Marathon Superday Prep
Content Key
1. The Energy Gang Notes
Questions to add:
13. How is it possible for a company to have a positive net income but go bankrupt?
Could happen if the company is growing so fast that it’s unable to raise enough capital to fund
operations.
12. Why would a company issue equity rather than debt to fund its operations?
- If the projects the company is looking to invest in do not produce immediate or consistent cash
flows to pay its debt.
10. Can a company have a negative book equity value?
Yes. If the company has been operating at a loss for a long time.
7. What is WACC and how do you calculate it?
It reflects the overall cost for a company to raise new capital, which is also a representation of the
riskiness of investment in the company (higher the risk, higher the cost of capital).
6. What is Enterprise Value?
the value of an entire firm, both debt, and equity. This is the price that would be paid for the
company in the event of acquisition without a premium.
EV = Market Value of Equity + Debt + Preferred Stock + minority interest - Cash
16. Why might there be multiple valuations of a single company?
Because every methodologies uses diff assumptions or multiples.
17. Walk me through a DCF.
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Project out cash flows for 5 - 10 years depending on the stability of the company
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Discount these cash flows to account for the time value of money
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Determine the terminal value of the company - assuming that the company does not stop
operating after the projection window
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Discount the terminal value to account for the time value of money
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Sum the discounted values to find an enterprise value
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Subtract the present value of debt (this is generally the market value of debt) and then
divide by diluted shares outstanding to find an intrinsic share price
18. What is the cost of equity?
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Sample Answer:
The cost of equity is usually calculated using the Capital Asset Pricing Model
(CAPM).
CAPM = Risk-free rate + Beta * (Expected market return - Risk-free rate)
23. What are the major factors that drive mergers and acquisitions?
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are the major factors that drive mergers and acquisitions %282%29.png?itok=Q8Zdz_bL
25. What is Beta?
Sample Answer:
Beta is a measure of the volatility of an investment compared with the market
as a whole. The market has a beta of 1, and hence, investments that are more
volatile than the market have a beta greater than 1 while those that are less
volatile have a beta less than 1.
26. How/why do you lever or unlever Beta?
Sample Answer:
Unlevering beta allows us to remove the effect of debt in the capital structure.
This shows us the beta of the firm's equity had it not used any leverage in its
capital structure. Also, if we are trying to do a market comparison with a
company that's not on the market (so no beta), you can take a comparable
company and unlever its beta and use this unlevered beta as a proxy for the
unlisted company's beta.
27. What is net working capital?
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Net Working Capital = Current Assets – Current Liabilities
Net Working Capital is calculated as current assets minus current liabilities. It is
a measure of a company’s ability to pay off its short-term liabilities with its
short-term assets. A positive number means they can cover their short-term
liabilities with their short-term assets. A negative number indicates that the
company may have trouble paying off its creditors, which could result in
bankruptcy if cash reserves are insufficient and further financing cannot be
arranged.
28. What happens to free cash flow if net working capital increases?
You subtract the change in Net Working Capital when you calculate Free Cash Flow, so if Net
Working Capital increases, your Free Cash Flow decreases and vice versa.
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https://docs.google.com/presentation/d/1wsHmii3W5HWT0jyqObMlOnaj7jYWyq4I4A_xBFo4h7k/e
dit#slide=id.g301627cae87_0_42
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The Energy Gang
1. Are Low Profits to Blame for the Energy Transition Lagging?
- Dynamics of the market; natural gas pricing and the ability of power producers
buffer themselves in different situations that renewables producers simply don’t
have, because they’re so upfront capital intensive.
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Unfortunately, many dynamics play together, so there isn’t a clean cut “this is
the one thing that’s affecting the profitability of these projects, so let’s just solve
this one thing” since there are a lot of different things going on in the market at
the same time.
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Many of them being around incentive structures, and how we have incentivized
getting these things into the system, because there isn’t a clean cut optimized
option, because socially it is not an optimized process or approach.
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So, if we want this stuff to deploy more of these carbon/net zero systems, how
do we do that? How do we make these systems profitable and bankable? How
do we get people to put money out of oil and gas companies, and into
renewables.
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Incentive structures are HUGE; it’s logical. It makes people think of how do we
provide profits and how do we think about returns on these profits.
2. Will Utilities Meet Surging Power Demand?
- How can the world reach net-zero if it keeps inventing new ways to consume
energy? Quote from the new yorker
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Christian Advice
EMAIL:
1. What helped you understand the 400 questions conceptually rather
than just memorizing them?
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I would focus on the mechanics of the 3 statements rather than super specific details
and really only focus on the “essentials” they have outlined. Memorizing the 400 is
overkill because we don’t expect you to be a finance expert. I think the hardest
technical I got was “walk me through the three statements” but I also studied energy
economics, not finance.
2. If you could recommend 5 questions you believe I should know the ins
and outs of, which would they be and why? (besides the 3 statements
and walk me through a DCF)
- Energy projects are funded through debt or equity.
- How do different energy projects create revenue and what are their costs?
Do these vary by technology and why?
1. Financial considerations vary by technology.
2. Renewable energy projects are very capital intense, they require large up-front
investments that must be financed. Thus, the cost of capital makes up a significant
part of the lifecycle costs of renewable energy costs.
3. Financing structures for renewable energy projects; can be financed through
corporate finance structures “on balance sheet”, for instance of a utility, or project
finance structures “off balance sheet”, in a new legal entity.
4. Cost of Capital: “the expected rate of return that market participants require in order
to attract funds to a particular investment”
5. For investments that use more than one type of capital (e.g., equity and debt), the
overall cost of capital is a combination of the returns of the different components. In
the most simple formulation, the weighted average cost of capital (WACC), The
vanilla WACC abstracts from any considerations of tax. In most countries, however,
interest payments are tax-deductible expenses for companies; thus, debt comes
with a tax benefit. This fact is reflected in the after-tax WACC
6. utilities make profit by investing in the infrastructure, like pipes and wires, that
provide energy services to customers.
7. In some states, utilities own and operate power plants too, but in Illinois power
plants are required to be owned by different companies from the poles and wires that
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bring electricity to your house (although power plant owners and utilities in some
cases are both subsidiaries of the same company, as is the case with ComEd and
Exelon).
Utilities are regulated monopolies, meaning they’re the only companies legally allowed to
deliver electricity or gas to people within a geographic area. In Illinois, electric utilities are
required to deliver reliable electricity that’s as clean and low-cost as possible—in the
words of the law, “adequate, efficient, reliable, environmentally safe and least-cost public
utility services”. In exchange, utilities are allowed to recover their costs, plus a profit.
https://www.nrdc.org/bio/jc-kibbey/utility-accountability-101-how-do-utilities-makemoney
all utility spending isn’t the same: there are two types of expenses for utilities, and they are
treated differently. The first is operating expenses: costs for the day-to-day operation of
business, which includes things like workers’ salaries, paper to print bills and stamps to
mail them, and rent for offices. The second is capital expenses: the physical infrastructure
that makes up the electric grid, including things like wires, poles, transformers, and
substations.
Utilities can collect their spending on operating expenses from you and me, on our bills. In
practice, they almost always cover their costs, but they don’t get anything extra beyond
what they spent. So, if a utility spends $100 on operating expenses, it collects $100 back,
spread out across all the bills people pay to that utility. They don’t profit.
But with capital expenses—that is, physical infrastructure, like poles and wires—utilities
can collect the money they invested plus an additional percentage they keep as profit. So, if
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a utility spends $100 on capital expenses, they might collect $110 on our bills, with $100
paying for the wires and poles and $10 going towards profits.
Utilities fund capital expenses with a combination of shareholders’ money and money
borrowed from banks. No one would lend them money at zero percent interest, nor can we
expect their shareholders to invest their money at zero rate of return, so it’s reasonable for
utilities to charge a little more than they’re spending to pay back banks and shareholders.
But there’s a conflict at the heart of this business model.
On one hand, utilities are required to deliver “environmentally safe and least-cost
services.” And there are ways utilities can meet the needs of the grid without any capital
spending at all, for example with “demand response” programs that reward customers for
using less electricity when there’s lots of demand (like on a hot August afternoon when
everyone is running their air conditioner).
On the other hand, the only way utilities make profits is by spending money on physical
infrastructure (e.g., poles and wires). The law says they should spend the least they can
while providing quality, environmentally safe service, but when it comes to their bottom
line, utilities are incentivized to make more costly investments. The more they spend
on physical infrastructure, the more profit they stand to make.
3. How do you think a sponsor’s (developer) cashflows look? Why?
- A developer’s cash flows would follow a distinctive pattern due to the capitalintensive nature of renewable energy projects, high upfront cost, and the stable yet
regulated long-term revenue streams.
could look like…..
in the development phase: it will have negative cash flows.
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During development, the sponsor will incur high costs related to land, permitting,
environmental assessments, engineering, and securing financing.
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Outflows will dominate due to development and permitting costs, while inflows are
limited as no power is generated yet.
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They’re often financed through debt and equity, with potential tax incentives to mitigate
some of the initial costs.
Construction Phase; Significant negative cash flows
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Outflows will go up due to the capital expenditures needed to procuring equipment,
contruction and installation of the project,
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This phase will have the highest negative cash flows as large-scale investments are
made before revenue generation begins.
Commissioning & early operations:; transitioning from negative to positive cash flows
Once the project is completed and operating, cash inflows begin from selling generated
power, often through PPAs or feed-in tariffs.
Revenue starts flowing in, although cash flows may remain low as debt repayments and
operational costs begin.
Revenue stability; PPAs and long-term agreements stabilize revenues, though they may
not fully cover early operational expenses or debt service initially.
Mature Operations Phase; Positive and stable cash flows
As the product matures, cash flows begin to stabilize and can become substantially
positive, depending on the PPA terms, , and operational efficiency.
Positive cash flows driven by consistent revenue from energy sales, while outflows
decrease as debt principal is repaid and operational costs level off.
