by Emma Foehringer Merchant
September 10, 2020

When the economy began to suffer in March, renewables financiers, developers and lawyers warned of a possible repeat of 2008-2009 when the Great Recession restricted tax equity and challenged the solar market's growth.

Through the spring and part of the summer, the market seemed to avoid that prediction. As recently as late July, big banks — the largest tax equity players in the renewables space — were predicting a record year of investment. It's possible that the solar industry could still end 2020 having seen more tax equity investment than in any previous year.

Even so, lawyers and developers working in the sector say many players are feeling a pinch.

“It’s been hard this year for a lot of developers to find tax equity, ironically, in the face of a market that may set a record in volume,” Keith Martin, a transactional lawyer at Norton Rose Fulbright, told Greentech Media. “The [tax-equity] market is emerging as something of a possible chokepoint for renewables this year.”

Big solar projects are planned years in advance, and many developers are working to capture as much of the soon-to-expire federal Investment Tax Credit as possible. In the nearer term, banks are coping with uncertainty about their tax liability or financials in the next few years.

The tax equity pinch may not be as severe as was feared in the early months of the pandemic. Analysts at Wood Mackenzie are still forecasting the deployment of nearly 14 gigawatts of new utility-scale solar in 2020, up from about 8.4 gigawatts in 2019. Still, tax equity constraints are likely to delay some projects this year and possibly next, with financiers favoring those with big-name developers and those they perceive as having the lowest risk. 

"We're still on a really, really strong path in terms of new projects that are being announced," said Colin Smith, a senior solar analyst at WoodMac. "But we've definitely reached a point where tax equity is perhaps one of the bigger bottlenecks that we're seeing."

The United States of tax equity

Opposing economic signals abound right now. The U.S. is in a recession, millions of Americans have lost their jobs and many businesses are closing down for good; at the same time, the stock market is near a record high, and long-term signals for investment into clean energy remain strong in many places.

Contradictions are also playing out in U.S. solar financing. In recent years, solar — particularly large projects — has become a popular asset class for investors of all stripes. Consistent returns, an understanding of risk and more general comfort levels with what solar investing looks like have helped pull in traditional investors, such as big banks, as well as smaller financiers like infrastructure and pension funds.

Continued interest in solar, set against uncertainties around how long the current economic pain will last, means some in the space are predicting unprecedented investment even as many developers are reporting problems getting their projects funded. 

A July report (based on a survey conducted in May) from the American Council on Renewable Energy (ACORE) showed that three-quarters of the nine tax equity investors surveyed expected declines in the overall tax equity market due to COVID-19, while 79 percent of all types of investors (a group that includes debt financing and direct project equity, for instance) did not expect to change their immediate business plans.

The current state of the tax-equity market is squeezing smaller players most, creating a "bifurcation," said Marshal Salant, Citibank's global head of alternative energy finance, on a September panel at REFF-Wall Street, an annual renewable finance conference hosted by ACORE. 

“The really big players...have no trouble, in general, getting their projects done; they can raise their tax equity because of their track record," said Salant. "But for every one of them, there's one, two or even three smaller players. That's where everybody is struggling.”

Norton Rose Fulbright's Martin, who advises investors and developers on these types of transactions, has been in communication with investors through the pandemic. In the spring and summer, most tax equity investors insisted activity was carrying on as usual or said they were only beginning to tap the brakes.

In a late July conversation hosted by Martin, Robert Capps, SunTrust Bank’s managing director for tax equity origination, said he expects the tax equity market to provide $15 billion in 2020 for renewables, up from between $12 billion and $13 billion in 2019.

But in that same conversation, investors from First Horizon Bank and M&T Bank said they were decelerating or done with investments for the year. And even as global investment bank RBC Capital Markets expects to nearly double its volume this year, “developers are finding many doors closed,” said Yonette Chung McLean, who works on that bank’s tax equity desk, in the same panel discussion.

That’s put pressure on developers as well as financiers. Jim Spano, who develops projects through his firm Spano Partners and also founded RadiantReit, an investment trust that funds solar projects, said that where once he may have landed approvals for 10 out of 12 projects submitted to an investor, in the current environment, he’s more likely to get just one approved.

With a swelling pipeline of projects under development and a strain on tax equity, some investors with remaining investing capacity are overwhelmed. “The challenge this year is processing the number of deals being sent to us every day,” said RBC Capital Markets' McLean. “It feels like trying to drink out of a firehose.” 


Parts of the Coronavirus Aid, Relief, and Economic Security Act were geared toward helping businesses — including renewables companies — ride through this precarious period.

In addition to seeking out Paycheck Protection Program loans and Emergency Economic Injury Grants, Spano said, certain investors and developers should be paying attention to changes to the rules governing net operating losses. Before the 2017 Tax Cuts and Jobs Act, companies that logged losses were able to carry those losses back to prior years, receiving a refund on taxes already paid.

“One benefit of the net NOL carryback was it put cash back in the pockets of companies that are struggling,” said Martin.

The 2017 law ended that benefit, but CARES brought it back.

Now, companies with losses that occurred between 2018 and 2020 can once again carry losses back to the last five years, offset past income and get a refund. Spano suggested that could free up tax equity that's tied up by investors unsure of their current tax appetite.   

“While you may not have any current tax liability, or you may not be sure yet…you can invest in our project and get back taxes that you certainly have paid in the past,” said Spano.

Because it requires that a company can demonstrate net operating losses, the tool won't work for big banks and funds. But Spano, who was able to recapture past taxes based on more recent losses, believes the change could shake some investment loose for smaller developers and smaller tax equity investors, whose investing habits he said have been hit hardest by the uncertainty. The provision also only applies to investments made prior to the end of 2020, meaning that the window of opportunity is closing quickly, particularly in a market where negotiations can take time.

Martin said for many tax equity investors, particularly the big names who are the most active in the market, the utility of the net operating loss provision is limited. Larger players are more interested in how they can best utilize renewables tax credits, according to Martin, which cannot be carried back.

All eyes on Capitol Hill

Many in the solar industry are also now looking forward to what else legislators can do for them as lawmakers mull further rounds of stimulus. 

This summer, the U.S. House of Representatives passed a bill allowing tax credits to be delivered via direct payments. Many developers hope that provision is taken up by the full Congress in future stimulus legislation.

"All of these constraints that we're talking about in the tax equity market are really the reason the industry is lobbying for direct pay," said Meghan Schultz, senior vice president of finance and capital markets at developer Invenergy, at REFF-Wall Street.

Though Invenergy, a top-tier developer, has reported no issues finding the tax equity investments it needs in 2020, Schultz sees constraints in the overall market in 2020 and heading into 2021. Developers, led by their trade group the Solar Energy Industries Association, argue that direct pay at the full value of tax credits can alleviate financial strain. 

"Direct pay is really essential for the future of the business, because otherwise there won't be capacity to monetize all of the tax benefits that these projects are going to generate," Schultz added.  

There’s also a push — led by the U.S. Chamber of Commerce — to make some business tax credits, including some carried forward from years ago, available in cash. Cash grant, direct pay or refund provisions would all be valuable solutions to investors, according to Salant at Citibank. "You have to form this in a way that it’s not a big bank bailout or corporate bailout, but anything that allows us to get additional tax capacity is helpful,” he said. 

Any support for renewables will likely come as a benefit of broader tax or financial provisions, rather than explicit support for the sector, as Republicans and Democrats remain far apart on what they want to be included in the next package. In early September, Republicans unveiled a proposal that is far less expansive than even the previous GOP version. It's a non-starter for Democrats, and the coming election complicates negotiations even further.