Details of the fix: BNEF’s Nathan Serota on final form of BEAT in the tax bill

In this interview BNEF Senior Analyst Nathan Serota explains the details of the 80% offset under the new BEAT provision in the final tax reform legislation, and what this means for solar and wind finance.

December 18, 2017 Christian Roselund

Deep-pocketed investors and utilities increasingly are targeting renewables.

By Alex Proimos from Sydney, Australia (Wall Street) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)]

Editor’s note: Of all of the aspects of the tax reform legislation currently making its way through Congress, it is likely that the Base Erosion Anti-Abuse Tax (BEAT) provision in the Senate bill caused the most concern for the solar industry. And while an 11th-hour fix appeared to soften the severity of the provision in the final bill, the details of this and other aspects of the tax reform legislation are inherently complicated.

pv magazine: The information that I have indicates that there will be an 80% offset to the BEAT provision. Can you explain your understanding of how this offset will work?

Nathan Serota: In the simplest terms, prior to the 80% offset there was a risk that in any given year a tax equity investor (a company) exposed to the BEAT provision could end up having to surrender 100% of the value of the tax credit in that year. The offset reduces that value to 20% at least until 2025.

pv magazine: And what happens after 2025?

Serota: After 2025, it is possible that 100% of the tax credits would be exposed to the BEAT credit unless Congress were to extend the ‘80% offset’ in the future.

pv magazine: Are there other provisions in the BEAT tax that would have an effect on tax equity investment?

Serota: My understanding is that while the final bill reduced companies’ exposure to the BEAT, it may have also increased the number of companies who would have to calculate BEAT taxes in any given year – or at least that is one concern raised by wind and solar industry lobbyists.

pv magazine: Which classes of tax equity investors do you expect to be most affected by the provision as it is currently reads?

Serota: There are two ways to think about this. The first is what kinds of companies are likely to be most affected by BEAT; the second is where do those companies invest in terms of wind versus solar and deal size.

Large, multinational companies who provide tax equity will be most affected. That is principally financial institutions: that includes U.S.-based bulge-bracket investment banks; foreign financial institutions that provide tax equity in the United States.

pv magazine: What effect do you expect this to have on tax equity financing overall, and on the downstream wind and solar market?

Serota: This is likely to change how tax equity deals are structured. Lawyers and project finance banks will have figure out how to accommodate new elements of the tax code in deals.

Generally speaking, the tax plan will increase the value of operating renewable energy projects. There is likely to be a greater use of debt in project structuring since tax equity is likely to be more difficult to source. Tax equity will remain a necessary evil in U.S. renewable energy project finance.

It remains to be seen how this will affect the downstream industry – how it will affect deployment of wind and solar over the next five years. The ultimate impact will be influenced by how the largest tax equity providers respond.

Wind will be more affected than solar. This is because solar developers are less affected by the BEAT generally because they tend to tap into a larger number of sources of tax equity, many of which are not going to be affected by the BEAT provision.

pv magazine: How long until solar doesn’t need the 30%ITC? At what point will the cost of building solar be so low that this is irrelevant?

Serota: I think right now, solar is on track with the phase-out to be competitive at current prices on the ITC phase-out schedule. There is a question about if you were to abruptly remove the ITC, how would the industry respond.

Right now, solar competes against solar, or directly against wind in most situations. That’s the nature of the market. So removing the tax credits for either would impact the economics of that technology relative to other renewables.

Solar doesn’t compete against merchant power prices exactly. So the question, when would solar be able to stand on its own two feet… There will continue to be power purchase agreements signed and new projects developed if the ITC were to go away. There would just be less, in the short term.

pv magazine: Does the presence of the BEAT provision with the 80% offset… do you expect to change your forecast for the amount of solar deployed in 2018, based on that fact, assuming the tax bill passes?

Serota: How much PV gets built in 2018 will be affected by the tax bill, but to be honest, the compromise tax bill compared to what we had expected to be released, it is marginally different. Therefore the impact is likely to be small if at all.

We are still working out exactly what the impact will be.

pv magazine: Is there anything else our readers should know about this bill that we didn’t cover?

Serota: I think the BEAT provision was certainly a potentially impactful element of the tax bill for downstream renewables including solar, but there are other elements of the tax plan that are going to affect the project finance market – especially for renewables – and it is important to think about those.

Without going in to those provisions, there is a lot going on in this bill. The BEAT is only one part of it.

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