By Anna Hofmann, MBA ’22
This article was written in response to a seminar given by Enrique Alvarez-Uria Berros, Country Manager US, Ocean Winds, and Varun Saluja, Commercial Manager, Mayflower Wind, in an EDGE Seminar at Duke University’s Fuqua School of Business in Fall 2021. This article voices one student’s perspective and does not necessarily represent the views of either Duke University or the seminar speaker.
During our EDGE Seminar class, Enrique Alvarez-Uria Berros and Varun Saluja outlined how offshore wind projects are financed and commented on the challenge of securing tax equity for these projects. For most offshore wind projects, tax credits are a necessary component of the project financials. While many offshore wind developers have developed strategies to secure tax equity, a “direct-pay” provision would make it easier to capitalize on the tax credit. [See a summary of direct-pay legislation here.]
Lawmakers should create a direct-pay option for clean energy tax credit monetization so developers can capture the benefit of tax credits even when tax equity markets are constrained. This is especially important for offshore wind projects that have significantly larger projects and, as a result, larger tax credit. With constrained tax equity markets, otherwise viable projects are not being built which means a loss of economic development, job creation, and clean energy on the grid. Allowing developers to monetize the tax credit directly would not only be more cost efficient–since expensive contract structures with tax equity would be avoided–but it could accelerate clean energy deployment.
Efficient use of government funding
Tax credits for renewable projects require a large tax appetite in order to be monetized. Since most renewable energy developers don’t have a large tax appetite, they need to engage tax equity investors in order to utilize the tax credit. Bringing in this third party dilutes the benefit going to the renewable energy project and is therefore not as efficient as it could be. Forbes estimates that only about 60% of the tax credit benefit ends up with the project. This means that the U.S. government could provide a reduced tax benefit (80-90% of the tax credit today) and still provide a greater benefit to the clean energy industry offering direct pay options.
Allow growth & capture benefits from renewable energy
In 2020, the renewable energy industry experienced greater constraints in the tax equity market as investors held back some investment due to the economic stress from COVID. This meant that not all viable projects were able to get tax equity investment, delaying some projects. The American Council on Renewable Energy (ACORE) found that 46% of investors and 35% of developers experienced a decrease or a significant decrease in available tax equity in 2020. Marshal Salant, Managing Director at Citigroup Inc. acknowledged the need for a direct pay provision saying, “There has always been a supply-demand imbalance in the tax equity market. We’ve never had enough tax equity investor dollars to supply all the good projects. The programs that have been rolled out in the various bills could double the size of the demand for tax equity, and there’s no possible way that the tax equity market could absorb all of that right now. So direct-pay becomes essential”.
Tax equity will be especially difficult to secure for offshore wind developers because of the large size of offshore wind projects. Upcoming offshore wind projects planned in the U.S. will be larger than any individual onshore project to date (Ocean Wind I, 1.1 GW; Sunrise Wind, 924 MW; Vineyard Wind, 800 MW). Additionally, with the Offshore ITC investors will need to use the tax credit in the first year of the project rather than spread across 10 years like the PTC. This reduces the players that have that tax appetite or requires multiple tax equity investors to be involved on one project. Narrowing the funnel of who can invest adds unnecessary burden for developers when we need to be ramping up offshore wind deployment to meet renewable energy goals. The Biden Administration set a goal of bringing 30 GW of offshore wind online by 2030 and the industry has the potential to drive $166 million of new investment and create 80,000 jobs by 2035. The federal government has an incentive to change how tax credits can be monetized in order to let the industry grow to its full potential.
Value of tax equity involvement
One argument for keeping tax equity investors involved in all projects is that they are good gatekeepers to evaluate project risk and decide which projects provide the best value. However, developers and lenders have become more sophisticated with assessing the risk of renewable energy projects and this gatekeeping role is less important than it was in the early years of the industry. That being said, tax equity can still play a role and an introduction of direct pay should not exclude tax equity investors from deals but rather give developers two paths to monetize the tax credit. This will allow for a more efficient use of tax credits and allow the renewable industry to grow to its full potential.
 Christian, Molly. Copley, Michael. “Democrats eye ‘essential’ alternative to Wall Street for green energy incentives”. S&P Global. October, 2021. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/democrats-eye-essential-alternative-to-wall-street-for-green-energy-incentives-66014537.
 Myers, Amanda. “Seven Policies To Tap U.S. Offshore Wind’s $166 Billion Economic Growth And Emissions Reduction Potential”. Forbes. October, 2021. https://www.forbes.com/sites/energyinnovation/2020/08/31/seven-policies-the-us-can-use-to-tap-offshore-winds-166-billion-economic-growth-and-emissions-reduction-potential/?sh=32a231b246f2.
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 The White House. “Fact Sheet: Biden Administration Jumpstarts Offshore Wind Energy Projects to Create Jobs”. October, 2021. https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/29/fact-sheet-biden-administration-jumpstarts-offshore-wind-energy-projects-to-create-jobs/.
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