Below are soundbites from panelists at the Solar Energy Industries Association’s (SEIA) Finance & Tax Seminar in New York City.  The seminar was held on June 1 and 2, but only comments from the second day are reflected below.  The soundbites were prepared without the benefit of a transcript or recording and were edited for clarity.  Further, they are organized by topic, rather than appearing in the order in which they were said.

Tax Equity Market in 2017

• It has been a slow start to the year. We will see a down year [compared to the $11 billion of tax equity funded in 2016]. – Executive Director, Energy Investing, Money Center Bank
• There is relatively smaller tax equity flow in 2017, but there is continued demand for good projects with experienced sponsors. – Director, Investment Fund Manager
• We saw a lag coming into this year. We haven’t seen a large uptick in investment. – Director, Structured Finance, Solar Services Company

Partnership Flip v. Sale-Leaseback Structures

• A partnership flip provides an attractive balance for a cash equity investor to invest at scale and earn an attractive yield. The structure is attractive to cash equity investors because it raises less cash than a sale-leaseback.  [A cash equity investor is, generally, an investor other than the developer of the project.  Such investors are eager to invest, but typically do not have tax appetite.  Therefore, the partnership flip suits them well as it allows the tax equity investor to monetize 99% of the ITC, and much of the depreciation, while still requiring a significant cash equity investment.] – Director, Investment Fund Manager

Tax Equity Investors’ Reaction to the Possibility of Tax Reform

• We are putting into our documents cash sweeps for the risk of tax reform resulting in a lowering of the tax rate. – Business Development Officer, Retail Bank
• We want to be sure that if a tax law change occurs, we are protected with a step-up in our cash-sharing percentage or an indemnity. – Executive Director, Energy Investing, Money Center Bank
• There is the potential for a tax equity investor’s economics to improve with a reduction in tax rates, if the reduction occurs after the losses are used. – Director, Project Finance, Solar Services Company

Tax Equity Pricing Conventions to Reflect the Risk of Tax Reform

• We are pricing to current law. We sweep cash later if we invested too much due to tax reform being enacted. – Assistant Director of Project Management, Renewable Energy Investments, Retail Bank
• We are not pricing to a tax rate change. – Director, Project Finance, Solar Services Company
• We have priced deals both assuming a tax rate cut with a true up payment by us if the tax rate cut does not occur, but we have also seen it go the other way with pricing assuming current law and a cash sweep if there is a tax rate cut – V.P., Tax Equity Investor
• In a deal with back leverage, sometimes our hands are tied if the tax equity is requiring a cash sweep if tax rates are reduced. Then we have to have the tax equity price assuming tax rates will fall to avoid the potential of a cash sweep for the tax equity investor, depriving the back leverage lender of principal and interest.  – Director, Investment Fund Manager

Tax Risk Insurance Generally

• Tax insurance cultivates a culture of tax compliance because we put our money where our mouth is. – CEO, Specialty Insurer
• A few years ago, if there was an unpaid tax indemnity claim in a partnership flip deal, the tax equity investor swept 100% of the project’s cash to the detriment of the sponsor’s back leverage lenders. That made raising back leverage difficult.  Tax risk insurance addressees that, but tax risk insurance is not needed if the tax equity investor is willing to have its cash sweep for an unpaid indemnity be from the cash remaining after cash is distributed to the sponsor for payment of principal and interest owed to the sponsor’s back leverage lender. – V.P., Project Finance, Residential Solar Developer
• We are seeing less insistence from tax equity investors on investment tax credit basis risk insurance as the industry has more IRS audit history and the price of solar projects comes down naturally. – V.P., Project Finance, Residential Solar Developer
• Tax risk insurance for the investment tax credit lets us have a bigger exposure to the solar sponsors we have invested with the most. We try to get our insurance protection limited to the fair market value issue for the amount of the investment tax credit and not “structural” risk.  –  Executive Director, Energy Investing, Money Center Bank
• The desire of a tax equity investor to have tax risk insurance has to do with its aggregate risk exposure from doing deals over the years. – V.P., Project Finance, Residential Solar Develop
• Tax risk insurance gives us comfort that we have managed against the catastrophic risk with respect to tax exposure. – Business Development Officer, Retail Bank
• Premiums for tax risk insurance in the solar space have come down due to the efforts of the brokers. – Business Development Officer, Retail Bank
• We are still looking for sponsors to escrow cash from the project if there is an adverse IRS adjustment. We are solely looking to the insurance if the sponsor does not pay its indemnity for an adverse IRS adjustment related to the amount of the investment tax credit.  Executive Director, Energy Investing, Money Center Bank
• We view tax risk insurance as a credit enhancement backstopping the obligations of the sponsor. – Business Development Officer, Retail Bank

