NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

Contract No. DE-AC36-08GO28308

§1603 Treasury Grant 

Expiration: Industry Insight on 

Financing and Market 

Implications

Michael Mendelsohn

National Renewable Energy Laboratory

John Harper 

Birch Tree Capital, LLC

Technical Report

NREL/TP-6A20-53720

June 2012
NREL is a national laboratory of the U.S. Department of Energy, Office of Energy 

Efficiency & Renewable Energy, operated by the Alliance for Sustainable Energy, LLC.

National Renewable Energy Laboratory

15013 Denver West Parkway

Golden, Colorado 80401

303-275-3000 • www.nrel.gov

Contract No. DE-AC36-08GO28308

§1603 Treasury Grant 

Expiration: Industry Insight on 

Financing and Market 

Implications

Michael Mendelsohn

National Renewable Energy Laboratory

John Harper 

Birch Tree Capital, LLC

Prepared under Task No. SM12.3040

Technical Report

NREL/TP-6A20-53720

June 2012
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iii

Executive Summary

In the United States, the growth of the renewable energy sector is dependent on the U.S. tax code 

and the availability of “tax equity.” Investments in new commercial and utility-scale renewable 

power production facilities are fostered by tax credits (the production tax credit and investment 

tax credit) and accelerated depreciation benefits. However, distinct from many industries 

receiving tax support, most renewable energy developers do not have significant tax liability

internally to monetize the tax credits and depreciation benefits. Rather, they must rely on 

specialized, third-party investors (e.g., financial institutions)—known as tax equity investors—to 

finance projects in return for the tax benefits. This need for such specialized investors constrains

the availability of private capital for renewable energy projects, particularly for projects that are 

developed by entities that are smaller, have less development experience, or that seek to deploy 

new or less-proven technologies.

During the 2008–2009 financial crisis, the number of tax equity investors willing to make new 

investments decreased from nearly 20 to approximately 5. This withdrawal of investors from the 

market contributed to a significant stagnation in new renewable power project development. In 

response, Congress established a temporary grant program pursuant to Section 1603 of the 

American Recovery and Reinvestment Act (the §1603 Program) to offer a cash payment in lieu 

of previously existing investment tax credit. The §1603 Program entitled project developers to 

receive 30% of a project’s capital cost in the form of a cash payment, thus freeing developers of 

having to rely on tax equity investors to monetize the tax credits.

The §1603 Program expired on December 31, 2011, although projects that started construction 

prior to that date are eligible to receive the award. Accordingly, as of mid-2012, the §1603 

Program continues to stimulate project development. That stimulus is expected to wane over the 

next several months, and projects will again need to rely more heavily on the tax equity markets 

to monetize federal tax benefits.

This study explores the likely project financing and market impacts from the expiration of the 

§1603 Program. The authors assembled an array of insights offered by financial executives 

active in the renewable energy market during conference panel discussions and in presentations, 

direct interviews, and email correspondences.

This analysis finds that the current form of tax benefits limit the pool of investors to a select few 

financial institutions and others who: 

• Have a substantial current and future tax liability

• Have the financial acumen to engage in a complex project structure

• Are willing to hold their ownership interests in the projects for several years 

• Are able to invest in illiquid assets (i.e., that tie up cash and cannot easily be resold)

• Are willing to invest in non-core assets rather than the firm’s primary mission, debt 

reduction, shareholder dividends, or retaining cash for a contingency 
iv

• Are sufficiently sophisticated to account for a shifting tax policy environment in their 

investment decisions

• Are comfortable with modest returns generally earned by tax equity (unlike most 

corporations, financial companies are highly leveraged, which increases the value of 

the tax equity investment).

These constraints have resulted in a limited number of suppliers and supply of tax equity 

investment, which was consensually cited among experts interviewed for this analysis as critical 

to renewable energy project deployment. In 2010, the latest year for which industry data is 

available, 10 entities provided the large majority of tax equity (97%). Of these 10 substantial tax 

equity investors, all but one, Pacific Gas and Electric, were financial entities.

Through May 8, 2012, the §1603 Program had awarded $11.6 billion to almost 38,000 projects. 

Figure ES-1. §1603 Program total funding ($millions) Figure ES-2. §1603 Program total projects 

awarded

Assuming §1603 awards equal 30% of total project costs, the program has supported, up through 

May 8, 2012, $38.6 billion in total investments. Awards under the program have been made to all 

50 states. Eight states have received over $350 million in §1603 program awards, with the largest 

total award dollars going to Texas.
v

Figure ES-3. §1603 Program awards by state

The program has supported 16.9 gigawatts (GW) of new installed capacity, expected to produce 

43,500 gigawatt-hours (GWh) annually, made up of a wide range of technologies, including 

hydroelectric, geothermal, biomass, and fuel cells.

The analysis also finds that the §1603 Program provided the following benefits to renewable 

energy projects relative to the tax credit program it replaced: 

• Increased speed and flexibility 

• Lower transaction and financing costs 

• Stretched supply of traditional tax equity

• Support of smaller developers (including new entrants) and innovative technologies 

that were less capable to tap tax equity markets

• Improved economics of most renewable energy projects

• Allowed use of more debt, lowering developer or project cost of capital 

• General support of an extensive build-out of renewable power generation projects.
vi

Three potential and not mutually exclusive outcomes are expected as the §1603 Program ends: 

1. Smaller or less-established renewable power developers, especially those with smaller 

projects, are expected to have more difficulty attracting needed financial capital and 

completing their projects. This is likely to lead to industry consolidation as well-funded 

developers acquire smaller firms.

2. Development of projects relying on newer or “innovative” technologies that have little 

operational track records will likely slow as many tax equity investors are seen as highly 

averse to technology risk in the projects they fund.

3. Projects relying on tax equity are usually more expensive to develop due to the 

transaction costs and potentially higher yields required to attract tax equity. This cost 

increase may slow new investment in renewable power projects by reducing developer 

returns. Moreover, alternative and new sources of tax equity are needed to meet market 

demand. GTM Research estimated total financing needs for renewable energy in 2013 

will reach roughly $50 billion. Assuming roughly one-half of that value represents 

monetized tax benefits, approximately $25 billion in tax equity or similar investment will 

be needed, significantly exceeding the investment appetite of current tax equity 

providers. Over time, absent new tax equity investors entering the market or offsetting 

reductions in capital cost, the incremental cost to project financing might increase the 

cost to utilities and end-users who procure renewable power.
vii

Table of Contents

Executive Summary................................................................................................................................... iii

Table of Contents...................................................................................................................................... vii

List of Figures .......................................................................................................................................... viii

List of Tables ............................................................................................................................................ viii

1 Renewable Energy Policy and the U.S. Tax Code ................................................................................ 1

1.1 Introduction..........................................................................................................................1

1.2 Analysis Motivation and Methodology ...............................................................................3

1.3 Background on How Tax Credits are Monetized ................................................................3

1.4 ITC/PTC Policy Challenges.................................................................................................5

1.4.1 Policy Uncertainty ......................................................................................................5

1.4.2 Tax Subsidies are Complex to Use and Increase Project Costs..................................6

2 Third-Party Tax Equity............................................................................................................................. 9

2.1 Market Entities.....................................................................................................................9

2.2 Supply of Third-Party Tax Equity .....................................................................................12

2.3 Demand for Tax Equity .....................................................................................................13

2.4 Tax Equity Investment Factors..........................................................................................16

2.5 Cost of Tax Equity.............................................................................................................18

2.6 Cost to Acquire Tax Equity ...............................................................................................20

2.7 Limited Secondary Market for Tax Equity........................................................................21

3 §1603 Treasury Grant Program............................................................................................................. 22

3.1 Background........................................................................................................................22

3.2 Program Benefits ...............................................................................................................23

3.2.1 Flexibility..................................................................................................................24

3.2.2 Speed.........................................................................................................................24

3.2.3 Lower Transaction Costs ..........................................................................................25

3.2.4 Indirectly Supports Projects by Non-Profits and Communities................................25

3.2.5 Supports Innovative Technologies, Smaller Developers, and New Entrants ...........26

3.3 Weaknesses and Inefficiencies of Tax Subsidy Programs.................................................26

4 Expected Impacts Due to §1603 Program Expiration......................................................................... 28

4.1 Small Developers May Lose Financing, Ability Causing Market Consolidation .............28

4.2 Cost of Tax Equity Could Increase....................................................................................28

4.3 Differential Impact for Solar and Wind.............................................................................29

4.4 Funding Challenges for Innovative Technologies.............................................................30

4.5 Impact on Cost of Renewable Power.................................................................................30

5 Conclusion.............................................................................................................................................. 32
viii

List of Figures

Figure ES-1. §1603 Program total funding ($millions)................................................................. iv

Figure ES-2. §1603 Program total projects awarded..................................................................... iv

Figure ES-3. §1603 Program awards by state................................................................................. v

Figure 1. Reduction in asset value for tax purposes under accelerated and 20-year straight line 

depreciation schedules.................................................................................................................... 2

Figure 2. Wind energy investment in response to federal incentives............................................. 6

Figure 3. Estimates of historical and projected availability of tax equity for renewable power 

projects (as measured by federal government support payments)................................................ 13

Figure 4. Potential renewable energy financing sought and tax monetization required............... 14

Figure 5. Renewable energy capacity additions needed to meet existing state RPS 

requirements.................................................................................................................................. 15

Figure 6. §1603 Program total funding ($millions)...................................................................... 22

Figure 7. §1603 Program total projects awarded.......................................................................... 22

Figure 8. §1603 projects awarded by state ....................................................................................23

Figure 9. §1603 dollars awarded by state .....................................................................................23

List of Tables

Table 1. Large-Scale Tax Equity Investors by Year..................................................................... 11

Table 2. Potential Tax Equity Required to Fulfill Existing State RPS Requirements.................. 16

Table 3. Estimated Costs to Acquire Tax Equity and §1603 Program Awards............................ 20
1

1 Renewable Energy Policy and the U.S. Tax Code

1.1 Introduction

Tax policy is one of the government’s main fiscal instruments to incentivize or disincentivize 

allocation of resources. Additionally, tax policy may intend to correct a perceived market failure. 

Examples include tax policy incentives for the oil and gas industry, research and development 

(R&D), manufacturing, and low-income housing. Renewable energy production has been 

supported via tax policies in order to reduce reliance on imported, foreign oil, while also 

addressing environmental concerns by reducing the use of fossil fuels.1

The federal government offers incentives through the tax code to promote private sector 

investment in new commercial and utility-scale renewable power projects. Investors benefit from 

these tax incentives in two ways. First, investors in qualifying renewable power generation 

projects can claim credits against their income tax obligations, including:

• Investment tax credit (ITC), which is currently 30% of eligible project capital costs,

for projects using solar and certain other renewable technologies

• Production tax credit (PTC), which currently ranges from $0.011 to $0.022 per 

kilowatt-hour (kWh), depending on the technology2 but which is prominently used 

for wind projects.

The ITC and PTC vary by technology in their availability and terms. Both reduce dollar-fordollar federal income taxes owed by the owners of the qualifying property. 

Second, investors in new renewable power generation projects also are able to accelerate the 

depreciation of the renewable project assets that in turn enables them to defer related federal 

taxable income and obligations in the early years of the projects. Specifically, renewable power 

investors are able to use the five-year Modified Accelerated Cost Recovery System (MACRS)

accelerated depreciation method for most of their project capital costs.

3 Figure 1 compares the 

percentage of the assets deductible annually under the five-year MACRS schedule, the five-year 

MACRS schedule with a 50% bonus (for which renewable electricity plants generally are 

eligible in 2012), and a 20-year straight-line schedule.

4 Together, the tax credits and the 

accelerated depreciation compose what is referred to as the “tax benefits” of a renewable project.

A Chadbourne & Parke tax attorney estimates the tax benefits for solar and wind projects—on a 

present value basis—amount to about 56% of the initial capital costs.

5

 1 See CRS Report R40999, Energy Tax Policy: Issues in the 111th Congress, for a larger overview of various energy 

market failures and economic rationales for intervention.

2 See 26 USC § 45 and 26 USC § 48 of the federal tax code. Also “Business Production Energy Tax Credit” and 

“Business Investment Energy Tax Credit.” Database of State Incentives for Renewables & Efficiency, North 

Carolina Solar Center. www.dsireusa.org/incentives/index.cfm?state=us&re=1&EE=1. Accessed December 14, 

2011.

3 “Modified Accelerated Cost-Recovery System (MACRS) + Bonus Depreciation 2008-2012.” 

www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US06F&re=1&ee=1. DSIRE. Accessed December 14, 

2011.

4 All depreciation schedules shown are based on the half-year convention. 5 “Financing Rooftop Solar Projects in the US.” Project Finance Newswire, Chadbourne & Parke LLP. November 

2011. www.chadbourne.com/files/Publication/d97f5fc1-1924-4ea6-90cd-
2

Figure 1. Reduction in asset value for tax purposes under accelerated and 20-year straight line 

depreciation schedules*

*First six years only; Source: National Renewable Energy Laboratory 2012

These benefits can represent a powerful incentive to private investment, but their realization is

hampered by the complexity of monetizing their value, the illiquid nature of the investments, and 

the uncertainty of the policies. Since most renewable energy developers do not have significant 

tax liability internally to monetize the tax credits and depreciation benefits, developers have to 

rely on third-party specialized investors (e.g., financial institutions)—known as tax equity 

investors—to realize the benefits of the tax incentives and, in turn, finance projects. The need for 

such specialized investors constrains the availability of private capital, particularly for projects 

that are developed by entities that are smaller, have less development experience, or seek to 

deploy new or less-proven technologies.

During the 2008–2009 financial crisis, the number of tax equity investors willing to make new 

investments decreased from nearly 20 to approximately 5. This withdrawal of investors from the 

market contributed to a significant stagnation in new renewable power project development. In 

response, Congress established a temporary grant program pursuant to Section 1603 of the 

American Recovery and Reinvestment Act (the §1603 Program) to offer a cash payment in lieu 

of the ITC. The program entitled project developers to receive 30% of a project’s capital cost in 

the form of a cash payment, thus freeing developers of having to rely on tax equity investors to 

monetize the tax credits.

The §1603 Program expired on December 31, 2011, although projects that started construction 

prior to that date are eligible to receive the award. Accordingly, as of mid-2012, the §1603 

Program continues to stimulate project development. That stimulus is expected to wane over the 

next several months, and projects will again need to rely more heavily on the tax equity markets 

to monetize federal tax benefits. 

 48e96a8307f5/Presentation/PublicationAttachment/6d7a694c-94c9-4e23-ae3a4b411d00f682/PFNewsWire_Nov11.pdf. Accessed December 5, 2011.

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6

Cumulative Depreciation

Project Year

5 Yr. MACRS w/ 50% Bonus

5 Yr. MACRS

20 Yr. Straight Line
3

This study explores the likely project financing and market impacts from the expiration of the 

§1603 Program. 

1.2 Analysis Motivation and Methodology

This report was developed as part of the National Renewable Energy Laboratory’s (NREL’s)

ongoing efforts to inform business and policy decision making in the renewable energy sector

and the impacts associated with §1603 Program expiration. Funds for the effort were from the 

U.S. Department of Energy.6 While this report provides indicative viewpoints from participants 

in the renewable energy project finance community, it is not based on a formal survey. While the 

analysis focuses on the impact of the §1603 Program expiration on the renewable energy 

community, it does not include broader evaluations of the impact of this program on the federal 

budget deficit, the value and efficacy of tax incentives versus other policy tools (to either project 

developers or taxpayers), or other public policy considerations.

During the second half of 2011 and early 2012, the authors spoke with senior figures at several 

prominent renewable power developers, investment firms, and related financial advisory and law 

firms. These interviewees were selected due to their breadth of knowledge and experience 

regarding renewable energy finance. The authors spoke with individuals only within the 

renewable energy finance community directly using or otherwise advising on use of the 

incentives. These included: Matthew Meares, director of project finance at Amonix, a developer 

of concentrating photovoltaic (PV) systems; Jonathon Zurkoff, vice president of finance with US

Geothermal, an international developer of geothermal power systems; Jacob Susman, founder 

and CEO of OwnEnergy, a developer of community wind systems; Mike Niver, former director 

of project finance with SolarCity, a developer of residential solar systems; Terry Grant, 

managing director of Marathon Capital, a renewable power financial advisory firm; Ed Feo, 

managing director of USRG Renewable Finance, an investment firm in the sector; Barry Neal, 

director of environmental finance at Wells Fargo, an investor of tax equity and other financing 

for renewable power projects; Steven Taub, senior vice president, Investment Strategy at GE 

Energy Financial Services, which invests globally in energy projects and companies, including 

renewable energy; Greg Rosen, vice president of solar finance for Union Bank, a financing firm; 

Brett Prior, senior analyst with GTM Research, a source of renewable energy financial analysis; 

and James Duffy, a partner with the law firm of Nixon Peabody LLP, and Adam Kobos, a 

partner with Stoel Rives, LLC, both large law firms with practice specialties in renewable energy 

and tax credit finance.

1.3 Background on How Tax Credits are Monetized

Renewable energy projects generally do not create sufficient income tax obligations to directly 

take full and immediate advantage of tax benefits. While the project owners can “carry forward”

tax benefits to use them in future years, their present value is reduced, lowering the project's

return. Tax benefits are generally realized or “monetized” in one of three ways:

 6 NREL benefits from the §1603 Program as it receives compensation for reviewing applications on behalf of the 

Department of Treasury. No funds from such compensation were used to support this article, no data collected 

through NREL’s application review services were used in this analysis, and no NREL staff involved in such 

application reviews were interviewed or involved in preparation of this article.
4

1. Sponsor Tax Appetite. The project developer, or sponsor, may have the taxable income, 

referred to as “tax appetite,” from other business activities that can use the project’s tax 

benefits. In these instances, the project developer’s tax benefits are passed through and 

consolidated with the developer’s other taxable income and losses. Several large 

developers closed financing for projects in 2011, including NRG, Duke, Exelon, NextEra 

Energy, and MidAmerican Energy Holdings, and likely plan to employ their own tax 

appetite to monetize the tax benefits flowing from their equity investments in their 

projects.

7 For example, Mid-American Energy Holdings announced in December 2011 a 

plan to acquire a 550-megawatt (MW) solar farm from First Solar.8 Such companies may 

also acquire these benefits from other developers. A common trait of such companies is 

their ability to make use of the tax benefits by virtue of links to large, recurring tax 

obligations from their other operations. 

However, most renewable energy developers cannot easily use tax credits due to their 

small size and/or lack of profitability at the project or corporate level, leading to a lack of 

tax liability necessary to monetize the tax benefits at full value. Thus, third-party “tax 

equity providers” emerged to fill this gap. 

2. Third-Party Tax Equity. Developers who are unable to make full use of the tax benefits of 

their projects and are unwilling to sell their projects outright can seek investment capital 

from specialized third-party entities. The third parties invest in renewable energy projects 

specifically to use their tax benefits to reduce their own tax obligations.

