“We’re looking at the end of the principal financing mechanism that has fostered growth of the renewable energy sector since the 1990s.”
With the Senate tax bill speeding toward a vote, renewable energy trade organizations on Wednesday raised the alarm about an obscure and “extremely problematic” provision they say would pull the investment rug out from underneath renewables projects.
“It’s a crazy situation — one that we should not be in at the moment,” said Greg Wetstone, CEO of the American Council on Renewable Energy. “We are in an all-hands-on-deck drill across the sector trying to repair a very broken problem.”
That problem is the Base Erosion Anti-Abuse Tax (BEAT) provision, which targets “earnings strippings,” where large companies with foreign operations reduce their tax bills through cross-border payments they can then deduct in the U.S. The BEAT provision aims to circumvent that stripping with a minimum tax of 10 percent of taxable income.
BEAT would require every company to do two calculations: one quantifying 10 percent of a company’s taxable income, including cross-border payments, and another quantifying the corporation’s tax liability, excluding any tax credits the company received from tax equity investments.
The BEAT provision applies to all but R&D credits. If a company has invested in renewables, the second number could be lower than the first. If that’s the case, the company would have to pay the difference in taxes.
That expense makes any renewables investments exponentially less appealing to large, risk-averse companies.
Tax equity the renewable energy market’s “core financing tool,” said Keith Martin, a transactional lawyer at Norton Rose Fulbright that specializes in tax and project finance. It makes up 50 to 60 percent of the funds for an average wind farm and 40 to 50 percent of funds for the average solar project.
And while the tax implications for companies are complex, the potential impact on the renewables market is not. Put simply, the BEAT provision would make projects cost more.
“The more expensive something is to build, the less of it you get,” said Martin.
Throwing more uncertainty into the mix, the BEAT formula would have to be calculated every year. For companies investing in new projects, it would be unclear if the tax credit would even deliver a return.
The provision is potentially more insidious because it works retroactively. Banks and insurance companies that have helped finance renewables projects could have to pay for past decisions. For wind projects brought online in 2008 that are still receiving tax credits, for example, that credit would go away. Martin said that type of tax provision is rare in the U.S.
“We don’t usually change rules retroactively in this country,” he said. “We don’t usually hold out a carrot to induce people to do something, and then after they’ve already done it, take the carrot back.”
According to a Wednesday letter from renewable trade associations, including the American Wind Energy Association, the Solar Energy Industries Association, Citizens for Responsible Energy Solutions and ACORE, the situation is dire. On a previously scheduled Wednesday webinar on energystorage Wetstone sounded panicked about the provision, even if the final outcome and impact remains uncertain.
“We normally don’t speak in these kinds of terms, where we talk about collapse of the tax equity market. But unfortunately that’s what we’re looking at,” he said. “Virtually every major tax equity provider would exit the space under these constraints. We’re looking at the end of the principal financing mechanism that has fostered growth of the renewable energy sector since the 1990s.”
Unlike the House bill, the Senate tax bill was silent on the Production Tax Credit and the Investment Tax Credit, leaving a multi-year ramp down in place and leading renewables companies to breath a collective sigh of relief.
But BEAT, which ACORE’s Todd Foley called a “poison pill,” lurked within.
Now that the potential implications of the BEAT provision are known, advocates are hoping to get an exemption for the ITC and PTC credits similar to the R&D exemption. That could come in the form of a manager’s amendment or a floor amendment. ACORE said it was working with Republicans friendly to clean energy to turn around the provision, even as it headed toward a potential floor debate on Wednesday. Republicans are still working to get enough votes, but a path forward for the bill seems to be crystallizing.
According to Martin, the frenzied pace from Republicans hungry for a win has made it difficult to both assess the provision’s impacts and make any changes.
“It’s all come within the space of two or three weeks […] it’s hard to digest,” he said. “It’s very hard to turn around a train that has picked up as much speed as this tax bill.”
Groups like ACORE pledge that they’re trying, though.
“People are working feverishly on this issue,” said Foley. “We have a very short window to fix this.”