The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Recapture Rapture: Can Revised Tax Credit Policies Attract More Capital to Solar?

For developers trying to monetize the federal tax benefits for a given project, finding a tax equity partner can be a lonely process. Tax equity investors consist of a limited pool of suitors—investment bankers and a few other firms — who can tolerate the array of risks associated with this type of investment, including:

Investors also tend to be put off by IRS rules that limit the resale of solar assets. Investors claiming the investment tax credit (ITC) are required to maintain ownership until the sixth year of the project's operation. If the asset is sold before the fifth year elapses, the IRS will "recapture" the remaining tax credits that have not yet vested over the five-year schedule (i.e., 20% of the total tax benefit per year).  Accordingly, sale of the asset in that timeframe may cause investors to forfeit a significant portion of the tax credit benefit and, subsequently, a portion of their expected return. This constraint results in illiquidity, which incentivizes investors to seek other investment opportunities or to increase the required return.

The Treasury's 1603 program is widely recognized as easing the financing of renewable energy projects and supporting a general buildout of renewable energy capacity from 2009 through 2012.  Prior to its existence, U.S. solar deployment was roughly 200 megawatts (MW) per year. This year, annual deployment is expected to reach roughly 3,000 MW, driven in part by the continued effects of the program even though it officially terminated at the end of 2011.

A little known fact about the Treasury's 1603 program is that it relaxed the recapture rules. Under the program, sale of the asset did not result in a recapture event, greatly easing investor illiquidity concerns.  A new paper by Joel Meister — a law student and employee of Solar Energy Industries Association — provides valuable insight in the more flexible recapture criteria under 1603. According to the paper, the 1603 rules only contemplate three narrow circumstances that trigger recapture. Importantly, these circumstances exclude sale of the asset as a relevant event so long as the sale is to an entity that qualifies for the 1603 payment (i.e., to someone who pays taxes) and the project continues to produce renewable energy.

The rigidity built into ITC regulations was designed to constrain abuse by providing for "safeguards against the quick turnover of property" and the associated fallout that could occur if investors were not interested in a project's long-term operation.  This seems a reasonable rule, though research by the National Renewable Energy Laboratory has found no evidence that 1603 projects — which would presumably allow for quick turnover abuses — currently have operational problems.

Flexible recapture rules were written into the extension offered to low income housing tax credits. In this case, Congress provided an exception to an asset sale-as-recapture event so long as "the asset was reasonably expected to remain in operation" over the recapture period. Industry insiders were expecting a 50 percent increase in investment in low income housing tax credits due to the relaxed regulation.

Although the ITC declines to 10 percent in 2017, when combined with accelerated depreciation, the tax benefits in total represent about 35 percent of the installed costs of a solar project. That could be too high for solar projects to monetize internally. Accordingly, solar project developers will continue to knock on the doors of investment banks and other tax equity investors. Relaxing the recapture rules offers the potential for more doors opening up when the solar industry comes a-courtin'.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Lead image: Finance on folder via Shutterstock

Untitled Document

RELATED ARTICLES

Sunrise in Pakistan as the Country Delves into Solar PV

Robert Harker Pakistan has joined the list of countries that are exploring solar power as a means to bridge critical energy generat...

Global Renewable Energy Roundup: China, Kenya, Turkey, India Seeking More Renewables

Bloomberg News Editors China is being encouraged by three industry groups to double the nation’s solar-power goal for 2020 to make up for sh...

Why Smarter Grids Demand Smarter Communications Networks

Mark Madden

Historically, utility networks and communications networks have had little in common.

The Importance of “Switching Costs” to the US Residential Solar Industry

Paula Mints The DoE and numerous organizations and governments globally are focused on driving down the cost of solar convinced t...

PRESS RELEASES

Array Technologies’ DuraTrack HZ v3 Continues to (R)evolutionize at SPI

Array Technologies, Inc. (ATI) prepares to showcase its recently launched tracking syst...

Appalachian's Energy Center assists counties with landfill gas to energy projects

The Appalachian Energy Center at Appalachian State University recently completed a proj...

Early Bird Registration Deadline for GRC Annual Meeting is This Week

The deadline for early-bird rates for registration for the biggest annual geothermal ev...

Redesigned HydroWorld.com Video Gallery

Hydropower news and information, and interesting promotional announcements are now avai...

FEATURED BLOGS

Transitioning to Net-Zero Living

Judith and Jeffrey adore living in Belfast, Maine – a quaint harbor town of Belfast, Maine. They previously res...

The True Cost of Electric Vehicles in Australia

In order to avoid increased congestion, further greenhouse warming and lessen Australia’s reliance on imported ...

The Coming Multi-trillion Dollar Energy Investment Drive

In coming years, a multi-trillion dollar low-emission energy investment drive will get underway. Three catalysts wil...

The Perfect Elevator Pitch

The elevator pitch is a concise statement that grabs attention and communicates value, ideally leading to a next step...

FINANCIAL NEWS

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @jennrunyon

FEATURED PARTNERS



EVENTS

Intersolar North America 2016

Exhibition: July 12 - 14, 2016; Conference: July 11 - 13, 2016 Intersola...

Intersolar South America 2015

Exhibition and Conference: September 1-3, 2015 Intersolar South America ...

Intersolar Europe 2016

Exhibition: June 22-24, 2016; Conference: June 21-22, 2016 Intersolar Eu...

COMPANY BLOGS

Less Is More

When you’re giving a presentation, one of the easiest things to do...

Captivology

One of the biggest challenges we face as efficiency sales professionals ...

How To Optimize Your Meeting Schedule

Do you spend more time in meetings than you do actually working? While m...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS