Tax credits are being used by federal governments to promote renewable energy, but the tax equity strategy has challenges. Investment banks have driven much of the growth in solar and wind power, but the industry is highly dependent on federal policies and profitability of investment banks. The state of the tax equity market affects the future of alternative energy production. Renewable energy developers have pushed for allocations tied to tax credits to prevent financing from stagnating.
Federal governments have extended tax credits to promote the proliferation of renewable energy, including solar, geothermal, and wind power. The United States is no exception, and this administration has provided financial incentives to renewable energy investors and developers to boost the industry, especially as traditional oil and gas prices become prohibitive. Tax equity is a strategy that investors can use to provide capital for alternative energy projects. However, this type of incentive program has its challenges, and any roadblock to this funding threatens to further slow the pace of alternative energy.
Investment banks have driven much of the growth in solar and wind power. Part of the incentive to invest is the growth potential for the infant industry, but government tax credits also play a role in this business. The US government has earmarked funds for renewable energy market participants, but those benefits don’t always shrink and dry up.
To qualify for some of the financial benefits attached to investing in wind and solar power generation, investors must generate earnings that exceed a certain threshold. This is because, rather than a direct interruption, the tax credit is offered as a means to offset the investor’s anticipated tax liability, a process known as tax equity. Since renewable energy distribution in the US remains in its early stages, developers typically do not make enough profit to qualify for tax equity.
Wind and solar power projects are extremely expensive endeavors. Developers typically do not have enough capital to complete these large-scale projects without the help of tax equity. Subsequently, the renewable energy industry is highly dependent on the policies set by the federal government and also on the profitability of investment banks. In the event that investors are no longer eligible for tax equity benefits, whether earnings falter or for some other reason, there is less incentive for these institutions to finance renewable energy projects. When the state of the tax equity market is in question, so is the future of alternative energy production.
Federal policies surrounding tax equity continue to take shape through changes in business cycles. Renewable energy developers have pushed for allocations tied to tax credits that would prevent the flow of financing from stagnating. For example, market participants have been known to request refunds for unused tax credits and permission to trade credits between parties.
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