The project generates a stable income stream, which is distributed to equity holders or
reinvested into new projects.
Later Stage; High Positive Cash Flows
At the end of the debt term, the cash flows improve significantly as debt repayments
taper off, leaving the sponsor with fewer outflows and steady income from energy
sales.
Strong positive cash flows as the sponsor captures nearly all revenues, subject only to
operational expenses, taxes, and maintenance costs.
Potential Strategies: Sponsors may look to refinance, sell the asset, or reinvest in
upgrades or new projects.
Why This Pattern?
• High Upfront Investment: Renewable energy projects are capital-intensive upfront,
requiring substantial initial investments to build infrastructure.
• Long-term PPA Agreements: These agreements provide stable, predictable
revenue streams but often at fixed rates, limiting early revenue flexibility.
• Debt Financing: Project finance structures, with debt secured by future project
cash flows, mean that debt service dominates early cash flows until debt is repaid.
• Asset Longevity: Renewable energy assets have a long operational life, allowing
sponsors to benefit from long-term cash flows once initial financing is serviced.
This cash flow profile reflects the unique balance of risk and return in renewable
utilities, with front-loaded costs and long-term stable revenues that attract both equity
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investors seeking steady returns and debt providers interested in secure, predictable
repayments.
4. What are the general components to the energy markets, for electricity
/ molecules?
5. Is there a specific technology that makes you excited?
6. What kills an energy project in its development stages (put in finance
terms, what are a project’s main risks?)?
1. Main Risks:
- Permitting and regulation; delays can increase a project’s soft costs and can jeopardize
financing arrangements, as lenders and investors may require regulator clarity before
committing funds.
- Financing and Capital Structure; securing capital is essential to proceed, but financing
terms, interest rates, and access to funding can change, impacting the project’s
feasibility. If financing falls through or is too costly, the project may not be viable:
example, higher interest rates can push the project’s return below acceptable levels.
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Construction and completion risks: cost overruns or technical difficulties can increase
a project’s capital requirements. Escalating costs may exceed budget, potentially
requiring additional equity infusions or forcing the project to halt.
Resource risk (production and operational risk: renewable energy depends on natural
resources which can be less predictable than expected, leading to lower than expected
forecasted energy production -ex, hard to forecast wind
Offtake or market risk: projects depend on the sale of energy to a buyer (offtaker) but
changed in energy prices or demand, or failure to secure a PPA can affect cash flows. If
energy prices drop, revenue can be insufficient to cover costs, especially if a PPA isn’t in
place (uncontracted projects are more susceptible to price volatility which can reduce
predictability. Securing long-term PPAs at viable rates help mitigate risks.
1. Construction period risks: Permitting, scheduling (interest during construction, links
to off-taker agreements), performance/completion, technology risk. Use Turnkey,
fixed-price construction contract with schedule and performance guarantees
including delay and performance damages.
2. Finance terms: Timing expectations are unrealistic. Insufficient working capital
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7. Probably 95% of your interviews are going to be industry related. We’re an energyspecific bank where most of our deal flow is coming from the infrastructure side
and the companies \that operate, build, and own those assets. In short, interviews
are more about the industry and the market. I’d place most of your emphasis there
because we don’t stress technical interviews, that’s why we have a model prompt.
- Fun to read about it what your feelings are on the hydrogen and nuclear markets,
we all have different opinions.
- Don’t be a robot, if I’m stuck in an airport with you I don’t want to have to pull out my
headphones! And answer what you’re bringing to the team here not just what Marathon
has to offer.
Tara Advice
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What is tax equity? If I am a developer and you are JP Morgan, and I don’t have enough money to
develop the project by myself, so I go to you, who has so much money and so much tax
liabilities, then they are going to give me (the developer) the money, and you get the tax benefits
and the depreciation. The developer would get 1% of the tax benefits, while JP Morgan will get
the tax benefits. Only a few organizations can do this -Tax equity actually is what corporations
are going to use to get the depreciation benefits (five-year MACRS, depreciation benefits, tax
credits) then the developer will get money to build the project. JP morgan here will own the
project until the developer pays off their debt.
tax credit transferability, which enables corporate buyers to support clean energy projects and
offset their federal tax bills through the purchase of tax credits. This allows more participants to
enter the market, paving the way for more investments — thereby speeding up the energy
transition.
Trends in renewable energy?? General Knowledge
PPA?
ITC (30% Subsidy at the beginning of the project) vs. PTC, (Production based tax credits which
last 10 years) which would you pick for solar project in Illinois vs. in Florida? It’s sunnier in
Florida than in Illinois, so we would do production-based tax credits is Florida and ITC in a solar
project in Illinois.
What new technologies are you interested in?
Different projects make revenue in different ways? By selling energy to the grid. Vary
Trends she sees: prepare for this 100% solar is getting cheaper, ppl are trying produce more
panels and modules in the U.S to get domestic content adders, IRA. A lot of companies are
trying to get greener energy so they have to buy more energy and offtake. How would the
election affect things? Interconnections of bottlenecks??? -it’s hard to get your project to turn
on.
What would the developer’s cashflows look like and why??? Look up how to answer this bc she
didn’t know.
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Wind vs. Solar, Solar-location and size. (why is it more difficult to value a solar project vs a wind
project, solar is much easier to forecast than wind -wind is very hard to forecast.
Renewable energy is intermittent, you will have different peaks, on peak and off-peak during a
project.
Marathon Deals: distributive generation?
What is the capital stack of the energy market? Natural gas has the most, coal plants that are
retired use a lot of solar, RNG is a thing now.
Have a story, why investment banking, why renewables, why clean energy? Not just investment
banking
Merge my interest in energy and sustainability, with finance. Marathon is the marriage of the two
things I like.
What would kill a project? Permitting, feasibility, lots of permitting and independent engineer
report.
Hardcosts – capex.
Meera Advice: Email
1. If you could recommend 5 questions you believe I should know the ins and outs of,
which would they be and why? (besides the 3 statements and walk me through a
DCF)
I can point you to broad topics that you can focus on: the unique attributes of energy finance in
this country (like the tax credits, tax equity – just know the concepts, no need to know details).
Different technologies and terms of renewable energy, and the power markets of USA (like ISOs,
interconnection, MWh vs MW, etc.). Again, I don’t think they expect the ins and outs of these, but
enough to have a foundation.
2. How much emphasis should I place on industry specific questions? (I can show my
interest easily as that comes naturally, but how much of an emphasis should I put
into learning about things like hydrogen or policy's such as Joe Manchin's
infrastructure permitting reform bill)
I don’t think you’ll be expected to know recent legislature/bills etc (unless it’s the IRA). You can do
a deep dive on the policy landscape but not necessary in my opinion.
3. What is something you wish you knew before your interview?
I didn’t have a lot of finance background so I wish I’d done more of that
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4. What made attracted you the most to Marathon Capital and the energy sector? What
is your favorite part of the industry?
I think since energy/environment is my favorite domain, it felt natural to be drawn to the financial
subsector because I believe it has significant impact. The focus on renewables made me feel like
the company’s mission was aligned with mine. I like that this industry has proven to be resilient
even when policy isn’t the most conducive.
5. What are the biggest challenges the industry is currently facing? How could this
look in the next 5 years?
Policy, obviously and we also don’t know a lot about the full life cycle of renewable energy
equipment and their subsequent impacts. A five year outlook still points to the relevancy and
robust-ness of the renewables since climate change isn’t getting any better, in my opinion.
The Price Is Wrong
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So, yes, the cost of building renewable energy projects -like solar and wind- have
significantly decreased over the years. So much so, that 81% of new renewable energy
capacity added in 2023 was cheaper than fossil fuels. Despite this, fundamentally,
renewables have high upfront costs and low operating costs. Since the expenditure is
so heavy, investors need funding to justify investment -which is where tax incentives
come in.
The IRA and 10 year extension of tax credits passed in 2022 have made the cost of
production much lower. So, why are people not investing in renewable energy? The
issue is not inherently that costs of production are too high but rather that price is the
wrong category to prioritize analytically. The better, more meaningful yardstick is profit,
which is what we should be focusing on. Profits on renewable energy tend to be
generally underwhelming, meaning that they are simply not an economically attractive
proposition. So, the hurdle we need to get over is profitability aka the capacity to turn
capital into more capital. The government’s support mainly focuses on keeping prices
low rather than keeping profits up, but lower costs do not automatically equate higher
returns. Until the govt truly supports the energy transition by passing permanent
legislation and continuing to provide incentives for renewable energy, investors will not
feel confident about investing in renewable energy. With the US government’s
support, generating renewable power would become much more profitable, and by
extension, so would the business of investing in companies in that sector.
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The Fed’s recent rate cuts might make renewables a more attractive investment and
increase their profitability. Lower rates = lower borrowing costs, making it easier for
investors to get the capital needed to fund these expensive renewables project. This
could also help increase the share price of existing clean energy companies since it
would help them pay off their debts.
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BlackRock, the world’s largest asset manager, was excited for the IRA and its expected
impact on clean energy profits. Blackrock saw the IRA as a rare opportunity for the
company to satisfy both of their major needs. If they were to invest heavily in
renewables enterprises during the 10 years the US has extended its renewables tax
credits, they would be able to not only please those who want the firm to be ‘woke’ and
to put the planet before profit; it would also please those who insist that BlackRock’s
only duty is to maximize investor returns. ‘This could easily produce 12, 13, 14 percent
returns very easily’ said Larry Fink (BR Chief Executive) in 2023.
