The clock is ticking for renewables developers to grab a bonus handed out in the Trump administration’s 2017 tax reform, celebrated by the Treasury this week.
The Tax Cuts and Jobs Act of 2017’s Opportunity Zones provision, described by advocates as a “giant money fire hose,” could provide a capital gains tax benefit for renewable investments in up to 8,700 federally designated areas across the country, according to a report by FTI Consulting.
Under the Opportunity Zones program, investors get tax credits for investing in low-income areas.
The program allows equity investors to defer taxes on gains put into Qualified Opportunity Funds (QOFs), the investment vehicles used to invest in the zones, until December 2026.
If investors hold their investments for five to seven years, they can increase their basis on the investment by 10 and 15 percent, cutting tax by an equal amount. If they hold the investments for at least a decade, any extra gain on the investment is not subject to federal tax.
There is only a limited window of opportunity for investors to take full advantage of the Opportunity Zone program, though. The headline 15 percent capital tax deferral rate is only available up to the end of this year. After that, it drops to 10 percent until 2021.
So far, 90 funds have been set up targeting Opportunity Zone investments, mostly in real estate. Renewable energy investment funds could also benefit if they pump money into projects in low-income areas. But the response from developers has been sluggish.
A database held by the National Council of State Housing Agencies (NCSHA) lists only 11 QOFs focused on renewable energy.
The renewable QOFs have accrued around $2 billion of capital for investment in Opportunity Zones, although in most cases only a portion of investments will likely go toward clean energy projects.
The largest renewable energy QOF on the NCSHA list, for example, is looking to invest $500 million but is also targeting housing, commercial real estate, community revitalization, and economic, hospitality and mixed-use development projects, to name a few areas.
Only one QOF, the Oregon-based Obsidian Opportunity Fund, appears to have a primary focus on renewables.
The fund, listed as investing between $100 million and $500 million, is pumping cash into a 600-megawatt solar and storage project in Fort Rock, Ore., due to go live this year.
Geared toward shovel-ready projects
Renewable developers may have been slow to pick up on the Opportunity Zones because it is not such a natural fit to their needs as the more widely known federal Investment Tax Credit (ITC) and Production Tax Credit (PTC) schemes.
The ITC and PTC schemes offer direct relief for renewable energy projects, while QOF benefits apply only to money put into the financing vehicles that fund each project.
Also, renewable energy projects tend to depreciate rather than appreciate. The main attraction of QOFs is that they could serve as a haven for investors with unrealized capital gains.
Finally, the brief period in which QOFs can achieve maximum benefit means the funds have so far tended to focus on shovel-ready projects, such as housing developments, rather than longer lead time solar or wind plants.
“The PTC and ITC provide significant, directly tangible benefits which improve economics across the board for wind and solar investments,” Chris LeWand, FTI Consulting’s global clean energy practice co-leader, told GTM.
“Opportunity Zones are a more nuanced vehicle that clearly provides benefits but [they are] primarily applicable to investors with a long time horizon [and] existing capital gains exposure, wanting to reap other benefits available from applicable renewable investments.”
Complementary to existing renewables tax credits
This does not mean renewable developers should turn their back on the program, though. According to an Economic Innovation Group estimate from March 2018, up to $6.1 trillion of capital could be eligible for reinvestment in Opportunity Zones.
The Opportunity Zone program could be seen as complementary to the existing ITC and PTC, FTI Consulting said. Projects eligible for tax credits could get supplementary benefits if backed through a QOF, it said.
Alternatively, Opportunity Zone investments could help improve the returns for projects as the ITC and PTC wind down.
“For developers with projects in Opportunity Zones, the funds can provide an attractive pool of capital, but only if developers take the initiative by attracting investors or even raising their own funds," said LeWand.
"Opportunity Zones represent a significant opportunity for renewable energy investors, developers and projects. However, in order to take advantage of the full benefits associated with the program, developers and investors must act soon."