iStock_000021177656SmallFederal and State Renewable Energy Tax Credits have been specifically credited with the explosive growth in the solar and wind industry. As such, investment tax credit (ITC) financing has become a critical component in virtually every project financing assignment we review.

Credits are available for eligible renewable energy generating systems placed in service on or before December 31, 2016 including solar, biomass, fuel cells, small wind turbines, geothermal systems, microturbines and combined heat and power (CHP):

In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.

State Renewable Energy Tax Credits are purchased at a discount, and can be used to offset corporate income tax, franchise tax, insurance premium tax and/or bank shares tax. The type of taxes that these credits can be used against varies from state to state. Currently, 24 U.S. states issue renewable energy tax credits.

General observations:

  • ITC investors are very risk adverse, perhaps even more so than senior debt lenders. Projects must be creditworthy, often with third-party guarantees, and developed by experienced developers. ITC investors are typically the last party to the table, once all the other components are in place.
  • State ITC require an investor with tax liability in a particular state, and thus have more limited appeal. States with a high state ITC, such as North Carolina, tend to attract a disproportionate number of projects, and thus tend to exhaust the local ITC availability.
  • ITC origination fees are expensive, and are paid by the project. Legal and accounting fees alone are at least $600,000-$700,000 for the most basic transactions. Pooled or composite deal fees run higher. As such, most institutional ITC investors are not interested in ITC transactions less than about $10 million.
  • Federal and State ITC pricing, like everything in the financial marketplace, is driven by supply and demand. Currently, ITC supply is overwhelmingly biased toward solar development, based upon the perceived lack of operating risk. As such, qualified solar projects have tremendous negotiating leverage. Non-solar renewable energy projects will have an exhaustive search for ITC interest.