Tax Equity
Matt: incentives at the federal level are tax benefits, tax credits and accelerated
depreciation deductions, but in order to get benefit out of tax credits, the developer
has to be a tax credit, but very few developers of renewable energy projects have
the quantum of tax liabilities that can absorb the tax benefits flowing out of these
projects, so the solution to generate and get benefits out of these credits is to form
a partnership with a large tax paying institution, have the partnership acquire the
project, then allocate 99% of the tax attributes to that investor, and a minority of the
cash, so that the developer is indirectly getting benefits of these tax credits and
other tax benefits by raising capital, whose return is primarily paid with tax credits
they otherwise can’t use, so they’re equity investors who are primarily paid with tax
incentives. In addition to, a tax equity partnership transaction, the IRA allowed the
direct transfer of tax credits ex. If I’m a developer developing a solar project, and I
have 100 million dollars of investment tax credits, I can actually sell that 100 million
dollars to an unrelated party for cash, so much simpler transaction, so you sell that
and get 95 million dollars for it, so that cash goes to help build out the project.
When you transfer a tax credit, you can’t transfer accelerated depreciation but in a
tax equity partnership the accelerated depreciation benefits are allocated to the tax
equity and do generate value, so the hybrid transaction you do monetize that
depreciation. A tax equity investor, typically a large institutional bank like J.P. Morgan, can
solve this time value of money problem for renewable energy developers. In exchange for
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putting upfront cash in the project (in this case, at least $27 million), the tax equity
investors can receive the tax credits and tax losses from the project and use those to offset
taxes elsewhere in their business.
Questions I could ask: it may not be dersirable for tax equity investors to hold their stake in
a project indefinitely. could you tell me about the different buyout options in a tax equity
deal? What are yield-based flips?
Offtake agreement / PPA.
- solar increased general inflationary pressures out of covid and Tariffs on solar
panels. Offsetting of offtake rate and ppa rates. Solar is growing , wind is growing
but not as much because of time of day generation that solar has an advantage, so
we see more solar than wind.
- A lot of stand-alone storage since it is eligible for the ITC.
- How are investors in the renewable sector reacting to uncertainty over which party
will be in party? The big change comes with a big sweep, the biggest issue is what
happens to the 2017 tax cuts that are due to expire (trump is going to extend those
credits) which costs money, a lot of it, so where do you look for money to plug the
holes? We’re concerned about the tech neutral PTC and ITC that kick in next year
and expire in 2032
- Grandfathering projects: What is marathon doing to ensure their clients that no
matter what happens in the next four years after the election, they will have the
same protection
Podcast Episode:
- Tax equity is essentially a form of structured equity that investors in the renewable energy
projects would derive its returns primarily from the tax benefit that's available from these
renewable energy projects. U.S. policymakers have a tendency to use federal tax codes to
incentivize private investments. In the renewable space, the two primary form of federal tax
benefits are tax credits and depreciation benefits. So, tax credits in the form of production-based
tax credits or investment-based tax credits. Lot of the renewable energy developers, they are either
startups or they are in the growing company that they typically do not have a lot of U.S. tax federal
liability, therefore, they cannot efficiently use these tax benefits. There comes in the tax equity
investors who will form joint ventures with these developers and a primary form of this joint venture
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is called tax equity partnerships. In a partnership, the tax equity investors would receive 99% of the
tax benefits, a small portion of the cash distribution, where the develop partner will receive majority
of the cash distribution but 1% of the tax benefits. That has been a predominant structure over the
last 20 years, and has really played an instrumental role in the development of renewable energy in
the U.S.
Evan Junek: So to recap, if we think about tax equity, it is really a way for firms or
specifically developers in energy transition investments opportunities to monetize tax
credits that they might otherwise not be able to take advantage of, certainly not on the
timeframe that most people are focused on in the context of their investments in these new
projects. That a fair summary?
Rubiao Song: That's a very good summary. But I also add that some of the clients we are
dealing with are very large developers. In the U.S. it's becoming a very large industry so they
would require billions of capital each year to give up lease projects and the federal tax
capacity does not grow as fast as their business pipeline, so they would need to have tax
equity to monetize the tax benefits from their projects as well. That's a big part of our
business.
Evan Junek: So basically big clients and small clients, really, are availing themselves of this
market. Let's talk a little bit about J.P. Morgan's role here because I think J.P. Morgan's
position in this market is also incredibly important. Maybe you could talk about how
J.P. Morgan's tax equity business is positioned relative to the market.
Rubiao Song: Sure. As I mentioned, that we start this business over 20 years ago. In
December 2003 we made our first investment in tax equity in a wind project out of
Sweetwater, Texas. Since then, we have been building this business over 20 years. We are
consistently the leading tax equity investor in the country and we've have built a team that
making this investment from end-to-end in terms of opportunity identification, transaction
structuring, due diligence, and documentation, as well asset management, accounting, et
cetera. So this is very unique in the sense that we have built a full-capacity, full-capability
team that comprised of not only the originators, transaction managers, of pricing analysts,
we also have a team of professional engineers on staff and they are leading the technical
engineering due diligence for us.
Evan Junek: So two decades is incredibly impressive to be in any market, especially one
that we play such a big part of. Can you share a little bit more about the kinds of projects
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that we've been involved with over the years and the positive ripple effects that they've
had?