9 Third-party tax 

equity is frequently cited as a critical source of tax-benefit monetization, without which 

many renewable energy projects would not be able to arrange financing.10

The market for third-party tax equity investment has a relatively high barrier to entry

because these entities need to have (1) a current and future tax appetite to absorb the tax 

benefits fully (requires visibility over future earnings that is particularly difficult in times 

of economic volatility), (2) the expertise to fully assess the array of technology and

financial and contractual risks involved in renewable power projects, and (3) the acumen 

to negotiate the complex financial structures necessary to distribute risk and reward 

among the various parties involved. Innovative financial equity partnership and leasing 

structures have been created to respond to the varying goals and capabilities of project 

developers and tax equity investors, but implementing these can generate significant 

transaction costs and/or absorb some of the tax benefits designed to spur the 

 7 Prior, B. “Assessing the State of Project Finance.” GTM Research, U.S. Solar Market Insight Conference, 

November 16, 2011. 

8 Burger, A. “Buffett’s Mid-American Buys First Solar’s 550MW Topaz Solar Power Project.” CleanTechnica.com. 

http://cleantechnica.com/2011/12/08/buffetts-mid-american-buys-first-solars-550-mw-topaz-solar-power-project/. 

Accessed December 14, 2011.

9 However, most tax equity investors will require the deal to have a positive cash-on-cash return per IRS rules. 10 See “U.S. Policy Outlook for Renewable Energy.” Chadbourne and Parke, LLP, Project Finance Newswire, June 

2011. See also Mendelsohn, M. “A Chicken in Every Pot? Is there Enough Tax Equity to Sustain the RE Market?”

NREL, November 15, 2010. https://financere.nrel.gov/finance/content/chicken-every-pot-there-enough-tax-equitysustain-re-market. 
5

investment.

11,12 The community of tax equity investors and the tax benefit monetization 

capacity they bring to the renewable power industry are discussed in Section 2.1.

3. §1603 Treasury Grant Program. From 2009 to 2011, the §1603 Program essentially 

monetized the ITC tax credits by allowing a project sponsor to take a cash award, or 

grant, in lieu of the ITC tax benefits. By doing so, the program directly reduced the 

demand for tax equity. The §1603 Program expired at the end of 2011 and is discussed at 

length in Section 3.

1.4 ITC/PTC Policy Challenges

There are two major challenges with respect to the ITC/PTC policy that are most commonly 

cited by energy project developers and financers: policy uncertainty and complex and costly 

transactions.

1.4.1 Policy Uncertainty

Neither the PTC nor the ITC (in their current forms) has been made permanent. These tax 

policies have expired, or been renewed in the last quarter-year of their existence, at least seven

times over the last 15 years (see Figure 2), creating significant market uncertainty. For example, 

since 1999, the PTC has been allowed to lapse by Congress on three occasions, with each lapse 

resulting in a precipitous drop in new wind installations. In the earlier years of wind project 

development, pending expirations of the PTC led developers to undertake extraordinary efforts 

to bring their projects online prior to the expiration date to manage the uncertainty associated 

with the renewal of the incentive policy. This reaction led to a boom-bust cycle in the wind 

sector from 1999 to 2005 that reduced investment levels and, as a consequence, the overall 

effectiveness of the PTC.13 Figure 2 shows the subsequent growth in wind energy investments

when the PTC was extended for a longer time period.

14

The ability to qualify for the PTC will terminate at the end of 2012 (for wind projects) and 2013 

(for projects using geothermal, biomass, landfill gas, and hydro technologies). Qualification for 

the current 30% ITC rate for solar projects is legislated to fall back to a 10% rate at the end of 

2016. The eligibility period and rates vary by the renewable power technology. Projects only 

obtain/qualify for the ITC and the PTC when the project enters into commercial operations; that 

date must be prior to the expiration of the legislated availability of the respective tax credit.

 11 Harper, J.; Karcher, M.; Bolinger, M. Wind Project Financing Structures: A Review & Comparative Analysis. 

LBNL-63434. Berkeley, CA: Lawrence Berkeley National Laboratory, September 2007.

http://eetd.lbl.gov/ea/ems/reports/63434.pdf. 12 “The Return – And Returns of Tax Equity for US Renewable Projects.” Bloomberg New Energy Finance.

November 21, 2011. 

http://www.reznickgroup.com/sites/reznickgroup.com/files/papers/taxequity_reznickgroup_wp112011.pdf. 13 "Production Tax Credit for Renewable Energy." Published by the Union for Concerned Scientists. 

www.ucsusa.org/clean_energy/solutions/big_picture_solutions/production-tax-credit-for.html. Accessed September 

12, 2011.

14 The reduced investment levels in 2010 and 2011 shown in Figure 2 reflected more the national recession, which 

reduced the demand for new renewable power capacity and financial market turbulence, which reduced the supply 

of tax equity available to make use of the depreciation benefits.
6

Figure 2. Wind energy investment in response to federal incentives

The drop in wind investment levels from 2009 to 2010 and 2011 did not reflect the PTC being 

unavailable (new projects can qualify for it through the end of 2012). Rather, it reflected lower 

natural gas prices, the economic recession, and utilities approaching or meeting their renewable 

portfolio standard (RPS) mandates, all of which reduced the demand for new renewable power.15

1.4.2 Tax Subsidies are Complex to Use and Increase Project Costs

Government incentives in the form of tax credits can be difficult for a renewable project to use

efficiently and can cause the project to incur increased transaction costs. First, the tax benefits

generated by most renewable energy projects substantially exceed the ability of the projects to

make immediate use of the tax savings. That is, the tax credits and accelerated depreciation 

create tax savings in excess of the income tax obligations created by operation of the renewable 

power project itself. For projects using the ITC and the accelerated depreciation, most of the tax 

benefits are received in the first year of operations. Receipt of the PTC is tied to production 

during the first 10 years of the project. In either case, the tax benefits received in a given year are 

frequently larger than the project’s income tax obligation for that year. While a project (or its 

owners) may “carry forward” these tax benefits to reduce tax obligations in subsequent years, 

doing so reduces the present value of the tax benefits.

 15 “As Expected, U.S. Wind Installations Down 50% in 2010.” Renewable Energy World.

www.renewableenergyworld.com/rea/news/article/2011/01/as-expected-u-s-wind-installations-down-50-in-2010.

Accessed February 10, 2012.
7

Project developers can elect to use a project’s tax benefits to reduce their income tax obligations 

from other operations. However, this option has limited value for developers because they often

lack sufficient aggregate income tax obligations.

There are other barriers to effective use of the tax credits as well. Regulated investor-owned 

utilities (IOUs) cannot immediately pass the tax credit benefits through to their customers. Utility

regulators require IOUs to spread the tax benefits over the life of the asset, rather than recognize 

them in the year(s) in which they are received, which reduces the competitiveness of utility 

ownership relative to independent developers.

16 Separately, the passive activity and at-risk tax 

rules make it difficult for most individuals (and certain closely-held corporations) to realize the 

full benefit of the tax credits and accelerated depreciation deductions.17 Still other entities (e.g., 

municipalities and entities with non-profit status) do not pay federal income tax and thus gain no 

value from receiving tax benefits.

To secure the maximum value of the tax benefits, many project developers seek a separate 

investor or investors who can make immediate use of the benefits. The amount of legal and 

technical due diligence costs and time to source such tax equity can reduce the net value of the 

tax incentives and slow the pace of investment by having to secure agreement from more parties. 

Some economies are possible with experienced national-scale tax investors familiar with the due 

diligence process and forms of documentation. Still, the transaction costs remain higher than 

they would be if the developer or the site host could make use of the tax incentive and own the 

project directly without tapping third-party capital sources.

Continued reliance upon tax credits and specialized equity investment constrains the renewable 

energy industry from employing more liquid, tradable mechanisms that can access wider pools of 

public capital at lower yield requirements. Numerous financial innovations such as asset-backed 

securitization, real estate investment trusts, master limited partnerships, and long-term debt 

instruments offer the potential to pool renewable energy project portfolios, reduce risk for 

investors, and create a tradable security that offers a more accessible-investment environment for 

pension funds, private individuals, sovereign wealth funds, and other sources of currently 

untapped capital.18

Finally, the reliance on third-party tax investor capital subjects renewable power projects to 

broader financial market conditions and the investment preferences of the tax equity providers. 

While the tax credits are not capped, changes in the overall profitability of tax equity providers 

has affected the availability and cost of tax equity capital in recent years and, in turn, the rate of 

investment in the renewable power sector. While the tax incentives theoretically are available to 

all qualifying technologies, renewable power projects employing innovative technologies are 

 16 See “Normalization of Solar Investment Tax Credits.” Technical Brief, Solar Electric Power Association, June 

2011.

17 See Tracy, S. “Passive Loss Issues in Connection with Solar Investments.” Novogradac & Company LLC, 

February 2010.

18 See Mendelsohn, M. “Securitization: A Dirty Word, or a New Opportunity for Renewable Energy?” NREL, 

November 28, 2011. Accessed May 22, 2012. https://financere.nrel.gov/finance/content/securitization-andsecondary-markets-renewable-energy.

See also Mendelsohn, M. “Tapping the Capital Markets: Are REITs Another Tool in Our Toolbox?” NREL, 

February 27, 2012. https://financere.nrel.gov/finance/content/capital-markets-reit-real-estate-investment-trustrenewable-energy-project-finance-prologis-KIMCO. Accessed May 22, 2012.
8

impeded from making use of the incentives due to the relative unwillingness of many tax equity 

providers to assume the performance risks of such technologies.
9

2 Third-Party Tax Equity

2.1 Market Entities

Third-party tax equity is the provision of equity investment specifically designed to take 

advantage of the tax benefits. A small set of large institutional investors supplies most of the 

third-party tax equity. Given the complex and long-dated nature of renewable energy tax equity 

deals, non-financial institutions have typically not been interested in serving as tax equity 

investors, especially if renewable energy is not part of their core operations.

