In this White Paper, Marathon Capital explores how a decrease in corporate income tax rates and other proposed corporate tax changes could impact the U.S. renewable energy financing landscape. The White Paper offers a variety of insights, including the following key findings:
- U.S. renewable energy projects generate a portion of their value from tax deductions in the form of accelerated tax depreciation. The value of these deductions will decrease to corporate taxpayers as the corporate tax rate is reduced;
- The potential decrease in value is not uniform across renewable energy projects but will vary based on different tax incentives and contractual structures. In general, wind projects are more sensitive to a decrease in tax rates than solar projects, and certain types of wind projects (for example, projects with low capacity factors and long term PPA’s) are more sensitive than others;
- Our analysis actually shows that investor returns on most solar projects will not change and could, under certain circumstances, show small improvements. In contrast, many new wind projects could see returns decreasing by ~40 to ~120 basis points;
- For certain wind projects financed with third party tax equity partnerships, sponsor returns could drop significantly by ~80 to ~240 basis points;
- To restore sponsor returns to the current market levels, offtake prices would need to increase by as much as 10%, capital expenditures would need to decline by 8% (in a worst case 15% tax rate environment), and/or third party tax equity providers would need to charge less than current returns;
- In summary, while a reduction in the corporate tax rate could have a negative impact on the valuation of wind projects, the market may be able to absorb most of the potential loss in value through some combination of adjustments to offtake prices, build costs, and sponsor returns;
- Marathon believes that the potential uncertainty created by the prospect of corporate tax reform, with imperfect knowledge of what it will contain, will drive tax equity investors to larger, better capitalized sponsors that are better able to absorb the risk of future tax changes with indemnities or higher upfront investments. Such a shift could significantly increase the inevitable consolidation across the U.S. renewable sector and especially around wind projects.
The White Paper represents Marathon Capital’s commitment to helping renewable energy developers, investors and other market participants better understand the renewable energy opportunity.