An Analysis of the Costs, Benefits, and Implications of Different Approaches to Capturing the Value of Renewable Energy Tax Incentives
In the United States, Federal incentives for the deployment of wind and solar power projects are delivered primarily through the tax code, in the form of accelerated tax depreciation and tax credits that are based on either investment or production. Both wind and solar projects are equally eligible for accelerated tax depreciation, but tax credit eligibility varies by technology: solar is currently eligible for the investment tax credit (“ITC”), while wind is eligible for either the ITC or the production tax credit (“PTC”), though wind project sponsors typically choose the PTC.
For either technology, and with either the PTC or ITC, the combined value of tax deductions and credits (in combination, referred to as a project’s “tax benefits”) generally exceeds a project’s internal ability to use them in each of the first five (or more) years of the project’s life. Some project sponsors, said to have “tax appetite,” are able to efficiently (i.e., in the years in which they are generated) apply these excess tax benefits against other sources of taxable income external to the project in question. This is the best possible outcome for the sponsor. Other project sponsors that lack tax appetite can carry forward excess tax benefits to future years until they can eventually be used internally by the project itself, but this strategy sacrifices some of the incentives’ value, due to the time value of money. A third option is to bring in – at a cost – a third-party “tax equity” investor who is able to efficiently use the project’s tax benefits, and who invests in the project in exchange for being allocated most or all of its tax benefits; this is known as “monetizing” the tax benefits (i.e., converting their value into money that can be used to finance the project).
This report compares the relative costs, benefits, and implications of capturing the value of renewable energy tax benefits in these three different ways – applying them against outside income (labeled as “Tax Appetite from Sponsor” in Figure ES-1), carrying them forward in time until they can be fully absorbed internally (labeled as “No Tax Appetite”), or monetizing them through third-party tax equity investors (“Tax Appetite from Tax Equity”) – to see which method is most competitive under various scenarios. As summarized in Figure ES-1, it finds that under current law and late-2013 market conditions (denoted by the two green-shaded columns – one for wind, one for solar – in Figure ES-1), monetization makes sense for all but the most tax-efficient project sponsors. In other words, for most project sponsors (i.e., those without much tax appetite), bringing in third-party tax equity currently provides net benefits to a project.