February 1, 2023

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Benefits of tax equity financing of renewable energy in the United States

Overview

Since past few decades, what we see is the United States leading toward expansion in terms of renewable energy by giving the lead to tax equity financing. Talking about wind power and solar, it makes a great impact to provide utility and generating facilities. But there has been some issues as well least consistent environment and crises seen in terms of finance. 

What is Tax Equity Financing and Renewable Energy?

Tax equity is basically a term defines that in a project there is an interest for owners either it is an asset or project.  In this, investor gets a return from two sides be it the cash benefits or tax benefits provided by federal or state. Most of the investor in tax entity is a large financial entity who uses this as a shield to reduce tax liabilities in future. 

On broadly classify tax entity, we mainly found tax deductions and tax credits. 

On the other hand, Renewable energy also termed as clean energy which can always be constantly replenished and comes from natural sources. These are those energy sources which can never be depleted. The renewable energy sources are – sun, wind, geothermal heat, waves, tides, biomass, etc. in all this, Biomass has maximum contribution with 50 percent, followed by hydroelectricity which consist of 26 percent and wind contribute approximately 18 percent for renewable energy.

Renewable energy doesn’t harm environment in any way and that is why it can be referred as green or clean energy as well due to its quality of non polluting surroundings. There were some drawbacks as well with renewable energy that it is available naturally only and for example if there is no wind or sunshine then it is impossible to produce energy. This form of energy cannot be stored even.  Also cost of making energy through natural sources is costlier.

Benefits of Tax Equity Financing of Renewable Energy in United States:

Tax equity structure

Tax equity structure develops or starts when investor put forward their interest in renewable energy like solar or wind. This investment by general partner which invest equity in the project and receives cash benefits in return. At the same time, limited partner who also invest equity but will get tax benefits only. 

Tax equity investors are mostly large corporations with predictable tax liabilities on them. For example: Citi Bank, Bank of America, JP Morgan, etc.

Tax equity which we simply define as the process where one party assigns to the other all of the tax benefits in exchange for the equity investments.  In this, inefficient tax payers receive a significantly higher investment in return as compared to an efficient taxpayer, who doesn’t hold the quality and capacity to utilize tax benefits appropriately.

Inefficient taxpayers are those parties who assign the tax benefit to other and efficient taxpayers are one which receives the tax benefits.

Tax benefits allocation rules: 

  • In us partnerships, we can assign the tax benefits to other party and retain the cash benefits. 
  • The assignment of tax and cash benefit to the parties does not have to be static.  We can have a certain allocation in early stage of the project and different allocation when project becomes proper.  So tax and cash benefits can vary over time. 
  • Tax and cash benefit allocation does not have to be proportional to the partner’s equity investment. 
  • We can only invest only 10% of the capital in the project to get 90% of cash flow from partnership.

Tax benefits 

  • Apart from everything, this method provides Environmental sustainability which is the basic need.
  • To take steps towards lower carbon economy, it is good to choose renewable resources.
  • This step add the chances of united states go one step ahead in economic and climate impact from its tax policy for renewable  energy.
  • In United States, this tax equity arises to monetize the tax benefit, both tax credits and losses with a vision.

Conclusion:

Tax equity is important for renewable energy projects. According to partnership agreement, the market just want the benefits the project generates due to renewable energy involvement but in some way it is the most popular way to grow economy without  harming  environment.