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Lowering the Cost of Capital for Renewables
November 20, 2013
On Wednesday, November 20th, John Rhodes, President and CEO of the New York State Energy Research and Development Authority (NYSERDA), Eli Katz, Partner at Chadbourne & Parke LLP, and Paul Francis, Distinguished Senior Fellow at the Frank J. Guarini Center on Environmental and Land Use Law and Trustee of NYU School of Law discussed federal and state policies and private finance mechanisms to drive down the cost of capital for renewable energy projects. The discussion covered a wide-range of policies and incentives including production and investment tax credits, accelerated depreciation, Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), and NYS’ proposed Green Bank along with YieldCo and securitization structures.
Eli Katz observed that the recent growth in the renewable energy industry has been supported by four primary factors: alarm about climate change, concerns about energy security, renewable portfolio standards in the states, and federal tax policy and argued that federal tax policy has probably been the largest driver of this growth.
The speakers agreed, however, that relying primarily on tax benefits (credits and accelerated depreciation) was inefficient and created uncertainty because of the episodic extension and expiration of renewable energy tax credits. Tax benefits increases the cost of capital for renewable energy projects by 8-9% by restricting investors to the limited number of “tax equity” players that number 15 investors “on a good day” and increases the transaction costs for such projects by requiring elaborate deal structures to monetize the tax benefits available to these projects. Taking advantage of these benefits remains vital to any renewable energy project since about 45% of a project’s structure is often being paid through the federal tax code.
John Rhodes described a “pragmatic” approach at the state level, where New York strives to make sure that its renewable energy subsidy programs, which are not tax credit-based, integrate readily with federal programs. The proposed “Green Bank” in New York State can help close the financing gap for renewable energy projects through “aggregation, credit enhancement, and securitization” and should provide the kind of transparency and consistency about state incentives that will decrease reliably over time that will send a clear market signal and drive business model and technology innovation in the market place.
Alternative federal policies attracting attention like MLPs and REITs may help drive down the cost of capital (perhaps by 20%) and attract more investors, but they don’t widen the pool of eligible tax investors and so are an imperfect or incomplete substitute for the tax benefit incentives for renewable energy.
For more information on some of the mechanisms discussed on this panel, see the Guarini Center’s Fact Sheet.