Unfortunately, there is a paucity of formal data on the U.S. tax equity market. The Internal 

Revenue Service (IRS) does not publish information on taxpayers claiming the credits or 

accelerated depreciation for renewable power projects. Measuring renewable power investment 

flows also is hindered by confidentiality agreements established among the investment parties. 

Third-party tax equity investors can be roughly defined as those businesses (individuals are all 

but ineligible)19 who:

• Have a substantial current and future tax liability

• Have the financial acumen to engage in a complex project structure

• Are willing to hold their ownership interests in the projects for several years

• Are able to invest in illiquid assets (i.e., that tie up cash and cannot easily be resold)

• Are willing to invest in non-core assets rather than the firm’s primary mission, debt 

reduction, shareholder dividends, or retaining cash for a contingency 

• Are sufficiently sophisticated to account for a shifting tax policy environment in their 

investment decisions

• Are comfortable with modest returns generally earned by tax equity (unlike most 

corporations; financial companies are highly leveraged, which increases the value of 

the tax equity investment).

While formal data is lacking, an industry trade association and some private financial advisory 

and market intelligence firms do follow tax equity market developments and make their analyses 

available publicly.

20 These analyses represent the most coherent publicly available reviews of the 

tax equity market. In the fall of 2011, U.S. Partnership for Renewable Energy Finance (US 

PREF) estimated that 15 entities would make the majority of the third-party tax equity 

 19 Existing “passive loss” and “at-risk” tax regulations make it difficult for most individuals to access the PTC, ITC,

and accelerated depreciation incentives. For example, see Spector, P. “Update: Financing Renewables with Treasury 

Grants.” Troutman Sanders LLP. www.troutmansanders.com/update-financing-renewables-with-treasury-grants-03-

03-2010/. Accessed January 4, 2012.

Individuals are eligible for a residential energy tax credit for their home-based systems. See “Residential Renewable 

Energy Tax Credit.” DSIRE. www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=US37F&re=1&ee=1.

Accessed May 22, 2012.

20 Private firms actively assessing the tax equity market include, among others, the market research firms of 

Bloomberg New Energy Finance (a service of Bloomberg, L.P.) and GTM Research (a subsidiary of Greentech 

Media, Inc.) and the accounting and financial consulting firms of Reznick Group, P.C. and Novogradac & Company 

LLP.
10

investments in 2011, down from 20 such investors active in 2007 prior to the economic 

downturn.

21 Bloomberg New Energy Finance (BNEF) estimates only five third-party tax equity 

investors were active immediately after the financial crisis.22 The number of such investors has 

recovered in the last year. An expert panel convened in February 2012 estimated there were 20–

22 active players in the tax equity market as of early 2012, but that any project would have far 

fewer interested investors because many investors “have esoteric requirements, specific needs, or 

quirks” that limit their interest to a small set of projects.23

These estimates focus on the larger national players; they do not assess the small-scale, regional,

or local investors who made only a few investments in small amounts. For the latter, only

scattered, mostly anecdotal public data exists.24 Importantly, many of the current tax equity 

providers have limited post-crisis income and, in turn, may exhaust their tax capacity before the 

end of the year.

25 Moreover, pending banking regulatory reforms (e.g., Basel III)26 may place 

additional scrutiny on assets with questionable credit risks, such as financings involving power 

purchase agreements with weaker utilities. 

Financial sector entities are the principal tax investors due to their familiarity with credit analysis 

and project investment and large and recurring tax obligations.

27 Table 1 identifies 16 tax 

investors in 2010, the top 10 of which provided 97% and the top two sources (JP Morgan and GE 

EFS) provided approximately 49%.28 Of the top 10 providers of tax equity in 2010, 9 were 

financial entities (the sole exception being Pacific Gas & Electric). While this subset varies in 

composition from year to year, these financial entities provide the bulk of the third-party tax 

equity investment dollars. While specific data is not publicly available, anecdotal evidence 

indicates that financial institutions again provided the large majority of tax equity in 2011. 

 21 “Prospective 2011-2012 Tax Equity Market Observations.” U.S. Partnership for Renewable Energy Finance, July 

2011. http://uspref.org/wp-content/uploads/2011/07/US-PREF-Tax-Equity-Market-Observations-v2.2.pdf. Accessed 

September 12, 2011.

22 Zindler, E. “The Renewable Energy Tax Equity Opportunity.” Presentation to the U.S. Department of 

Energy/White House. Bloomberg New Energy Finance, March 13, 2012.

23 “State of the Tax Equity Market.” Chadbourne & Parke, LLP, Transcript from Infocast Wind Finance and 

Investment Summit, San Diego, CA, February, 2012. Project Finance Newswire, May 2012. 24 As an exception, see Bolinger, M. Community Wind: Once Again Pushing the Envelope of Project Finance

LBNL-4193E. Berkeley, CA: Lawrence Berkeley National Laboratory, January 2011.

http://eetd.lbl.gov/EA/EMP/reports/lbnl-4193e.pdf. Accessed September 12, 2011. 25 “State of the Tax Equity Market,” Chadbourne & Parke, LLP, op. cit. 26 Basel III is a “comprehensive set of reform measures designed to improve the regulation, supervision and risk 

management within the banking sector.” Investopedia. http://www.investopedia.com/terms/b/basellIII.asp#ixzz1v99oqhHI. Accessed May 16, 2016. 27 “Renewable Energy Project Finance in the U.S.: 2010 – 2013 Overview and Future Outlook,” Mintz; Levin; 

Cohn; Ferris; Glovsky; Popeo, PC, produced in collaboration with GTM Research, January 2012. 

http://www.mintz.com/publications/3055/Renewable_Energy_Project_Finance_in_the_US_20102013_Overview_an

d_Future_Outlook. 28 Mintz; Levin; Cohn; Ferris; Glovsky; Popeo. (2012). op cit.
11

Table 1. Large-Scale Tax Equity Investors by Year

2007 2008 2009 2010

Bank of America Bank of America Bank of America Bank of America

GE EFS GE EFS Citibank Citibank

HSH Nordbank HSH Nordbank Credit Suisse Credit Suisse

JP Morgan JP Morgan GE EFS GE EFS

Key Bank Key Bank JP Morgan Google

Morgan Stanley Morgan Stanley Key Bank JP Morgan

New York Life New York Life Morgan Stanley Key Bank

Northern Trust Northern Trust Northern Trust MetLife

Union Bank Sempra Energy Union Bank Morgan Stanley

Wells Fargo SunTrust U.S. Bank Northern Trust

ABN Amro * U.S. Back Wells Fargo PG&E

AIG * Wells Fargo PNC

Citi Sun Trust

Fortis * U.S. Bank

John Hancock Union Bank

Lehman Brothers * Wells Fargo

Merrill Lynch *

Northwestern Mutual

Prudential

Wachovia *

(* Denotes that the company left the tax equity market entirely, bold denotes “main” investors in 2010)

Source: Mintz; Levin/GTM (2012)

To date, other corporates (i.e., non-financial companies) have been reluctant to take on tax 

equity. Renewable energy is not a core business for most of these companies, and most do not 

have dedicated in-house teams to grapple with the complexities of tax equity or to assess project 

risks of renewable assets. Non-financial firms may also prefer alternative investments to be more 

closely aligned with their primary mission, such as a relevant merger or acquisition, debt 

reduction, maintaining liquidity for a potential business contingency (e.g., unexpected required 

investment), or direct distribution to their shareholders via a stock dividend or share repurchase.

In addition, the returns on tax equity investments may not be sufficient for companies, such as oil 

majors or those involved in technology pure-plays, and particularly for companies without 

leverage. Finally, in the case of the PTC, engaging in a tax equity investment calls for confidence 

in the company’s ongoing profitability—thus, having tax liabilities—over a long-term (e.g., 10-

year) horizon. Companies that are less certain of their future tax liabilities are less willing to 

invest tax equity.
12

Generally, individual projects or project portfolios need to have a total capitalization over 

$25 million to attract tax equity from most of the investors identified in Table 1. Tax equity from 

regional and smaller financial institutions or through leasing entities, especially for smaller 

projects, is generally understood to be more expensive due to the higher cost of funds for such 

entities, the smaller number of potentially interested investors, and possible project-specific risk 

factors—all of which can increase the cost of development of smaller project portfolios.

2.2 Supply of Third-Party Tax Equity

The supply of third-party tax equity is constrained. US PREF surveyed all of the national tax 

equity players last year to assess the quantity of tax equity they intended to invest in 2011. Based 

on this analysis, US PREF estimated these investors would provide roughly $3.6 billion in 2011, 

excluding any funding from the §1603 Program.29 While up from the recent low of $1.2 billion

provided in 2009, US PREF considered the amount of tax equity invested would remain 40% 

below the $6.1 billion peak in 2007 (see Figure 3).

30 More importantly, US PREF has predicted

that the supply of third-party tax equity investments will not increase significantly going forward,

as these specialized investments require extensive due diligence and compete against similar taxoriented investment opportunities, such as low-income housing. They estimate that the tax equity 

supplied for renewable power projects will remain flat between 2011 and 2012 at $3.6 billion. In 

an earlier July 2011 report, the group estimated the unavailability of the §1603 Program in 2012 

would lead to a 55% reduction in total project investment.