Rubiao Song: Happy to, Evan. As a core tax equity provider over 20 years, we invested a
range over $47 billion of tax equity for renewable energy projects in the U.S., which include
$40 billion of J.P. Morgan's capital. In 2003, as I mentioned, we made our first $23 million
investment in the wind farm in West Texas. Since then, we have invested in projects over 40
states, 322 wind farms, representing almost 50 gigawatts of wind capacity in the U.S. As a
comparison, the total install the wind capacity in the U.S as of year-end '23 was 150
gigawatts. So, that represents almost one-third of U.S. total installed capacity. We also
start investing in utility scale solar, commercial and the industrial solar, as well as the
residential rooftop solar over the last 10 years. These investments not only made these
renewable energy projects possible, it also provided large impact to the local economies in
terms of the job creation, royalty payments to the land owners, as well as the property tax
to the local district, including schools and other public utility functions.
Evan Junek: And so shifting gears towards the current market climate, what are the latest
trends shaping the tax equity sector? As I understand it, the Inflation Reduction Act
specifically had some pretty major impacts on tax equity and maybe the future of tax
equity.
Rubiao Song: The Inflation Reduction Act is a watershed event to the renewable energy
development. It not only expanded tax credit support to renewable energy developments
like wind, solar, it also included new technologies now will be available for tax credit —
standalone battery, green hydrogen and other manufacturing tax credits. Included in IRA
was also a very critical provision called tax credit transferability, which allows the
developers, owners of these credits, to transfer the credits to third-party buyers, which may
include could banks or corporates that have large corporate tax liabilities. This
development significantly expands the universe of potential investors in renewable energy.
The tax equity investors are primarily banks, and the banks have been providing around $20
billion annual tax equity in this space. After passage of IRA, tax equity needs are expected
to grow from $20 billion to $30, $40, $50 billion in the next few years. Bank investors alone
would not be able to supply this amount of capital and we're expecting U.S. companies will
utilize the tax credit transfer provisions to support the renewable energy development.
Evan Junek: What are some of the challenges that we're witnessing in tax equity?
Rubiao Song: So the challenges are numerous and we are seeing that some of the
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challenges existing on the supply chain-side came out of COVID and albeit some of the
equipment supply issues are abating, whether there still are continue to be a shortage, for
example, some key equipment like main power transformers. But also as well as the higher
capital cost, always the inflation and the high interest rate as well as the global tariff and
the trade-related issues continue to present headwind to this industry.
Evan Junek: Given those current market dynamics, what's your outlook for tax equity in
2024? How can J.P. Morgan assist clients in navigating these challenges and complexities?
Rubiao Song: Well, we're seeing a strong continued demand, so we talk about a numerous
headwinds, but the tailwinds are as strong as well. We see a lot of companies are looking at
IRA as one way to tap into the incentives to make their own clean energy transition, to
reduce their own carbon footprint. So many companies are looking at ways to join in this
space and we are seeing a lot of opportunities for J.P. Morgan to play a role, particularly
with our large corporate clients. The one thing I would point out is, the IRA actually
introduced a new provision, which is unprecedented in the sense that now the energy tax
credits are available to transfer instead of you have to engage in tax equity partnerships to
transfer these credits and that the IRA, these credits can be transferred between the
developer and the buyers engaged in what we called, tax credit transfer transactions, and
we are seeing a huge interest from corporates looking at these tax credit transfer provisions
as a way to firstly, reduce their federal tax liability, but also looking at ways to support
renewable energy.
Evan Junek: So that's a great point. That's another aspect of the IRA that really is gonna
have a significant impact on the way in which both renewable energy developers are
operating their businesses, but also it sounds like many other companies are going to think
about potentially acquiring those credits in a more dynamic and active market.
Rubiao Song: Yeah, we see that market has been developing very fast. Last year, which
was really the first year these tax credit transfer are available, we see it by year end there
were five billion of tax credit being executed, and this year, we can see that number
continue to increase. At J.P. Morgan we rely our own capabilities in terms of underwriting
these projects and helping the potential corporate clients to get comfortable with taking
such risk and expand that investor base.
Evan Junek: So obviously, really exciting times to be exposed to this tax equity dynamic.
Ties in very closely to not just the overall energy transition that's taking place, but obviously,
J.P. Morgan's own role in the broader energy transition process. So thank you, Rubiao, for
Marathon Superday Prep
spending some time both explaining and exploring the dynamics of tax equity, and
discussing some strategies to success for the market and our clients.
Rubiao Song: This has been great. Thanks for having me.
Evan Junek: And a big thank you to our listeners for tuning in. We hope you found this
conversation enlightening. This is Evan Junek, your host, until next time, goodbye.
[END OF EPISODE]
YALE RESEARCH:
As noted in the table above, this project shows great promise to a utility-scale developer.
Located in an area with high levels of sunlight, a starting revenue of $10.2MM, and a
competitive installed cost of $1.03/W, this project could have a levered internal rate of
return (IRR) of about 20%. In other words, this is a very attractive investment to many
lenders! However, issues arise for this project’s developer regarding the use of the $27
million ITC for this project.
