Insight

A renewed approach to renewables

Are you aware of the tax incentives that your private company could be receiving if you invest in renewables?

Shel Shi

Shel Shi

Manager, Tax, BTS - AMCS, KPMG LLP

+1 617-988-2394

October 2021

There are dozens of reasons why private companies may want to invest into renewables. Now it looks like the Feds are about to give you another big reason in the form of direct tax payments. And that might change the way you think about renewables going forward. 

If you are like most private company leaders, you’ve probably already been thinking about renewables. Perhaps you see renewables as a key part of your company’s environmental, social, and governance (ESG) agenda. Maybe you see the sector as a smart opportunity to achieve compounded returns. Some are keen to invest into renewables to demonstrate their brand purpose or family values.

There are also many private companies investing into renewables as a way to drive cost efficiency. They have watched the cost of renewable energy fall dramatically (as compared to traditional fuel sources) over the past few years. And they see investments into renewable power as a way to reduce their operating costs and increase efficiency.

Of course, the tax incentives associated with renewables don’t hurt. Under IRC Section 48, there is a 26% Investment Tax Credit (ITC) rate available for solar projects started in 2021 or 2022; a Production Tax Credit (PTC) at 1.5 cents per kilowatt hour of electricity for wind facilities by the end of this year is provided under IRC Section 45; offshore wind farms started before 2026 are also eligible to claim the ITC at the full 30% credit rate under IRC Section 48. That’s on top of a basket of other incentives like the IRC Section 45Q credit for carbon capture and sequestration facilities and the ITC for waste energy recovery assets under Section 48. 

There are also many private companies investing into renewables as a way to drive cost efficiency. They have watched the cost of renewable energy fall dramatically (as compared to traditional fuel sources) over the past few years. And they see investments into renewable power as a way to reduce their operating costs and increase efficiency.

Cutting out the complexity

Up until now, few private companies had the tax appetite or the capability to invest into these sectors in any meaningful way. The reality is that, in many cases, developers and project owners don’t have sufficient tax liability to use the available tax credits and must rely on tax equity investors. But these tax equity structures are complicated and the pool of investors is limited.

Not surprisingly, many private companies have balked at the complexity, particularly when considering smaller deals. Private market investors have expressed interest in the program but are hesitant due to the level of complexity of the Tax Equity deals.  

The Biden Administration's Revenue Proposal for 2022 issued in May 2021 suggests these incentives could get much broader and much easier to capture for private market companies and investors, which could be an asset to the renewables sector and for private market players.

What’s in the proposal?

Let’s start with the straight-forward stuff. The Revenue Proposal for 2022 basically proposes the extension of the ITC and PTC programs for another 5 years or so. The ITC and the PTC will extend out to 2027; the 45Q program will extend to 2031. In other words, there is much greater certainty about the longer-term availability of these programs.

The Revenue Proposal also expands the applicability of the credits to a much, much wider range of assets and investments. Charging stations, electric vehicles, low-carbon hydrogen, advanced energy manufacturing – even the development of more sustainable aviation fuel are all up for new, extended or enhanced credits and incentives under the Proposal. The opportunities are expanding.

But here’s the biggest news: the Proposal includes direct pay options that could fundamentally change the equation for private market companies and investors. Simply put, the direct pay option allows taxpayers to treat these credits as a tax overpayment, resulting in cash refunds on filing. That eliminates the need for complex tax equity structures and allows investors and developers to access the credits much faster.  While this article was being drafted, on September 10, 2021, the Chairman of the House Ways and Means Committee released additional tax proposals in Budget Reconciliation Legislative Recommendations1, within which a direct pay mechanism is also provided to enable the refundability of these energy tax credits.   

The Biden Administration's Revenue Proposal for 2022 issued in May 2021 suggests these incentives could get much broader and much easier to capture for private market companies and investors, which could be an asset to the renewables sector and for private market players.

Room for clarity

For now, the expanded incentives are just part of a larger proposal. And that means there is still much to be understood about how these credits and incentives would work. The Proposal does not provide much additional detail on how direct pay would operate.

That may make things interesting. At KPMG, for example, we are exploring how these new proposals may interplay with existing credits and regulations. Could an investor apply for both the renewables tax credit and the Research and Development (R&D) tax credit at the same time? What if the investment is within an existing Federal Opportunity Zone? How will these proposals impact the applicability of the passive activity and at-risk rules that currently limit the benefit of ITCs and PTCs to individual investors?   

What is clear is that the ‘direction of travel’ being laid out by the Biden Administration and the House strongly suggests that these proposals will move ahead in some form. A direct pay option for credits has already been raised in other recent legislation. And the ideas seem to be a consistent feature of the administration’s infrastructure agenda. Most pundits are wagering it will pass. 

Your next steps

What does all this mean for private companies and investors? If you are already invested in renewables, it may be time to rethink the tax structure of those investments. Now is the time to start thinking about how these changes may influence your long-term tax strategy. If you are not already invested, it may be time to reassess your position.

In either case, the first step is to look across your investments and balance sheets to understand what expenses and costs might be applicable for renewables tax incentives. You may be surprised by what you find: even the purchase of a few electric vehicles (or electric bicycles according to the House Ways and Means proposals) could deliver some tax cash savings. To ensure you’re capturing everything, we would recommend this as part of a larger review of potential tax credits and incentives across your organization.

Then you need to start thinking about how these incentives and credits might help you achieve your organization’s strategic goals. What are you trying to achieve through investments in renewables? What is the organization’s tax appetite? How do these incentives influence the investment case? The answers to these types of questions should help you (and your tax team) to create the right structure around your investments. 

Renew your view

There are a multitude of reasons why you might be thinking about investing into renewables. And by offering a direct pay option and expanding the scope of the incentives, the Feds are taking clear steps to make the programs much more accessible and inclusive.

It may be time to renew your view on renewables.  

If you are already invested in renewables, it may be time to rethink the tax structure of those investments. Now is the time to start thinking about how these changes may influence your long-term tax strategy. If you are not already invested, it may be time to reassess your position.
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SUBFGHJ_xml.pdf

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