31

 29 “ITC Cash Grant Market Observations.” U.S. Partnership for Renewable Energy Finance (US PREF), December 

2011. http://uspref.org/white-papers. Accessed February 9, 2012. Some investment banks earlier placed the quantity 

of tax equity at $5 billion but based only on back-of-the-envelope estimates (“State of the Tax Equity Market,” 

Chadbourne & Parke, LLP, op. cit.). 30 US PREF. (December 2011). op cit. 31In this report, US PREF further estimated that this funding loss would lead to a reduction in U.S. renewable energy 

capacity installed (from 5,165 MW in 2011 to 2,291 MW in 2012). 
13

Figure 3. Estimates of historical use and projected availability of tax equity for renewable power 

projects (as measured by federal government support payments)

Source: US PREF (2011)

2.3 Demand for Tax Equity 

The total demand for third-party tax equity for renewable power projects could be higher than 

the available supply projected by US PREF. US PREF anticipates that renewable power 

developers will seek $7 billion–$10 billion in tax equity for their projects in 2012.

32 Moreover, 

BNEF confirmed this estimate of $7 billion in tax equity demand for renewable projects in 2012 

and states that it exceeds the investment appetite of the established tax equity providers.33

GTM Research projects the gross demand for U.S. renewable power project financing will reach 

$31.1 billion in 2011, $41.2 billion in 2012, and $48.9 billion in 2013.34

The amount of tax equity needed for individual projects varies by the type of financial structure 

employed and the relative financial attractiveness of the transaction. Sale-leaseback structures, 

popular in the solar PV sector, have the tax equity investor funding almost all of a project’s 

capital costs. In the utility-scale wind sector, a partnership structure has been commonly used in 

which a third-party tax equity partner contributes 50%–60% of the total capital costs of a 

project.35 Using 50% as a crude average estimate of the share of third-party tax equity financing 

 32 US PREF. (December 2011). op cit. 33 BNEF. November 2011. “The Return- And Returns-of Tax Equity for US Renewable Projects.” 34 Mintz; Levin; Cohn; Ferris; Glovsky; Popeo. (2012). op cit. 35 Harper, J.; Karcher, M.; Bolinger, M. Wind Project Financing Structures: A Review & Comparative Analysis.

LBNL-63434. Berkeley, CA: Lawrence Berkeley National Laboratory, September 2007.

http://eetd.lbl.gov/ea/ems/reports/63434.pdf. Accessed December 14, 2011.

0.5

3.2

6.1

3.5 3.2

7.2

7.5

3.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2005 2006 2007 2008 2009 2010 2011E 2012E

$ Billions

Tax Equity Est. Tax Equity 1603 Awards Est. 1603 Awards

PTC / ITC Only PTC / ITC / 1603 PTC / ITC
14

for projects of all types, industry tax equity demand to meet the projected aggregate financing 

requirements could top $20 billion in 2012 and $24 billion in 2013 (Figure 4).

Figure 4. Potential renewable energy financing sought and tax monetization required

(Assuming 50% of project financing needs)

Source: Mintz Levin/GTM (2012), NREL (2012)

GTM’s figures do not specifically differentiate among potential tax equity sources (e.g., direct 

sponsor investments, third-party tax equity, or grandfathered §1603 Program awards). Thus, 

future third-party tax equity requirements may well be less than the $20–$24 billion estimate.

The Mintz Levin/GTM report looks at all potential renewable energy investment regardless of 

regulatory need. Restricting the analysis to only the investments required to meet state RPS 

requirements suggests a smaller but still sizable demand for tax equity. According to a draft 

analysis by Lawrence Berkeley National Laboratory (LBNL), approximately 6,100 MW of new 

renewable energy capacity will need to be developed on average annually from 2013 to 2020 to 

meet the requirements of state RPS targets currently in effect.

36 Figure 5 provides the expected 

capacity additions through 2020.

 36 Barbose spreadsheet analysis of RPS requirements, LBNL, 2011.

0

10

20

30

40

50

60

2011 2012 2013

RE Asset Finance & Tax $ Req'd. ($B)

Other

CSP

PV

Wind

Tax Monetization Req'd.
15

Figure 5. Renewable energy capacity additions needed to meet existing state RPS requirements

Source: LBNL (2011)

Assuming a portfolio mix of 60% wind and 40% of the remaining renewable power 

technologies, as outlined in Table 2, roughly $7.5 billion in tax equity will be needed annually, 

twice the quantity supplied in 2010 and more than the record of $6.1 billion US PREF reported 

for 2007.

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

2001 2003 2005 2007 2009 2011 2013 2015 2017 2019

Annual Incremental Capacity (MW)

Cumulative RPS Capacity (MW)

Cumulative RPS Capacity Required

Annual Incr. RPS Capacity Required
16

Table 2. Potential Tax Equity Required to Fulfill Existing State RPS Requirements

Technology

% of 

Assumed 

Portfolio

Avg. 

Annual 

Capacity 

Addition 

(MW)

Estimated

Avg. 

Project 

Cost per 

Watt37

Estimated 

Total Project 

Investment 

Required 

($B)

Estimated 

Tax Equity 

Required

(50% of Total 

Investment)

Wind 60% 3,660 $1.91 $6.99 $3.50

Solar38 30% 1,830 $4.00 $7.32 $3.66

Biomass 5% 305 $1.86 $0.57 $0.29

Geothermal 5% 305 $0.64 $0.20 $0.10

Total 100% 6,100 $15.07 $7.55

Source: LBNL/author estimates (2012)

From another perspective, NREL has reviewed public records of utility-scale projects and 

identified over 16,000 MW of utility-scale solar projects in advanced development (i.e., projects 

5 MW or greater that hold a power purchase agreement with a major utility or are being 

developed by a major utility). If all of these projects reach financial close, just this single 

segment of the solar market alone could require approximately $32 billion in third-party tax 

equity over the next few years of project deployment.39 Of course, projects in development suffer 

from very high attrition rates and many are never built; still, the figure gives perspective to the 

potential need for tax equity.

On January 1, 2017, absent Congressional action, the ITC will decline from 30% to its 

permanent level 10% of eligible solar facility costs. Even at that lower level, the combined tax 

benefits, including both the ITC and accelerated depreciation, represent approximately 35% of 

project installation costs—too large for many developers to monetize internally, thus requiring 

them to seek third-party capital.

40

2.4 Tax Equity Investment Factors

Tax equity investors vary significantly in how they approach the market. Developers also differ 

in their needs and objectives. No two projects present the same risk-reward profile. This diversity 

in traits and preferences among tax investors, developers, and their projects effectively precludes

a single and fixed investment hurdle rate, or market price, for tax equity. Instead, numerous

 37 Wind, biomass, and geothermal installed cost values are from: Bolinger, M.; Wiser, R.; Darghouth, N. 

Preliminary Evaluation of the Impact of the Section 1603 Treasury Grant Program on Renewable Energy 

Deployment in 2009. LBNL-3188E. Berkeley, CA: Lawrence Berkeley National Laboratory, April 2010.

Due to rapidly declining installed solar costs, this report was not used as the basis for solar. Instead, the solar 

installed cost value (PV) is based on personal communication with Alan Goodrich, NREL.

38 Includes only PV. Concentrated solar power would likely increase the average cost per watt installed and tax 

equity required.

39 Assumes $4/watt installed cost and tax equity contribution equal to 50% of initial project capital costs. 40 Mendelsohn, M. “Will Solar Projects Need Tax Equity in the Future? Yes, but Baby Steps Toward Securitization 

Improve the Situation.” NREL, April 2012. https://financere.nrel.gov/finance/content/solar-PV-photovoltaics-valuetax-credits-equity-accelerated-depreciation-securitization. 
17

factors influence the price needed to attract tax equity to a given renewable power project at any 

particular point in time.

Key differentiating factors among tax equity investors includes their relative:

• Tolerance for technology-specific, regulatory, or other risk factors

• Interest in cash returns in addition to tax benefits

• Minimum threshold size for individual investments 

• Desire to shape or participate in transactions 

• Interest in continuing ownership after tax benefits have been utilized

• Desired level of control over project management

• Receptivity to project leverage (use of debt) and preferred investment structure

• Exposure to regulatory requirements (banks versus non-bank investors) 

• Overall capacity for undertaking multiple investments (“tax appetite”)

• Number of dedicated investment staff and their familiarity with analyzing energy 

projects.

Renewable power project sponsors also vary in their needs for and interest in the tax equity 

market. Factors distinguishing these project developers include their varying:

• Desire for sole ownership and control

• Ability to contribute cash to fund the project

• Intrinsic ability to use the tax benefits

• Desire for securing a quick financial return from selling the project versus ongoing 

returns from operations

• Comfort with project debt

• Interest in retaining or regaining full ownership at the end of the financing period

• Preferred investment structure

• Management experience, staff capabilities, and roles.

Lastly, the projects themselves vary in their attributes and, consequently, in their relative 

attraction to potential tax equity investors. These include:

• Project size

• Technology employed (e.g., wind or solar PV) 

• Relative commercial acceptance of the equipment used and vendor credit quality

• Power and renewable energy certificate (REC) buyer contract terms (e.g., term, rates,

and buy-out options)
18

• Credit quality of the proposed power and REC buyers

• Ongoing operating costs (e.g., fuel, spare parts, and major maintenance)

• Eligibility for state incentives

• Exposure to grid congestion (i.e., susceptibility to power sale interruptions).

2.5 Cost of Tax Equity

Several aspects of the tax equity market make it a more expensive form of investment than other 

sources of capital such as corporate bonds. First, the tax equity market is not “transparent.” There 

is no market exchange with posted prices for investors to easily evaluate the associated risks. Ed 

Feo, managing director with USRG Renewable Finance, observes that the lack of a centralized 

exchange with posted bid/ask information makes it difficult for a developer to find third-party 

tax equity capital sources willing to take on a non-standard risk for the right price.41 He says that 

virtually all developers and financial parties enter into confidentiality agreements and do not 

disclose the final rates or terms in completed transactions. In such an environment, the key focus 

is on relationships and informal anecdotal market knowledge.

