What options will emerge to replace tax equity financing for solar?

With the scope of global turmoil caused by Covid-19, supply chains have been completely disrupted. Further, as people are ordered to stay indoors, small businesses have had to shutter their doors due to the lack of demand. For bigger corporations, revenue projections are being slashed for the same reason. Even Apple isn’t immune.

Last week alone, the United States had a staggering 3.28 million unemployment claims. 

The financial markets have stumbled quite significantly overall and, at this point, a global recession appears a certainty. Businesses will be forced to react and adapt to this global pandemic that has no concern for showing economic mercy. 

One industry that will likely see big changes in financing is solar development. Up until this point, many industrial and utility solar development projects have been financed through tax equity financing. 

Solar energy projects, especially those on a larger, industrial scale, require a ton of capital to get going. On the flip side, solar energy developments offer some of the most robust tax benefits around, as clean and green energy initiatives become more coveted by both legislators and the public. 

In 2019, the investment tax credit (ITC) for solar development projects was 30% of the amount invested in the project. For solar projects starting in 2020, the ITC dropped to 26%, before it drops to 21% in 2021.  

Because of those generous tax benefits, tax equity financing for solar development projects has become immensely popular among financial institutions that already have large tax liabilities and can see solid profit margins by utilizing the ITC. 

In short, a financial institution will bankroll a solar energy project for a solar energy developer, who will do all of the actual construction and project management. The tax credits that come from solar projects are effectively being sold to the financier. 

The financial institution receives the tax benefits and whatever other profits from the project for a time, but does not want to be the majority owner for the life of the solar development. This is when a “partnership flip” takes place, where the financier and solar developer switch places as majority and minority owner, typically when the financier can no longer take advantage of the tax benefits.

With financial institutions likely looking to reduce liabilities in the face of a recession, you can expect to see far less tax equity financing for solar projects.

What alternatives to tax equity financing will we rise from this absence? For starters, tax equity financing may still be common moving forward, just not in the way that it has commonly been done by financial institutions who later partake in a “partnership flip.”

We could see more syndicated investments, where multiple investors partner up under a single entity to take part in tax equity financing for projects. This will be a way for aggressive investors to reduce vulnerability, while still taking advantage of the ITC. These investors may be able to get better deals if there is a lack of competition from larger financial institutions.

Alternatively, some of the largest solar development companies, like First Solar, SunPower, and Cypress Creek Renewables, may try to bankroll industrial solar developments themselves, without the help of financial institutions. If some of these development companies have good enough cash flow to make sizable investments, they could capitalize on the ITC themselves.

Other possibilities include specially crafted solar loans from financial institutions like LightStream, SoFi, or LendingTree. These types of loans would have to be for smaller-scale industrial solar projects, or only be used to cover a portion of the cost because solar loan limits often only go up to $100,000. 

Property Assessed Clean Energy Financing, otherwise known as PACE loans, may be a viable option to cover a fraction of the total cost of a solar development project. A PACE loan will stretch out payments for up to 20 years, so it can be more affordable for businesses with tighter budgets. 

Non-utility-scale alternatives

Clean Renewable Energy Bonds (CREBs) are taxable bonds where the issuer will get federal tax credits for subsidizing the interest, which usually ranges between 0% and 1.5% over 15 to 20 years. This is a viable and low-rate option for large-scale solar energy projects, especially for public sector entities, like schools, yet the slowing of the American economy won’t just change large-scale solar financing. Personal solar projects also figure to get impacted, as Americans tighten their budgets.

A recent LendEDU survey found that 44% of Americans have had to use money from a savings or emergency fund due to Covid-19, while 42% have already taken on more credit card debt than desired due to the outbreak. 

With consumers getting stretched thin financially, expect to see a slowing of residential solar projects. Personal loans or more specialized solar loans could be options for those consumers that still wish to install solar panels on their property but may not have the cash to fund the project directly. 

A consumer may well turn to a home equity line of credit or a home equity loan to fund their personal solar project. With either of these common home improvement project options, a person will use their home as collateral to secure the financing. With interest rates at historic lows, these forms of financing may be accessible for homeowners. 

***

Mike Brown is director of communications at LendEDU, where he uses data from surveys and publicly-available resources to identify emerging personal finance trends. His work provides consumers with a personal finance measuring stick and can help them make informed finance decisions. He has been featured previously in The Wall Street Journal and The Washington Post.