EDGE: How does Tax Equity Advisors operate in the tax equity market?
MR. SILVER: Tax Equity Advisors (TEA) advises U.S. corporations with significant tax liabilities on the use of solar tax equity. We source, diligence, and underwrite transactions, negotiate the terms of an investment on behalf of our clients, and monitor project performance for the duration of the investment. We generally serve as a fiduciary for our clients.
EDGE: Are you seeing increasing interest in tax equity investments by new and non-traditional investors?
MR. SILVER: Yes, slowly. The market for tax equity will be about the same size this year that it was in 2015 and it will grow next year.
The traditional sources of tax equity, banks and insurance companies, have insufficient capacity to meet the demand that exists today. Several institutions actually rescinded offers they had made for this year because they lacked capacity.
This unmet demand and the features of the investment tax credit program are well-suited to a new group of capital providers: corporations with significant federal tax liabilities. Many of them would benefit from taking advantage of the tax credits, accelerated deprecation and cash that comes from making a tax equity investment, but have not had any exposure to the sector and are often unfamiliar with the intricacies of investing in renewables. This year, however, a number of large companies have begun to assess the opportunity seriously and several became first-time investors in the sector. Our firm handles all of the very considerable work and diligence required for these companies to make sound investments and, after the investment, provides all the project oversight, compliance and tax reporting required.
EDGE: The number of available power purchase agreements for wind and solar has declined recently. Has this made sourcing good projects more challenging?
MR. SILVER: Yes and no. I wouldn't read too much into the number of PPAs available or announced at any one time. Some are never announced publicly and public RFPs come to market regularly. Last year, for example, corporations bought more wind power than utilities did.
In addition, a number of states are likely to increase their clean power targets next year and in the years to come, so the utilities will continue to be major purchasers.
The uncertainty around the ITC/PTC extension last year meant that a number of projects that might have been completed this year raced to close in 2015, which included, obviously, negotiating PPA agreements for them. Perversely, the extension slowed new project development a bit in 2016, but I expect a wave of new activity in 2017. The new interest in solar tax equity opportunities will increase the number of projects as well.
EDGE: Are you and your investors looking for projects with corporate offtakers?
MR. SILVER: We are not the investor. Our clients are the investors and reap all of the benefits of the investment. We will look at any project above a certain size that has an offtake agreement with a creditworthy investor.
EDGE: For a tax investor, does the structure of the contract, whether based on a traditional PPA, green tariff, or a contract for differences or some other synthetic PPA instrument, matter, in terms of how you view the investment?
Yes, but a more complete answer is that we underwrite each project against a very large number of credit criteria. The offtaker is relevant and the structure of the PPA is important. We are always looking to de-risk our investments and the nature, strength and duration of the PPA is certainly critical to that assessment. The stronger the PPA, the easier it is to underwrite the project.
EDGE: We see a lot of pressure from corporate buyers for shorter-term offtake agreements than we would typically see in a utility deal. How does this affect the tax equity approach?
MR. SILVER: It is true that corporate PPAs are generally shorter than the ones utilities write. To a certain extent, this has to do with their lack of familiarity with longer-term power contacts, but it is also a function of the corporate budgeting process which rarely extends more than five years. However, corporate buyers buy for many different reasons, including lowering their energy costs and for various marketing purposes. In the past year or so, a number of more traditional companies – like 3M and General Motors – became clean power purchasers. The length of these contracts varies significantly.
It might be worth mentioning that utilities themselves have occasionally written shorter-term agreements, driven in part, I think, by ongoing confusion about the Clean Power Plan. Whether corporate or utility buyer, we can assess potential ways to structure tax equity even with shorter tenor PPAs.
EDGE: Do you have different return expectations for a deal with a corporate PPA as opposed to a traditional utility PPA?
MR. SILVER: No.
EDGE: Corporate buyers can present a different credit risk than utility buyers - are you concerned about this, and if so are there tools you are using to manage this new risk?
MR. SILVER: Since we work principally with
Fortune 1000-size companies, which have significant capital to put
to work, we tend to concentrate on larger projects with well-known,
creditworthy offtakers. That said, corporate buyers can, and do,
present different risks often including basis risk, shorter tenors
and general credit issues. There are several new companies out
there developing tools
to help investors assess smaller projects and less creditworthy offtakers. An attractive, repeatable hedging product would also be helpful.
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