Second, the unavailability of a single standardized price for tax equity means that the developer 

and the investor negotiate a price for each project. The developer has to prepare an investment 

summary of the project, identify and approach likely investors, and spend time explaining the 

project, likely to multiple potential investors. Terry Grant, managing director of Marathon 

Capital, points out that each tax investor then needs to invest time and effort to assess a project 

before deciding whether it is of interest and at what price (i.e., expected return).

42 Even after the 

initial credit decision, work remains for both parties to negotiate the full investment 

documentation.

Third, projects with anything other than a “plain vanilla” design will have to pay more to obtain 

tax equity capital. As an example, developers of projects employing novel technologies or 

equipment from new-to-market manufacturers can face difficulties in attracting tax equity. Even 

if a project features specific mitigating features and incremental pricing to offset perceived risks, 

tax investors may decline to invest, citing that such risks are best left to other types of equity 

sources until the technologies are deemed “proven” by having been used in multiple successful 

projects. In such cases, the project developers or equipment vendors may finance the project 

using their own capital or, if necessary, seek capital from a larger, well-funded strategic partner. 

Difficult to find, such strategic partnerships represent a significant advantage to developers who 

have them.

The overall market supply of tax equity seems to be inelastic to price (i.e., supply is not 

significantly affected by price), due primarily to the small number of investors. As a general rule, 

Grant notes that tax equity investors are conservative in their tolerance for risk.43 Their 

willingness to accept a particular type of project risk (e.g., credit quality of the power purchaser)

is relatively unaffected by the price of the return offered. Rather, a given risk level is either 

acceptable or not, and changing the rate of return often does not induce a change in willingness 

 41 Feo, E. Email, 14 November 2011. 42 Grant, T. Email, 9 December 2011. 43 Grant, T. Email, 9 December 2011.
19

to accept such risk. Grant observes that higher offered prices can cause individual tax equity 

investors to favor one renewable power project over another or to shift some tax equity from 

alternate investment opportunities (e.g., low-income housing tax credits). Still, the complexity of 

such investments and the need to have large tax obligations represent significant market entrance 

barriers not overcome by simple increases in the proposed return. 

Increasing the overall market’s price elasticity in any substantive and sustained fashion would 

require attracting new capital sources that have not previously been involved in renewable power 

project financing. SolarCity, a major developer of residential solar systems, has closed tax equity 

financings with Pacific Gas & Electric and Google—a prominent example of a developer 

expanding the pool of third-party tax equity capital.44 BNEF suggests that utilities and 

companies in certain other economic sectors “adjacent” to the power sector also might increase 

their investments in renewable power projects.45 Such investors would increase the availability

of tax benefit monetization capital if they invest actively and not passively as third-party tax 

equity investors.

Lastly, broader external factors, such as the 2008–2009 financial crisis and actual or possible 

legislative and regulatory rules changes, complicate the price negotiation process. The limited 

pricing information that is publicly available typically is anecdotal and emerges from conference 

speakers, panel discussions, and the occasional report. Such intelligence suggests that major tax 

equity investors have invested their capital in recent years with expected after-tax yields of 7%–

11% (over the first 10 years of the project) for a high-quality, unleveraged, large wind project.

During robust periods (e.g., in 2007), tax equity yield requirements for such projects were near 

the bottom of the range referenced, according to Barry Neal, Director of Environmental Finance 

at Wells Fargo Bank.

46 During the 2008–2009 financial crisis, yield requirements rose sharply as 

tax investors left the market. Neal notes that required yields for investments in such high-quality 

wind projects gradually declined below 10% in 2010 and the first half of 2011 as the financial 

sector experienced renewed profits (and tax obligations), leading to the uptick in available 

supply. Industry participants suggested in February 2012 that rates for the best-in-market wind 

projects had declined to around and below 8%.47

There is no ready information for the yields required by regional and community-scale tax 

investors. Anecdotal experience suggests that their required returns are higher than returns for 

national-scale tax equity investors. This may reflect higher internal hurdle rates for allocating 

their capital, unfamiliarity with investing in power projects, and simply the market power that 

comes with their greater scarcity. Mark Bolinger of LBNL describes the challenges faced by 

several community-scale projects in a January 2011 report.48

 44 “Google Partners with SolarCity to Create $280 Million Fund for Residential Solar Projects, Nation’s Largest to 

Date.” SolarCity. www.solarcity.com/pressreleases/92/Google-Partners-with-SolarCity-to-Create-$280-MillionFund-for-Residential-Solar-Projects--Nation%E2%80%99s-Largest-to-Date.aspx. Accessed September 12, 2011. 45 BNEF. (November 2011). op.cit. 46 Neal, B. Phone call, 1 December 2011. 47 “State of the Tax Equity Market,” Chadbourne & Parke, LLP, op.cit. 48 Bolinger, M. (2011). “Community Wind: Once Again Pushing the Envelope of Project Finance”. Lawrence 

Berkeley National Lab, January, http://eetd.lbl.gov/ea/emp/reports/lbnl-4193e.pdf. Accessed March 2012. 
20

2.6 Cost to Acquire Tax Equity

Acquisition of tax equity can be more costly than other financing approaches. It can require due 

diligence from lawyers, engineers, accountants, environmental consultants, and other specialists 

specific to the relevant risks. Arranging for tax equity is generally recognized as having high 

transaction costs. Sheldon Kimber, chief financial officer of Recurrent Energy, explained that the 

costs of securing tax equity capital can eat up 15%–40% of the ITC, benefitting large financial 

institutions and law firms rather than the renewable energy projects the program was designed 

for.

49 In contrast, the §1603 grant requires less time to apply for, is awarded faster, and is 

provided in the form of cash, thus funneling the benefits to the developer and the project more 

directly.

In October 2011, US PREF compared the costs of accessing tax equity capital to costs of 

obtaining a §1603 Program award for large-scale (5–100 MW) projects in Table 3.50,51

Table 3. Estimated Costs to Acquire Tax Equity and §1603 Program Awards

Category

Cost to Sponsor 

of Tax Equity

Cost to Sponsor 

of §1603 Award52

Attestation n/a $75,000–$150,000

Legal Documentation/Tax Opinion $350,000 None

Independent Engineer $150,000 None 

Syndication Fees (may or may not be 

needed, depending on project size)

0.5% of tax equity amount (for 

large projects)

None

Cost of Capital During Construction 

(pending receipt of a §1603 award)

In absence of a §1603 award, 

funds provided by tax equity 

investor, at investor’s equity 

rate of return

Funds provided by 

construction lender at debt 

rates (est. 3%–5% per 

year) 

Source: US PREF (2011)

These initial costs also do not take into account the requisite sharing of ongoing cash flows and 

residual value of the projects required for tax equity partnerships. With a §1603 Program award, 

a developer has the option of retaining all of the ownership of the project assets, cash flows, and 

residual value. In contrast, participation by tax equity investors by definition involves some 

sharing of ongoing cash flows and residual value, with the percentage varying by the financing 

structure employed.53

 49 Mendelsohn, M. “So, Why are Treasury Grants so Popular? Two Words: Transaction Costs.” NREL.

https://financere.nrel.gov/finance/content/treasury-cash-grant-transaction-costs. Accessed November 29, 2011. 50 “Tax Equity, Tax Credits, and Alternatives to Spur Clean Energy Financing,” U.S. Partnership for Renewable 

Energy Finance. http://uspref.org/white-papers. Accessed October 30, 2011. 51 Eck, C. Email, 13 February 2012. 52 The Treasury Department requires professional accounting reports for larger projects. See “1603 Program: 

Payments for Specified Energy Property in Lieu of Tax Credits.” 

http://www.treasury.gov/initiatives/recovery/Pages/1603.aspx. Accessed May 22, 2012. 53 Mendelsohn , M.; Kreycik C. Federal and State Structures to Support Financing Utility-Scale Solar Projects and 

the Business Models Designed to Utilize Them. NREL. April 2012.
21

Importantly, the transaction cost of raising tax equity is independent of deal size. The legal and 

engineering costs to evaluate the project and establish the associated partnership, lease, or other 

financial structure are relevant for a tax equity investment of $25 million or $250 million. Tax 

equity investors prefer to spread their due diligence costs over larger investments.

2.7 Limited Secondary Market for Tax Equity

Financial markets have a variety of techniques to spread and reallocate risk to improve access to 

capital for an asset or pool of assets. These securitization and syndication techniques can span 

the bundling and reselling of individual homes and auto loans into secondary markets to the 

bundling of real estate assets through a real estate investment trust and mineral extraction assets 

through a master limited partnership. In general, these techniques allow asset owners the 

opportunity to procure, trade, and sell positions in the assets and companies of interest, lowering 

their risk and greatly expanding the potential sources of capital investment to passive owners 

such as pension funds, mutual funds, and small investors.

Such benefits, however, are only minimally available to renewable power projects involving tax 

equity, at least during the early years of the projects. The ITC is available only to the owner of a 

project on the first day of commercial operations (i.e., the original owner).

54 Claiming the ITC

negates the ability of the original owner to subsequently sell or transfer a project during the 

initial five-year period without risking “recapture” of credits by the IRS. This constraint limits 

both sales to another single party as well as secondary securitizations to multiple investors. In 

contrast, recipients of §1603 payments can sell the project during the first five years without 

triggering recapture as long as the sale is to an eligible entity and the project continues to 

produce energy. Finally, current rules do not allow master limited partnerships to invest in

renewable power projects.

It is easier to sell a project receiving the PTC, since the credits are awarded based on actual 

production to the project owner at the time of the production. Nevertheless, no liquid market

exists.

