Energy Standard—setting out a national target to zero out emissions in the power sector—a could expand that market even further. Tax-equity investors could, for example, skim billions off transmission lines (crucial decarbonization projects with a similar scale and set of developers) if they get an incentive structure like the existing ones for wind and solar. “It’s probably a plum project for them,” Knuth said, “and is going to be the kind of project the JP Morgans of the world want.” Yet even making sure all of the tax breaks in the infrastructure package are refundable (i.e., structuring them more like grants) wouldn’t solve the problem for public and nonprofit power providers, who would still lack access.”