If you want to get a feeling for what the future holds for finding reasonably priced tax equity for US solar projects, I'd recommend reading "Update: Tax Equity Market" in latest issue of Project Finance Newswire (article starts on page 8). Bottom line, the article makes it painfully clear that banks will be the only winners if we fail renew the Treasury Grant Program.
The article provides a front row seat at a recent Infocast summit of a discussion among six of the largest tax equity investors about the state of the market. The participants include JP Morgan, Bank of America, Union Bank of California, Citigroup, and Credit Suisse.
What's eye opening about the discussion is that normally these banks are fairly careful when they're on the record about pricing and availability of tax equity. As I read the article, I began to wonder if the moderator had slipped some truth serum to the panelists. At numerous points the transcript reveals them laughing about the degree of pricing control they have and how they expect to extract outsized profits from the renewable industry.
The transcript makes three things clear: (1) demand for tax equity in renewable projects will far outstrip the supply, (2) the only thing currently keeping tax equity yields from skyrocketing is the Grant Program which absorbs demand and gives developers the option of financing projects with debt, and (3) the banks will be the obvious winners if the Grant Program expires because they'll be able to cherry-pick the market and extract returns far in excess of the historical risk-reward norms for tax equity investments.
Let's think about what that means--if we let the Treasury Grant Program expire at the end of this year, banks will be a position to extract high yields from desperate renewable energy developers. One private study I saw recently indicated that as much as 40% of the tax benefits of a project are siphoned off by the banks making the tax equity investment. In other words, a government stimulus intended to encourage developers to put renewable energy projects in the ground will effectively be diverted via high financing costs into bank coffers.
It doesn't sound right, does it? And yet that's exactly what's going to happen if we don't renew the Treasury Grant Program now. So Senator Reid et al, if you want to provide a government-backed incentive that will increase bank profits, don't do anything about the expiration of the Grant Program at the end of this year. If, on the the other hand you want to see develpers invest that incentive in projects that create green jobs, add the renewal to the Extenders Bill today!