3. What a Biden-Harris Administration Means for a Sunwealth Solar Tax Equity Investment
By Omar Blayton, Chief Financial Officer
The CTEC Solar crew works on installing a 220kW solar array on the rooftop of the Whole Foods Market in Sudbury, MA. The system delivers clean power to an energy intensive business and creates over 7 job years over the lifetime of the project.
In the third installment of our Banking on Solar series, we look at what a Biden-Harris administration could mean for solar investments in general and tax equity investments specifically. To start at the beginning of the series, read Banking on Solar.
After many days of anxious anticipation, we can now say for certain that Joe Biden will be the next President of the United States. No matter how you may feel about the election outcome, one thing that we all can agree on is that a change in administration will be a net positive for solar energy investments. How exactly? Well, that likely depends on the balance of power in the Senate. There are two possible outcomes:
Divided government with a Democratic administration and House and a Republican Senate
Democratic administration and Congress.
Here are what these options mean for solar tax equity investment – and how Sunwealth will work with our partners to navigate them.
Divided Government: Good Solar Growth and Solid Risk Return Profile
Tax Equity Risks: No matter the makeup of Congress, the biggest risk to solar energy investments was always the Trump administration. With a new administration, the biggest risk is inertia. This means that in a worst-case scenario, we maintain the status quo. The Investment Tax Credit (“ITC”) will continue to phase down – 26% in 2020, 22% in 2021 and 10% thereafter for commercial solar projects – while tax rates will continue to stay the same. At the same time, the solar industry will continue to grow as it has throughout the Trump administration. Renewable energy has bipartisan support in Congress, due to its vast potential for job creation; we do not see this support waning anytime soon. For community banks, there is nothing in the worst-case scenario that will make solar tax equity investments any less attractive.
Tax Equity Returns: Even with a divided government, we will likely see improvements to the solar investment landscape due to actions that the Executive Branch can take unilaterally. President-Elect Biden has already committed to reversing President Trump’s executive orders inhibiting environmental initiatives. Additionally, Biden will be able to place more renewables-friendly administrators in the Environmental Protection Agency, Department of Energy, and Federal Energy Regulatory Commission.
With existing bipartisan support for renewable energy and interest in tax policies that support job growth and economic recovery, there is also a slight chance that Congress will decide to return the ITC to its original 30% and maintain it at that level for the next five years before resuming the phase-down. The Solar Energy Industry Association (SEIA) has been pushing such a bill for some time. However, given the current makeup of the Senate, it is hard to imagine much material legislation passing on this issue.
Takeaway: Even with a divided government, there are bipartisan opportunities to strengthen solar investment opportunities. The most likely regulatory changes will decrease the economic viability of fossil fuels, which directly advances the business case for solar energy investment. As a company that has experienced substantial growth during the Trump administration, Sunwealth anticipates continued growth even with the maintenance of the status quo. For community banks, we still expect plenty of quality opportunities to achieve high-impact, above-market, risk-adjusted returns through trusted partners such as Sunwealth. Any likely regulatory upside during the next administration will only serve to provide us with welcome tailwinds.
Democratic Administration & Congress: Excellent Growth and Enhanced Risk Return Profile
Tax Equity Risks: As one can imagine, a Democratic Administration and Congress provides the ideal scenario for solar investing. Government initiatives, such as ones listed below, would increase the scale and bankability of community based solar projects. A potential downside includes support for potentially riskier technologies that fail and taint investors’ view of the broader renewable energy industry. At this point, however, solar investing is robust enough of an asset class that it is able to stand on its own merits.
Tax Equity Returns: In a fully Democratic government scenario, we expect the ITC increase/extension, as well as other legislation that strongly aligns with Sunwealth’s mission. President-Elect Biden’s platform promises to allocate 40% of all benefits from spending on clean energy and energy efficiency to disadvantaged communities. This spending could come in the form of grants, tax credit increases, low-cost, government-backed debt, or all three. All of these initiatives would only strengthen Sunwealth’s already credit-worthy high-impact projects.
One concern of our community banking partners in this scenario regards an increase in the corporate tax rate. President-Elect Biden has stated that he would like to increase the corporate tax rate from 21% to 28%. While this increase is less than ideal in most situations, it actually makes investment in solar tax equity even more attractive. A higher tax rate means that there is a higher value associated with the depreciation deductions that an investor is allowed to take in year 1. This means that community banks could receive a return of up to 85% or more of their invested capital in year 1, increasing the risk reward profile associated with a tax equity investment.
Takeaway: In this scenario, we see great alignment between the government and Sunwealth’s goals. We expect that it will be much easier to create more volume of high-quality, deep-impact solar project portfolios that provide above-market, risk-adjusted returns for our investors. In such conditions, we only see our current growth greatly accelerating as we move faster into a more just and inclusive energy future. For our community banking partners, this scenario will provide tremendous opportunities to grow their portfolios with even higher impact local projects without increasing potential investment risk.
Our solar installation on the rooftop of Constance Baker Motley Apartments, named after the prominent civil rights activist, lawyer and judge, delivers $37K in lifetime energy savings to the Housing Authority of New Haven, CT.
Summary
In summary, the incoming Biden-Harris administration provides plenty of reasons for a positive outlook for solar tax equity investment and community bank participation. Community banks have a unique opportunity to take a leadership role with regard to climate change, local impact and inclusion through solar tax equity investments and policy advocacy. Just as community banks were instrumental in protecting the wellbeing of millions of Americans through their advocacy of the PPP program, they can be instrumental in protecting the wellbeing of current and future generations through advocacy of clean energy programs that make sure to include benefits to our most vulnerable communities. Sunwealth looks forward to continuing our partnerships with community banks to catalyze this impact and make our communities better for generations to come.
Read the next post in our Banking on Solar series: It’s a Wonderful Life: A Tax Equity Investment with Sunwealth.
Return to the homepage to check out our other Banking on Solar blog posts.
Want to learn more about solar tax equity investing? Reach out to Darreck Mitchell at darreck@sunwealth.com.
Omar Blayton is Chief Financial Officer at Sunwealth. He has over a decade of experience in renewable energy investment, finance and management. Omar is on the Board and serves as Treasurer of the Solar Business Association of New England (SEBANE), whose membership includes the best small- and medium-sized solar installers in the Northeast. He also serves on the Finance Committee for the Friends of the Public Garden.