What’s New?
Keith Martin
kmartin@chadbourne.com
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Treasury cash grants paid on renewable energy
projects will be subject to haircuts of 7.6% starting
January 2 if $984 billion in automatic spending cuts
take effect. There is talk in Congress of a six-month
delay. The haircuts could drive more companies to
claim tax credits rather than grants.
"obligated balance"
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The Treasury has been limiting developer fees paid to
affiliated development companies to 3% to 5% of
project cost. It has generally allowed markups of 10%
to 20% above cost in cases where projects are sold to
third parties, including in tax equity
transactions. There are three lawsuits pending
against Treasury. The government accused a solar
company in one of fraud in a counterclaim in
July. The Treasury inspector general is back out in
the field, but using the IRS this time to assist with
audits.
False Claims Act
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All remaining cash grant applications must be filed by
September 30. The Treasury has been sending back
emails acknowledging the filing deadline has been
met, but reserving the right to question later whether
the project was under construction in time to qualify
for a cash grant. The Treasury is taking a tougher line
on what "physical work" means. There have been a
number of "2012 transfer" issues with developers
hoping to rely on the 5% test.
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The IRS revoked a private letter ruling that said a PPA
that can only be performed by delivering electricity
from a particular power plant has no separate
value. The ruling said all the value is in the power
plant.
in the money?
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The IRS has issued two private letter rulings that large
batteries installed at wind farms qualify for
investment tax credits, at least in cases where the
batteries are like knobs on a motor that regulate the
flow of electricity into the grid. Another ruling is
pending on batteries that are part of solar rooftop
installations.
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The Senate gave up trying to pass a bill before the
election that would extend production tax credits for
wind farms through December 2013. Whether the bill
moves in a "lame duck" session will depend on the
outcome of the election. The bill would change the
deadline to a deadline to start construction of new
projects rather than complete them.
geothermal
offshore wind
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The odds of major corporate tax reform in 2013 or
2014 are receding. The potential for such reform is
like a hurricane approaching the Atlantic coast that
could eventually affect the weather pattern. Both
parties want to reduce corporate tax rates. This can
only be done by sweeping most incentives from the
US tax code.
“binding” contract
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If Obama wins and Democrats pick up seats in the
Senate, it could breathe new life into the clean energy
agenda. A Republican sweep would give a boost to
corporate tax reform and lead to a rollback of recent
EPA regulations limiting emissions from power
plants. It is hard to see a break otherwise in the
current gridlock.
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The Historic Boardwalk decision by a US appeals
court in late August calls into question a fixed-flip
partnership structure that some solar and wind
companies have used to raise tax equity, at least in its
earliest form. It may also require rethinking some
"pay-go" structures where tax equity investors pay for
tax credits as they are received.
refined coal
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Developers draw on as many as six tiers of capital
from cheapest to most expensive. The government is
pulling away the two lowest tiers. The focus should
remain on how to raise as much money as possible
from the cheapest sources.
Treasury cash grants
government-guaranteed debt
straight debt
tax equity
back-levered debt
true equity
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There is still some government-guaranteed and taxcredit-enhanced debt: US Exim, USDA, ECAs and
NMTCs. Prepaid power contracts and prepaid leases
are a way effectively to borrow at the offtaker's
borrowing cost. Inverted leases are a way of
borrowing against future electricity revenue. Solar
companies are moving toward ABS structures or
placing rated portfolio debt in the capital
markets. There is growing demand among mid-tier
developers for depreciation-only tax equity plays.
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MLPs and REITs continue to receive a lot of
attention. MLPs require changes in the tax code
before they can be used for most renewable energy
projects. REITs may be a way to raise equity at close
to a debt rate. REITs are a four-piece puzzle of which
the industry has solved 2 1/2 to 3 pieces.
Treasury
solar REITs
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In 2011, 25 banks did four or more deals. Only 15 are
expected to do so in 2012. Pricing has remained
stable at 225 to 275 bps over LIBOR since 2009,
although it is trending toward 300 bps. Tenors have
shortened to five to seven years with mini-perm
terms. All lenders except the Japanese have reduced
volumes.
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There are 15 to 20 active lenders in the institutional
debt market, although deal volume remains
thin. Pricing is 250 to 375 bps over average life
treasuries. Tenors run to 20 to 25 years.
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There are 20 active tax equity investors and another
five to seven have approval to invest but have not yet
closed a deal. Yields in the benchmark wind deals are
slightly under 8%, and have been trending down in
solar residential. Deal volume was $5.9 billion in
2011. Commitments through the end of Q2 2012 had
already reached $4.7 billion.
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In terms of opportunity, eight years ago, one could
see three large waves coming: renewables, biofuels
and PPPs. Now all that seems visible is a series of
smaller wavelets: LNG, nuclear, Latin America, energy
storage, inbound Chinese investment, net zero
projects and PPPs.
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I cdnuolt blveiee that I cluod aulaclty uesdnatnrd what
I was rdanieg. The phaonmneal pweor of the hmuan
mnid, aoccdrnig to a rscheearch at Cmabrigde
Uinervtisy, it dseno't mtaetr in what oerdr the ltteres
in a word are, the olny iproamtnt tihng is that the frsit
and last ltteer be in the rghit pclae. The rset can be a
taotl mses and you can still raed it whotuit a pboerlm.
This is bcuseaethe huamn mnid deos not raed ervey
lteter by istlef, but the word as a wlohe. Azanmig huh?
Yaeh and I awlyas tghuhot slpeling was ipmorantt!
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Percentage of top 40 songs from the 1960s
that were written in a major key:
85%
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From the 2000s that were:
43%
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What’s New?
Keith Martin
kmartin@chadbourne.com
New York • Washington • Los Angeles • Mexico City • São Paulo • Beijing • Moscow • Kiev • Warsaw • Istanbul • Dubai • London