 54 Leasing structures allow for a limited 90-day window after commercial operations to complete the financing 

operation.
22

3 §1603 Treasury Grant Program

3.1 Background

Pursuant to § 1603 of the American Recovery and Reinvestment Act of 2009, the federal 

government temporarily enabled taxpayers otherwise eligible for the PTC or ITC to elect to 

receive a cash payment in lieu of the PTC or ITC (i.e., a grant).

55 Separately, the Recovery Act 

enabled entities qualifying for the PTC to make an irrevocable election to receive the ITC 

instead. As measured by the volume of activity, the §1603 Program has had a dramatic impact 

upon renewable power development. Unlike the use of the PTC or ITC, the Treasury Department 

has provided metrics on the use of the §1603 Program. Through May 8, 2012, the §1603

Program had awarded $11.6 billion to over 37,700 projects.

56

Figure 6. §1603 Program total funding ($millions) Figure 7. §1603 Program total projects awarded

Source: Adapted from the U.S. Department of the Treasury

Assuming §1603 awards equal 30% of total project costs, the program has supported, up through 

May 8, 2012, $38.6 billion in total investments. These projects have added 16.9 GW of new 

installed capacity, which is expected to produce 43,500 GWh annually.

57 A wide range of 

technologies have received cash awards under the program including geothermal (92 projects), 

biomass (63 projects), as well as hydro, fuel cell, and other technologies (176 projects

combined).

Projects in all 50 of the U.S. states, Washington, D.C., and Puerto Rico have received §1603

Program awards. Eight states have received at least $350 million, with the largest funding 

amounts going to projects in Texas, California, Washington State, Oregon, and Illinois. Eight

states have had at least 550 projects awarded.

 55 §1603 was written under Division B of the Recovery Act, as amended. 56 “Overview and Status Update of the §1603 Program.” U.S. Treasury, May 8, 2012. 

http://www.treasury.gov/initiatives/recovery/Documents/Status%20overview.pdf. (forthcoming). 57 U.S. Treasury. (2012), op cit.
23

Figure 8. §1603 projects awarded by state Figure 9. §1603 dollars awarded by state

While the §1603 Program expired at the end of 2011, program awards will continue for projects 

that began construction in 2011 or earlier. The §1603 Program will continue to pay out grants for 

such qualifying projects as long as the project is completed by the time the ITC expires (2012 for 

wind, 2016 for solar).58

3.2 Program Benefits

Although the §1603 Program provides the same level of support as the ITC—30% of eligible 

capital costs—industry members describe the program as providing an array of benefits relevant 

to renewable energy project developers. In general, the §1603 Program is considered to have 

sped project development and lowered associated financing costs. For example, interviewees 

offered the following list of benefits:

• The §1603 award is typically paid sooner than the benefits of the ITC can be realized.

• All projects can use cash, but not all projects or their developers can use the ITC.

• §1603 awards have made it possible for some projects to be financed with no tax 

equity, speeding the development process.

• A §1603 award eliminates the need for private capital for that portion of the project 

costs and thereby stretches the existing supply of tax equity capital.

• The §1603 Program reduces barrier entry to first-time developers, as tax equity is 

particularly difficult to raise for new entrants to the field, thus increasing competition 

in the marketplace.

• The §1603 Program supports small projects better than the ITC as these projects, 

unless incorporated in a large portfolio, generally cannot attract tax equity due to high 

due diligence expenses incurred.

 58 Department of Treasury offers two methods by which a project may be defined as having begun construction, 

referred to as the “physical work” method or “5% of costs” method. See 

www.treasury.gov/initiatives/recovery/Pages/1603.aspx.
24

• As §1603 allows a project to avoid tax equity investment, debt is easier to raise as 

inter-creditor issues and associated transaction costs are mitigated. In contrast, the 

required yield on tax equity increases with debt, sometimes negating the normally

positive effect of debt on project return.

59

3.2.1 Flexibility

The Treasury grant option has sparked variations in financing structures. The ability to assign the 

payment has enabled developers to use the grant to pay for a portion of the project costs, rather 

than just treat the credit as a component of the returns to the tax investor. In such cases, vendor 

financing or construction loans can bridge the timing gap between the incurrence of project costs 

and the Treasury’s payment of the grant. James Duffy, a partner handling tax credit finance and 

syndication matters with the law firm of Nixon Peabody LLP, notes that this ability to assign has 

fostered use of leasing structures such as inverted “pass-through” leases that enable developers to 

maintain more control over their projects after the tax benefits have been utilized.60

Some developers have structured the tax equity investment to have the tax equity investor 

provide de facto bridge financing for the amount of the projected Treasury grant, thereby 

reducing the amount of or the need for third-party construction financing. There can still be a 

benefit in reduced transaction costs for these projects because investors view the §1603 award as 

relatively immune from operational risks.

In essence, the §1603 Program has provided a significant benefit by stretching the supply of 

traditional tax equity, thereby enabling the build-out of renewables. Some project developers 

have opted out of using tax investors altogether. Instead, they have relied upon the §1603 grant, 

their own equity capital, and bank loans to finance their projects and have retained and rolled 

forward the depreciation benefits to reduce the project’s tax obligations for an extended period. 

Tapping the Treasury grant has not proved to be the best course for all projects. For example, 

investors in wind projects with low capital costs and high capacity factors can find it more 

rewarding to use the PTC in lieu of the Treasury grant.

61

3.2.2 Speed

§1603 Program awards have a speed advantage over the ITC in two ways: (1) the speed to apply 

for a §1603 grant versus the time necessary to arrange for tax equity (for those who cannot 

monetize the tax benefits internally) and (2) the payout of the incentive.

First, the §1603 Program application process is straightforward and requires modest developer 

resources. In contrast, arranging third-party tax equity can be a very time-consuming process 

over several months requiring extensive negotiations between the developer and the tax equity 

investor. According to Adam Kobos, new tax equity financings (involving either entities who 

have not worked together before or perhaps a financial structure new to their relationship) could

 59 Tax equity investors willing to invest in transactions with project-level debt currently require a premium of 725 

basis points (or 7.25%) over the cost of their tax equity for investments without project-level debt. (“State of the Tax 

Equity Market.” Chadbourne & Parke, op cit). This compares with earlier premiums of 250–300 basis points seen in 

transactions before 2008. 60 Duffy, J. Personal communication, 14 November 2011. 61 See Bolinger, M.; Wiser, R.; Cory, K.; James, T. PTC, ITC, or Cash Grant? An Analysis of the Choice Facing 

Renewable Power Projects in the United States. LBNL-1642E. Berkeley, CA: Lawrence Berkeley National 

Laboratory, March 2009.
25

require up to 6–9 months to conduct the relevant due diligence and execute the necessary 

documentation.

Second, the Treasury’s goal of paying the grants within 60 days after application submittal or the 

date the property is placed in service, whichever is later, allows for the quicker repayment of any 

creditors associated with project development or construction.62 In contrast, the ITC benefit is 

realized only when the investor pays its taxes (typically quarterly for large financial institutions).

Accordingly, the lag time until the recoupment of the tax credit may be significantly longer than 

the 60-day turnaround promised under the Treasury payment.

In addition, the award payments are made irrespective of taxable income. In contrast, recovery of 

the ITC is tied to the availability of taxable income. Combined with accelerated depreciation, this 

may result in a sizable timing benefit. Under the ITC, it may take several tax payment periods to 

fully utilize the tax benefits, thus reducing the present value and hence overall benefit of the 

investment. As a result, it may reduce the effectiveness of the ITC as an inducement to private 

investment.

3.2.3 Lower Transaction Costs

As noted by US PREF, obtaining a §1603 Program grant, especially for smaller projects, is 

generally a low-cost exercise of submitting specific forms. A small amount of accounting 

assistance is required for larger projects. There are no extended due diligence or contract 

negotiation costs by a third-party investor. On the other hand, the transaction costs of monetizing 

the ITC can be substantial.

Adam Kobos of Stoel Rives notes that even where developers seek both the Treasury grant and 

third-party tax equity capital to monetize the depreciation benefits, the §1603 Program still can 

reduce due diligence costs for those transactions where the financing structure conveys mostly 

tax benefits with little cash flow to the tax investor and the operational risk of the low cash flow 

is acceptable.

3.2.4 Indirectly Supports Projects by Non-Profits and Communities

In a January 2010 LBNL report, Bolinger describes several ancillary benefits of the §1603

Program for community-scale projects.63 Direct use of the tax benefits associated with traditional 

tax equity financing can only be made by tax-paying entities with sufficient taxable income, thus 

restricting use by non-profit enterprises and community-based groups. 

By contrast, although non-profits are not directly eligible for a §1603 award, the award can be 

used by typically smaller developers of community wind and solar projects to monetize the tax 

benefit. Importantly, a §1603 award can make it easier to secure the remaining capital from 

fewer individual investors, following Securities & Exchange Commission securities registration 

requirements that limit the breadth of such solicitations, and thus, improve non-profits’ abilities

to develop renewable energy facilities.

 62 See “U.S. Department of Treasury - Renewable Energy Grants.” DSIRE. 

http://dsireusa.org/incentives/incentive.cfm?Incentive_Code=US53F. Accessed February 28, 2012. 63 Bolinger, M. Revealing the Hidden Value that the Federal Investment Tax Credit and Treasury Cash Grant 

Provide To Community Wind Projects. LBNL-2909E. Berkely, CA: Lawrence Berkeley National Laboratory, 

January 2010. http://eetd.lbl.gov/EA/EMP/reports/lbnl-2909e.pdf. Accessed September 12, 2011.
26

3.2.5 Supports Innovative Technologies, Smaller Developers, and New Entrants

The §1603 Program has been especially beneficial to smaller developers and manufacturers of 

“innovative” technologies. For example, as of February 21, 2012, the §1603 Program awarded 

$18.9 million to small hydro and marine projects and $54.4 million to fuel cell projects. 

