Thanks to last-minute changes, the GOP tax plan will be less ominous to the renewable energy industry than initially feared, but in the short term, renewable investments may be hampered, potentially leading investors both large and small to rethink their positions. Although clean energy advocates are still sorting through the legislation, they believe a key funding mechanism for wind and solar projects will survive.
Renewable energy developers rely on tax equity financing for significant investments in wind and solar projects. Because they lack sufficient tax debt, many developers can’t take full advantage of federal investment and production tax credits. Instead, the developers partner with investors who can use the tax credit, most of which are multinational companies with foreign operations.
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According to a 2017 study from Cohn Reznick, there are more than 45 active providers of tax equity, with new investors entering the market. Citing data from J.P. Morgan, the firm said $11 billion was raised or committed using tax-equity financing in 2016.
The legislation still includes a new tax, the Base Erosion Anti-Abuse Tax, or BEAT, which is designed to keep multinational companies from avoiding U.S. taxes by sheltering income in foreign investment. But a last-minute change to the bill allows companies to offset up to 80 percent of their BEAT tax with renewable energy credits.
At the same time, however, the bill lowers the threshold for determining which companies are subject to the tax. “We are uncertain how the marketplace will react to the fact that more multinational firms may now be covered by the BEAT, and tax credits may not all be usable in any given year,” says Gregory Wetstone, president and chief executive officer of Washington-based American Council on Renewable Energy (ACORE), which represents clean energy developers and investors.
New investment hits the pause button. Before the last-minute change, Wetstone says concerns about the tax proposals had sidelined the industry’s financing. When ACORE surveyed its members in early December, about $20 billion in new investment had been delayed because of the original provisions in the House bill. Even with the bill’s latest change, some uncertainty is likely to remain because, he notes, many tax equity investors won’t know if they’re subject to the BEAT tax until they have completed their year-end tax calculations.
Once the extent of the new BEAT provisions becomes known, some project funding that was otherwise held up should be freed, says Gary Hecimovich, a Deloitte Tax partner who leads the company’s national renewables tax practice. “Banks, insurance companies, and other investors in renewables are still digesting the potential implications of the new BEAT,” he says. “Those with significant cross-border transactions may bow out of the tax equity market as the tax paid under the BEAT reduces the benefit of the tax credits expected to be claimed. Other market participants will be sought to fill this void. All in all, renewables are expected to weather the tax reform storm, having survived several legislative challenges.”
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James Gellert, chief executive officer of New York-based Rapid Ratings, says the tax bill could influence which projects get funded. Like any industry, some firms are in better shape than others, and Rapid Ratings is in the business of evaluating their short-term financial outlook and long-term health. Investors sometimes use the ratings — which range from 1 to 100, with 100 the best — as a proxy for how well a company can weather a shock, he says. Rapid Ratings gives power generation firm NextEra Energy ( NEE) a short-term outlook of 63 and a core rating of 64, both of which he says are “very acceptable ratings,” and the company is “really quite solid.”
Two solar panel makers, First Solar ( FSLR) and SunPower Corp. ( SPWR), have rockier outlooks. First Solar has a good short-term rating of 68, bolstered by leverage and liquidity, making it a low default risk, but its core rating of 16 is weak. “If they can’t continue to fund themselves, it will have problems two to three years out,” he says. SunPower’s short- and long-term outlooks are weak, at 28 and 16, respectively, making it more susceptible to the volatility that is sure to come as the tax plan’s full effects become clear, he says.
Small investors will need patience and a discerning eye. Based on the proposed tax bill changes, investors of clean energy companies will need to be choosy, says Garvin Jabusch, chief investment officer at Green Alpha Advisors in Boulder, Colorado.
A number of stocks have seen their values dip because of the uncertainty over the proposed changes. Along with the business fundamentals, “look at [whether] a company can handle a short-term policy storm,” Jabusch says. “That way you can get in front of the low valuation.”
Although the tax bill may weigh heavily on clean energy stocks temporarily, the industry’s long-term outlook remains bright, says Elizabeth Levy, a senior vice president, portfolio manager and research analyst at Trillium Asset Management in Boston.
Trillium invests in publicly traded stocks and bonds, and Levy says the proposed tax bill provisions aren’t changing her firm’s long-term expectations. “It is making us anticipate perhaps more uneven performance in the short run, as companies and their customers are struggling to understand what these changes mean,” she says.
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But the technological advances in clean energy are far enough along that it’s unlikely these tax changes will have a damaging effect on the industry. “Nothing is going to halt this [progress], no matter how much people want to prop up last century’s technology,” she says. This tax bill only makes it “a bumpier road than it would have been.”
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GOP Tax Plan Not as Ominous to Renewable Energy originally appeared on usnews.com