As a small, privately held company, the developer for this solar project very likely does not
have enough taxable income, or “tax appetite”, to efficiently utilize the $27MM tax credit.
This is especially true during the first five years of the project’s life, when a project will have
a negative taxable income under (also intricate but separate) accounting rules. When a
company has more tax credits on-hand than taxes owed, the remaining balance will simply
carry forward year after year until the tax credit is exhausted. For our example, using the full
$27MM ITC internally as a “self-sheltering” taxpayer could take almost the entire 20-year
life of the project. This is a cause for great concern to developers simply because a $27
million tax credit that slowly pays out over the course of 20 years is much less valuable
than a $27MM cash payment today.
As a result of the economic inefficiencies from the current tax incentive structure, the tax
equity industry has emerged as a solution. A tax equity investor, typically a large
institutional bank like J.P. Morgan, can solve this time value of money problem for
renewable energy developers. In exchange for putting IR cash in the project (in this case, at
least $27 million), the tax equity investors can receive the tax credits and tax losses from
the project and use those to offset taxes elsewhere in their business.
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QUESTIONS TO ASK INTERVIEWERS
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What will equity investors expect to see before they commit to an investment?
tec
Things To Know
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PPA: Critical document to lender; contains fundamental business and financial terms
of the project. Must have a term sufficient to amortize the investment.
As a general (if not universal) rule, lenders will not forgo recourse to a project’s Sponsor
unless there is a projected revenue stream from the project that can be secured for
purposes of ensuring repayment of the loans. In the case of large wind and solar power
projects, this revenue is typically generated from a power purchase agreement (“PPA”)
with the local utility, under which the project may be able to utilize the creditworthiness
of the utility to reduce its borrowing costs
https://www2.deloitte.com/us/en/insights/industry/renewable-energy/renewableenergy-industry-outlook.html
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Trends in Renewables:
The global energy transition is entering a new phase, marked by rising costs, complexity,
and increased technology challenges.
We need energy security in an increasingly uncertain macroeconomic environment.
Considerations beyond technological feasibility will need to be addressed, spanning
capital deployment, improving business cases, ensuring economic returns, adjusting
regulation, and establishing continued political and public support in the face of
competing economic and societal priorities.
Increased energy demand continuing to grow.
Decline in emissions mainly driven by economic factors.
Industrial resurgence would drive demand growth through electrification in the United
States.
How the world will meet the projected increase in energy demand is one of the key
questions of the energy transition. Both RES and new fossil fuels build-out will be
required to ensure demand is met by supply, and nuclear power could play a bigger role
in the years beyond 2050. However, for all these energy sources, lengthy project
timelines and higher interest rates could add costs and put project execution at risk.
Of these new demand centers, the most striking is the rise of artificial intelligence (AI)
and the associated boom in data centers. The effect that AI could have on future energy
demand could vary substantially depending on the growth trajectories of its many
applications, as well as those of other technologies. Data centers are mostly powered
by electricity (with backup generators) and have constant demand, creating greater
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need for gas or other firming sources of energy to balance out the intermittency of
renewable energy sources (RES).
technologies for which the levelized cost of energy (LCOE) is already low at the point of
production, such as solar, wind, and energy storage systems, are projected to continue
to grow. Solar stands out with particularly strong growth projection.
CHALLENGES IN RENEWABLE ENERGY SOURCES
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renewable energy sources are now cheaper, but there is more work around the
economic feasibility of these cases.
- An emerging challenge affecting energy systems with a high penetration of
renewables is power pricing. The comparatively lower marginal costs of RES mean
that the price of electricity tends toward zero—or even negative pricing—at
certain times of day. For new RES installations, this could potentially impact the
business case, requiring electricity providers to derisk their positions. In some
scenarios, including those with the most cost-effective decarbonization pathways,
our analysis shows that new RES build-out would not have a positive business
case without regulatory intervention.
- Achieving firmness in a renewables-based system introduces another complex
challenge. The business case for firming capacity, such as from gas or battery
electric storage systems (BESS), needs to make sense and be supported by
government and correct market design. Even though a renewables-based system
may be cheaper than a fossil-based one, the need for firmness is nontrivial—and
this, in combination with the required grid investment, could make the final cost
of power for the consumer higher than previously anticipated.
- Policy and regulation can play a role in ensuring the build-out of low-carbon firm
energy sources is feasible, with robust business cases that result in affordable
power for end users. Additionally, BESS and other long-duration energy storage
(LDES) technologies could play an important role in meeting demand located far
from the grid and in balancing a renewables-based system.
Solar power
In 2023, solar photovoltaic energy made up three-quarters of renewable capacity additions
around the world, according to the IEA. Capacity growth stemmed from both utility-scale
plants and consumer adoption of distributed PV systems—on-site solar power generation
at homes and businesses—accounted for the other half (link resides outside ibm.com).
