When a tax lawyer calls for more simplicity in the wind project finance space, you know something is up.
“The wind market relies on a very complex set of structures to finance projects. With a simplification of incentives, we could significantly lower transaction costs and make wind that much more cost-competitive,” said Ed Feo, a prominent tax lawyer who focuses on the renewable energy space.
I spoke to Feo this morning at the Wind Power conference in Chicago.
America likes things complicated. The collapse of the financial industry because of the trading of extremely complex derivatives like collateralized debt obligations and credit default swaps proves just how ridiculously abstract things can get in the world of finance. ::continue::
Sure, these financial instruments were being sliced, diced and molded by investors in many different countries. But the trend was pioneered by firms in the U.S. – many of which are no longer with us.
Of course, these investment banks and insurance companies were the source of capital for many of the wind projects being developed throughout the country. They enabled the monetization of the production tax credit, which can only be acquired by the largest institutions with high levels of taxable “passive income” (i.e. rental properties, intellectual property and hedge funds).
As is the case with such players, the financing schemes set up around the PTC are numerous and incredibly complex.
“The impact of the crisis [on the wind industry] was amplified because of our reliance on the tax credits,” said Feo. “The U.S. market was disproportionately affected because of the peculiar structure we have for incentives,” he said.
Under the stimulus plan, which allows entities to take advantage of the investment tax credit or a cash grant, the new investor-developer partnerships and lease structures that utilize tax equity will be complicated as well.
“There will be a long education process about how these structures will work,” said Dennis Moritz of Advantage for Analysts, a company that provides analysis software for financial assets. I spoke with Moritz this afternoon at the conference.
The role of the tax credits should be not be downplayed — they are the backbone of the industry. The PTC has allowed the U.S. wind industry to become a world leader in wind development.
But because tax credits are a form of currency only available to a limited number of players, there is limited availability of capital. That drives up the cost of financing projects, said Feo.
So what’s the easier, less-costly route? Feed-in Tariffs, he said.
“There’s absolutely no doubt in my mind that a Feed-in Tariff would make much more sense as an incentive for promoting renewables.”
The benefit of the FIT is cash, which is much more easily financeable. And because it’s open to a broad group of investors and individuals, it can puts less constraint on the movement of capital.
“It’s beneficial to consumers to go to the most tradeable form of currency to get the lowest cost of capital and make renewables more competitive than they are in the current structure,” said Feo.
FITs aren’t really a big part of the conversation at a conference like Wind Power. The focus is on a renewable electricity standard, a carbon cap and trade scheme and the restructured incentives within the stimulus package.
So for the foreseeable future, tax lawyers all around the country will have fantastic employment prospects in the wind sector.
I’ll be releasing the full interviews with Feo, Moritz and others from the conference in upcoming episodes of our podcast, Inside Renewable Energy.