Main Challenges
-
Complexity and Limited Market:
- Complexity: Tax equity investments require a deep understanding of tax law and financial structuring, which can limit the pool of potential investors. This complexity restricts newcomers from entering the market, as they need to develop specialized expertise.
- Limited Market: The supply of tax equity often cannot meet the demand, especially for emerging technologies like energy storage. This scarcity can lead to higher costs for developers seeking tax equity financing.
-
Tax Credit Risks:
- Tax equity investors face risks related to Investment Tax Credit (ITC) recapture, which can occur if a project is decommissioned or sold within the first five years after being placed in service.
- Ensuring compliance with new regulations, such as prevailing wage and apprenticeship requirements, adds another layer of risk for tax equity investors.
-
Predictability of Cash Flows:
- Energy storage projects may not offer the predictable cash flows that traditional solar or wind projects do. This unpredictability can arise from the ancillary services revenue streams that energy storage projects rely on.
- Difficulty in forecasting these revenues can increase the risk profile for tax equity investors.
-
Evolution of Tax Credit Transferability:
- While the ability to transfer tax credits provides more flexibility for investors, it also introduces new considerations regarding tax capacity and project ownership structures. This flexibility can lead to additional complexities in structuring deals and managing tax exposures.
-
Technological and Operational Risks:
- Energy storage technologies require periodic major overhauls, which can impact their useful life and the eligibility for ITCs. This adds a layer of technological risk compared to more established renewable energy sources like solar or wind.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-main-challenges-tax-equity-investors-face-in-financing-energy-storage-projects/