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Continued policy support from governments around the world remains the primary driver of
this growth. For example, some policymakers incentivize renewable power generation by
individuals and businesses through net-metering programs that allow utility customers to
send excess energy generated back to their utilities for credits. Other incentives
encouraging the production and use of solar power include feed-in-tariffs, tax credits and
auctions in which solar power providers compete on energy market price to win contracts.
The expansion of the solar PV supply chain is enabling the manufacturing necessary to
meet the demands of the growing industry. More manufacturing capacity in the US, India
and the EU is expected to help diversify the solar PV supply chain, but China continues to
dominate the space. The country was home to 95% of new solar technology manufacturing
facilities in 2022 (link resides outside ibm.com). And advancements in solar photovoltaic
technology are producing lighter, less expensive, more efficient solar panels (link resides
outside ibm.com) that will continue to increase generation capacity over time.
Based on the IEA’s Net Zero Emissions by 2050 Scenario (NZE), if current growth rates are
maintained through 2030, solar PV is “on track” to meet annual generation capacity of
approximately 8,300 terawatt hours (TWh) by the end of the decade (link resides outside
ibm.com). In addition, solar PV is expected to be the dominant source of energy in the
production of low-emissions or green hydrogen. Low-emissions hydrogen (in contrast to
hydrogen produced with fossil fuel power) can potentially drive greater decarbonization
efforts (link resides outside ibm.com) in businesses ranging from steelmaking to ammonia
production, where hydrogen is used for industrial purposes.
Wind power
As with solar power, public policies have been key to driving wind energy expansion, but
growth projections vary by region. China saw a 66% increase in wind power capacity in
2023 and is on track for more additions in the coming years. Project development, however,
has been slower than initially expected in Europe and North America. Offshore wind
projects have been especially vulnerable: In 2023, in the US and UK alone,
developers canceled offshore projects (link resides outside ibm.com) with total capacity of
15 gigawatts (GW).
Recent public policies may help support the industry during this challenging period. In
2023, the European Union announced its Wind Power Action Plan, with measures to
improve permitting, auction processes and financing access as well as expand workforce
training (link resides outside ibm.com). In the same year, nine European countries
announced plans to increase offshore wind power capacity to over 120 GW by 2030 and
over 300 GW by 2050 (link resides outside ibm.com). Meanwhile, in the US, the government
is investing in the development of floating wind farms. The deployment of floating wind
farms with a capacity of 15 GW is expected by 2035 (link resides outside ibm.com).
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For wind power to meet the goals of the IEA’s NZE, average annual growth would need
to reach or surpass 17% per year until 2030 (link resides outside ibm.com).
LINKS
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https://www.financierworldwide.com/qa-capital-stacks-for-investment-in-the-usrenewable-energy-sector
https://shastapower.com/how-solar-farms-generate-profit-guide/
https://sustainablecapitalgroup.com/blog/project-financing-in-renewable-energy-acomprehensive-guide/
https://www.reddit.com/r/projectfinance/comments/1dagrh0/project_finance_financia
l_model_interview_test/?rdt=49333
https://www.linkedin.com/advice/3/what-questions-should-you-prepare-renewableenergy-e4kjf
https://courses.renewablesvaluationinstitute.com/pages/academy/how-to-value-awind-farm
https://www.energy.gov/eere/i2x/articles/tackling-high-costs-and-long-delays-cleanenergy-interconnection
https://home.treasury.gov/system/files/136/Fact-Sheet-IRA-Equitable-Clean-EnergyEconomy.pdf
https://cleanenergyforum.yale.edu/2022/05/16/the-essence-of-tax-equity-part-one-inseries
https://cleanenergyforum.yale.edu/2022/05/16/the-mechanics-of-tax-equity-part-two
https://cleanenergyforum.yale.edu/2022/05/16/current-challenges-to-tax-equity-partthree
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https://www.energystar.gov/about/federal-tax-credits
https://www.jpmorgan.com/insights/banking/financing/orsted
https://www.stoel.com/insights/reports/the-law-of-solar/project-finance-for-solarprojects
https://www.nrel.gov/docs/fy19osti/72037.pdf
https://business.edf.org/wp-content/blogs.dir/90/files/EDF-IRA-Renewable-EnergyActivation-Guide.pdf
https://energycentral.com/c/gr/what-are-renewable-energy-credits-how-do-they-workand-why-do-they-matter
https://iea.blob.core.windows.net/assets/45704c88-a7b0-4001-b319c5fc45298e07/Renewables2024.pdf
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https://www2.deloitte.com/us/en/insights/industry/renewable-energy/renewableenergy-industry-outlook.html
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https://www.weforum.org/stories/2024/02/green-energy-electricity-demand-growthiea-report/
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https://www.wri.org/insights/clean-energy-progress-united-states
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https://www.mckinsey.com/industries/energy-and-materials/our-insights/globalenergy-perspective
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https://www.ibm.com/think/insights/renewable-energy-trends
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https://www.climatecentral.org/report/solar-and-wind-power-2024
https://news.harvard.edu/gazette/story/2018/10/large-scale-wind-power-has-itsdown-side/