Well, that didn’t take long. Less than three months into his administration, President Donald J. Trump is beginning to impact the wind industry – although not in the manner that some had envisioned shortly after the election.
No, Trump is not undoing the production tax credits – the president can’t touch the tax credit without an act of Congress. Nonetheless, it seems Trump’s plans for tax reform have spooked some lenders and financial institutions. It’s a classic case of risk allocation.
But here’s the rub: Some lenders have taken the unusual step of calling back investors and owner/operators to the bargaining table to renegotiate tax equity deal terms.
As Kevin Pearson, partner at law firm Stoel Rives, writes in this month’s cover story on page 24, “Many investors have begun negotiating (and, in some cases, re-opening for negotiation) certain provisions in tax equity financing documents relating to the allocation of risk between the investor and the developer with respect to changes in tax law.”
During the presidential campaign, Trump’s tax plan called for a reduction in the top marginal corporate income tax rate from 35% to 15%. Investors have expressed concern that, if enacted, this proposal could significantly reduce the value of some of the federal income tax incentives, such as the modified accelerated cost recovery system, available to wind energy projects.
Pearson explains that wind projects generate tax losses that result from the large depreciation deductions in the early years of operation. These tax losses can be allocated to the tax equity investor and used to offset income from other sources.
“While the tax credits offset tax liability on a dollar-for-dollar basis, the losses offset taxable income that otherwise would be subject to tax in the year in which the losses occur,” he explains. “Therefore, the value of tax losses are reduced if the tax rate that would have applied to the income that was offset by the loss is decreased.” The value of tax credits does not change, Pearson asserts, because $1 of tax credit offsets $1 of tax regardless of the rate used to calculate that tax.
Until the election, nobody was particularly concerned, as most tax equity documents negotiated before the election didn’t address the issue at all, Pearson notes. Nonetheless, it will be interesting to monitor how the fallout impacts future deal transactions when (or if) Congress acts.
Lastly, it’s that time of the year. After a six-year hiatus, WINDPOWER 2017 returns to Anaheim, Calif., next month. Be sure to stop by North American Windpower’s booth (#2378) and say hello.