Insurance to Cover Tax Reform Risk

• Tax reform risk is considered political risk. Political risk is, generally, toxic in the insurance industry.  We are working with some political risk insurers on tax reform risk insurance, but they take three months to make an underwriting decision.  We recently had a success insuring against an adverse change in SREC law in Massachusetts.  This makes me think these political risk insurers may be flexible enough to insure tax reform risk.  CEO, Specialty Insurer
• We recently insured against Louisiana, retroactively repealing its motion picture tax credit. – Tax Risk Insurance Broker

Developments Regarding Executive Orders and Regulations Generally

• In its first 100 days, the Trump administration issued 32 executives orders. The Obama administration issued only 19, George W. Bush’s administration issued 13 and the Clinton administration issued 11. – Director, Big 4 Firm
• The Obama administration also issued a regulatory freeze, but the Trump regulatory freeze is broader with addition of the requirement of personal approval by an appointee of Pres. Trump. – Director, Big 4 Firm
• Internally, IRS personnel are told to continue working on reg projects without regard to the Executive Orders. But there are questions as to what regulations will actually be issued. – Director, Big 4 Firm

Start of Construction Guidance

Background: The “start of construction” notices (i.e., Notice 2013-29 and its progeny) provide guidance to the wind industry as to what had to be done to meet certain grandfathering rules related to the phase out of tax credits for wind.  Blog posts discussing this guidance are available at  https://www.taxequitytimes.com/2016/12/irs-extends-continuity-safe-harbor-december-31-2018/ and https://www.taxequitytimes.com/2016/05/start-of-construction-should-benefit-clean-energy/.  The guidance is important because if, for instance, a wind project started construction prior to the end of 2016, it qualifies for a full production tax credit (i.e., 2.4 cent per kWh for ten years); while if it starts construction in 2017 it only qualifies for  80 percent of that amount (and progressively less in later years).  The solar industry is waiting for its start of construction guidance, but the industry is benefiting from something of a grace period as a solar project must only start construction before the end of 2019 to qualify for a full 30% ITC.  Therefore, if a project is complete prior to the end of 2019, there is no question that it would have met this deadline.  Nonetheless, the solar industry prudently would like to know what the rules are so it can start planning to conform to them.

• The IRS is making progress on the “start construction” rules for solar, but the start of construction rules for solar are not on the Treasury’s priority, priority list [(i.e., a non-public list of which items on the published priority list should be addressed first)]. – Partner, Big 4 Firm
• The “start of construction” notices for the wind industry are being reviewed under the Executive Orders, but Section 7805(b) of the Code would prevent a retroactive change in guidance. – Director, Big 4 Firm

Overhaul of the ITC Regulations

Background: The IRS in Notice 2015-70 requested comments as to how the outdated investment tax credit regulations should be updated.  These regulations include definitions with respect to what types of property qualify for the investment tax credit, which are based on technology that existed in the 1980s.  The IRS received dozens of comment letters.

• My guess is that the proposed investment tax credit regulations will be published in the mid to end of 2018, but that is optimistic. It is important for the industry to have some of these issues clarified by the end of 2019, when the ITC phase down starts. – Partner, Big 4 Firm

Financial Performance of Publicly Traded Residential Solar Companies

• We’re not selling a consumer product. We are selling capacity, and in the power market, generally, increases in capacity are not linear over time. – Chief Commercial Officer, Publicly Traded Residential Solar Company
• The most important metric is not year-over-year number of installations but growth in revenue and capacity. – Chief Commercial Officer, Publicly Traded Residential Solar Company

YieldCo Economics

• It was the equity of the YieldCos that was over-valued, not the debt. The equity was based on the promise of future development.  – Chief Commercial Officer, Publicly Traded Residential Solar Company

Rise in Consumers Financing Solar with Loans

• Early consumer solar loans were cumbersome and complicated. The increase in consumer loans for solar is a function of the fact that in prior years there was not a good loan product in the market.  The rise of consumer loan financing for solar is a function of the capital markets widely providing an attractive product.   – Chief Commercial Officer, Publicly Traded Residential Solar Company

US Withdrawal from the Paris Climate Agreement

• Solar adoption is being driven by economics and low costs, and not by participation in a global agreement. – Chief Commercial Officer, Publicly Traded Residential Solar Company

The Fate of Coal

• It is really natural gas and fracking that is driving down the market for coal. – Chief Commercial Officer, Publicly Traded Residential Solar Company

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