For a while, renewable energy interests saw the Senate tax cut bill as a shield against the House tax bill. No longer.
The Senate bill – despite objections from GOP renewable energy allies – now poses its own threat to the growth of wind and solar power.
In a last minute markup on Thanksgiving eve, the Senate finance committee inserted the Base Erosion Anti-Abuse Tax (BEAT) provision. The aim of the provision is to make it harder for corporations to dodge taxes by backing out tax credits from the calculations used to determine tax rates.
The BEAT provision would make the production tax credit (PTC) favored by wind power developers and the investment tax credit (ITC) used for solar power projects less appealing to the multi-national corporations that dominate the tax equity market. That would create uncertainty in the market for financing many renewable energy deals.
Four trade organizations – the American Council on Renewable Energy, the American Wind Energy Association, Citizens for Responsible Energy Solutions, and the Solar Energy Industries Association – responded with a letter last week urging the Senate to create a carve-out for renewable energy.
Greg Wetstone, president and CEO of the American Council on Renewable Energy, said the provision would affect $50 billion in annual investment in renewable energy projects.
The BEAT provisions exempt research and development credits. Renewable energy interests had sought the same treatment for the PTC and ITC, but that did not happen.
“My guess is the base erosion tax will survive,” Keith Martin, a partner with Norton Rose Fulbright, told Utility Dive. “It could cause some banks to drop out of the tax equity market for a period of time next year until they can assess their exposure.”
The BEAT tax could make banks and other large tax equity investors reluctant to finance projects in ways that entitle them to tax credits, since every dollar of tax credit would have the potential to create a tax liability.
“A tax equity investor will not know when it invests whether it will receive the tax credits on which it is counting,” Martin said.
The BEAT provision would not only affect new renewable energy deals, it would in effect be retroactive because the calculation would have to be performed every year. So, in any year of a typical 10-year tax equity financing deal, the investor would not know the value of the tax credit until year end.
“Anti-base erosion language in the Senate tax bill, as currently written, would impose a 100% surcharge on overseas companies’ purchases of solar ITCs and PTCs in the tax equity market,” Clearview Energy Partners said in a Monday note. “The provision, which would appear to apply retroactively to existing credits, could significantly dampen financing for wind and solar infrastructure.”
Looking forward, the BEAT provision poses more risks to wind tax equity deals than to solar financing arrangements that use the ITC, which is funded in a single year.
“An investor would likely need to know that he won’t trigger the BEAT liability for next decade, versus only the next 12 months in the case of the ITC,” analyst Julien Dumoulin-Smith with Bank of America Merrill Lynch wrote in a Dec. 1 note.
Dumoulin-Smith noted that there is already talk in the industry about tax equity deals that are in danger and the beginning of negotiations to shift more risk to project sponsors as a result of the pending legislation. He also said the BEAT provision could already be limiting the availability of tax equity during the critical period in which many developers are rushing to bring deals to market before the PTC steps down at year end in accordance with a phase-out schedule put in place by Congress in 2015.
“We expect volatility and deal-making to persist,” Dumoulin-Smith wrote.
The prospects of a BEAT exemption for the PTC and ITC are dwindling, said Dumoulin-Smith. Congress is under pressure to pass the bill by Dec. 22, the earliest date on which a new senator elected in the Alabama special election could take his seat.
It now looks more likely that the most renewable interests could hope for is a two year “hold harmless” provision that would extend to 2019. That could “give certainty to near term new build, and leave open the option of later extension,” Dumoulin-Smith wrote. “However, even this could become an uphill battle.”
Minimum corporate taxes
The Senate also threw the renewables industry another curve ball before passing its tax cut bill. In a Dec. 1 rewrite aimed at plugging a $40 billion gap in order to win over Republican deficit hawks, the Senate introduced a corporate minimum tax.
There are essentially two corporate tax rates – a 35% rate and a 20% rate that is based on a wider definition of taxable income. Corporations compare the two amounts and pay the more favorable rate.
Both the Senate and House tax bills reduce the corporate tax rate to 20%, but under the Senate’s change, if both tax rates are 20%, corporations would have to pay the alternative minimum tax. Investment tax credits can be used against the traditional corporate tax, but under the alternative minimum tax, the PTC could be used for only four years after a project enters service, instead of the current 10 years.
“This may cause developers to switch to investment tax credits on new projects,” an option they already have but rarely use, Martin aid.
The four-year limitation could also “dramatically reduce after-tax earnings on existing and planned wind investments,” Analysts Eric Selmon and Hugh Wynne at research firm SSR, wrote in a Dec. 4 report.
In an earlier report, Wynne noted that cutting the corporate tax rate to 20% could result in a significant decline in tax appetite. He estimated that a 20% corporate rate could reduce the tax appetite of major tax equity providers by 40% and lead to a tighter tax equity market.
Wind power developers unable to access the market for tax equity could be forced to raise their prices by as much as 80%, Wynne estimated, shifting the advantage to larger developers able to use the tax credits internally.
The House tax cut bill does not have a corporate minimum tax. It also does not have the BEAT provision, but it would impose a 20% excise tax on some cross-border payments.
The House bill also leaves the PTC and ITC in place, but it would retroactively end the inflation adjustment clause, rolling back payouts to 1992 levels, and change the deadline for when the PTC can be claimed, which the American Wind Energy Association has said would be the equivalent of a 20% retroactive tax.
“My guess is the roll back of the PTC amount to the 1992 level in the House bill will not survive conference,” Martin said. He also said the provision that alters the eligibility deadline is not expected to survive, but anything can happen in the conference committee.