Although no one can say definitively whether these technologies would have been able to find 

tax equity sufficient to finance their projects without the §1603 Program, our interviewees

generally agreed that smaller projects and ones using innovative technologies find it difficult to 

attract investment from the established tax equity sources.

Smaller developers without a deep project portfolio benefitted significantly from the §1603 

Program. As of February 21, 2012, over 5,000 different entities were awarded §1603 grants. 

Although company size is difficult to gauge in the limited information made public by the 

Department of Treasury, the list indicates an extraordinary variety in awardees, ranging from 

Hassrick Farm LLC of Wisconsin receiving $2,340 for a solar electricity installation to Rio 

Grande Valley Sugar Growers, Inc. of Texas receiving $10.2 million for an open loop or 

cellulosic biomass facility.

Further, the §1603 Program reduces barrier to entry for first-time developers. Tax equity is 

virtually unavailable to development entities entering the marketplace, as the national-scale tax 

equity investors prefer to focus on experienced developers most likely to offer projects that can 

close quickly without unexpected complexities or delays. As §1603 awards can be obtained for a 

single small project, new entrants can acquire development experience necessary to establish a 

foothold as a going concern.

3.3 Weaknesses and Inefficiencies of Tax Subsidy Programs

The §1603 Program was conceived as a way to offset a temporary loss of availability of private 

tax equity capital. However, it is only a partial solution to alleviating the need for third-party tax 

equity. Foremost, the §1603 Program does not monetize the accelerated depreciation. Project 

developers still have to tap their own tax appetite, tap third-party sources able to make efficient 

use of these depreciation benefits, or simply forego the incentive.

Further, it retains the weakness of the underlying ITC in that non-tax-paying entities remain 

unable to own projects applying for the Treasury grant. The Treasury grant program, like the 

ITC, requires project owners to be taxpayers (but not necessarily have a tax appetite). For 

example, domestic pension funds seeking to invest in stable, long-lived assets still are essentially 

unable to invest in renewable power projects. Similarly, the §1603 Program, like the ITC,

essentially constrains project developers from tapping international sources of capital interested 

in funding U.S. renewable power projects. International institutional investors seeking passive 

investments in the U.S. market remain all but shut out from directly buying into projects.

Similar to ITC program, the §1603 award criteria focus principally on whether qualifying 

expenditures have been spent and the project has entered operations. They do not address the 

ongoing technical or overall financial viability of the projects. As a result, some awards may go 

to projects that might not otherwise have passed muster by third-party tax equity investors, either 

due to the inexperience of the developer, the immaturity of the technology, or other aspects of 

the project. While neither the ITC nor the §1603 program were established to measure the merit 
27

or risk of individual projects, merit reviews effectively are conducted by the investors and/or 

lenders that decide to provide the remaining funds.

Where the §1603 award has been used as a replacement to the PTC (traditionally used for wind 

and geothermal projects), there could be lost impetus on project quality if the award enables the 

developer to fund the project otherwise using its own capital without reliance on outside 

investors. As the PTC pays out over a 10-year period based on actual generation, it provides an 

incentive to optimize operational performance (i.e., generating the most electricity with the 

investment made). By contrast, the §1603 award—like the ITC—is received upfront regardless 

of future project performance. However, sponsor (and lender) desires to maximize cash flows 

from project operations can provide a similar discipline to develop and operate a wellperforming project.
28

4 Expected Impacts Due to §1603 Program Expiration

4.1 Small Developers May Lose Financing Ability, Causing Market Consolidation

The close of the §1603 Program is expected to have the largest impact on those renewable power 

projects and developers that had difficulty accessing the tax equity market prior to the 

commencement of the program. Smaller developers lacking a significant portfolio of projects or 

overall experience and financial strength to attract interest from a national-scale tax investor will 

likely find it harder to raise the necessary capital.64

The tax equity market’s favoring of experienced developers with large projects predates the

§1603 Program. National-scale tax equity providers often have a minimum investment threshold 

and are not able or willing to invest in projects calling for smaller amounts. Greg Rosen, vice 

president of Solar Finance for Union Bank, notes that the transaction costs of detailed due 

diligence requirements of many large tax investors simply are too high for smaller projects to 

absorb. He further notes that the time needed to review and close individual deals is largely 

independent of the project size, and that will lead to management pressure to optimize staff 

resources by focusing on larger projects.65 Increased demand for tax equity that is likely to 

follow the end of the §1603 Program would enable tax investors to be more selective.

The end of the §1603 Program poses incremental challenges for developers who are using the tax 

benefits internally to shelter the project’s own tax obligations and opting to carry forward the 

excess benefits. In part, this stems from the high amount of tax benefits that the 30% ITC can 

generate. While the economics of such projects may be able to tolerate not being able to fully 

utilize the accelerated depreciation benefit, a roll-over of excess amounts of the ITC could result 

in the lack of project viability.

The greater difficulties in sourcing tax equity following the program’s end also may spark 

consolidation in one segment of the renewable power industry. Many developers have entered

the solar sector in the last few years. The availability of the §1603 Program has been a key factor

enabling such entry through simplification of the financing process. Developers unable to find 

tax equity for their projects may be obliged to sell their projects to, or even be acquired by,

larger, better-funded industry players or risk seeing the projects stall. 

4.2 Cost of Tax Equity Could Increase

As described above, the §1603 Program provides two distinct benefits relevant to the cost of 

renewable energy. First, it reduces transaction costs. Fixed fees to arrange tax equity are 

estimated to be many times larger than the fixed fees associated with acquiring a §1603 award.

Further, the construction loan can require a significantly higher yield when the project monetizes 

the tax credits through tax equity rather than through a §1603 award. 

Second, the §1603 Program has significantly reduced the demand for tax equity, up to about 50% 

according to the US PREF survey discussed above. Some tax equity sector participants expect a 

spur in demand in tax equity with the wind-down of the §1603 Program. The shift in demand is 

 64 It may be argued that this is a benefit of §1603 program expiration, not a disbenefit, by reimposing more rigor in 

the analysis of viable projects as well as reducing the pace of tax expenditures. 

65 Rosen, G. Personal communication, 14 November 2011.
29

forecasted to cause the required tax equity yield to increase by mid 2012, although there is a 

difference in opinion on how much of an increase may occur.66 Mike Niver, former director of 

Project Finance with SolarCity, believes the demand for tax equity will increase greatly once the

§1603 Program terminates and predicts that tax equity yields will increase at least 2% and 

possibly as high as 4% (i.e., 200–400 basis points).

67

As a counterpoint, Matthew Meares, director of Project Finance at Amonix, a company 

specializing in concentrated PV technology with several utility-scale projects under 

development, notes that the size of the tax equity market for renewable energy projects pales in 

comparison to the competing markets for equipment leasing, low income housing, and “new 

markets” tax credits. A slight shift in return between these markets, according to Meares, could 

bring a substantial shift in supply. 

Other experts argued that there are other mixed stimuli in the market. First, investment in the 

low-income housing market is driven by Community Reinvestment Act (CRA) regulations and 

general comprehension of real estate assets, with which banks have considerable experience. In 

contrast, investment supply for renewable energy assets is unique as no similar CRA regulations 

apply and experience in renewable energy project investment is generally very modest among 

the nation’s lending institutions. An opposing force is the looming potential expiration of the 

PTC at the end of 2012. Experts reported that wind project developers are significantly scaling 

back development of projects not likely to enter into commercial service before the end of the 

year. Accordingly, the demand for tax equity capital to support wind projects is likely to shrink 

in 2013. Absent any other market changes affecting demand in other sectors or the sources of tax 

equity, this reduction in demand by the wind sector could result in downward price pressure on 

tax equity capital.

4.3 Differential Impact for Solar and Wind

The sunset of the §1603 Program may impact renewable technologies and market segments 

differently. GTM estimates that the wind sector will be able to weather the end of the program 

more easily than solar, all other things being equal. GTM notes that a significant portion of wind 

projects (25%) eligible for a §1603 award opt for the PTC.

Further, the larger size of utility-scale wind projects more closely fits the desired project profile 

of third-party tax investors, making it easier to win financing. That is, major tax equity investors

slightly prefer the PTC, with its 10-year stream of credits, over the single year of the ITC as a 

more efficient use of their limited tax appetite and due diligence resources.

Among solar projects, interviewed experts had mixed expectations. Utility-scale solar projects 

may enjoy an advantage over distributed systems in raising tax equity investors—provided 

technology risk is low—as they represent larger investments tax investors seek. In contrast, some 

experts perceived smaller solar projects as more eligible to raise tax equity to the extent these 

projects can be aggregated by a single developer or through some process of securitization (such 

as mortgage backed securities or real estate investment trusts). However, without a means to 

 66 “State of the Tax Equity Market.” Chadbourne & Parke, op cit. 67 Niver, M. Email, 3 June 2011.
30

effectively aggregate projects, developers of small-scale solar projects will likely find it difficult 

to raise tax equity.

4.4 Funding Challenges for Innovative Technologies 

The impact of §1603 Program expiration is likely to go beyond simply increases in tax equity 

yields. According to Meares, the tax equity market is binary. The strongest projects (i.e., very 

mature developers, mature technologies, and power purchasers with excellent credit) will 

continue to be able to attract tax equity.68 In contrast, projects by second-tier developers or 

utilizing newer technologies (e.g., marine hydro-kinetic and fuel cells) may watch from the 

sidelines.

Projects using new and untested technologies or newer manufacturers could be challenged in 

sourcing tax equity capital for their projects. Tax equity investors have a strong preference for

commercially proven technologies and have been unwilling to assume either the risk of poor

performance from the technology deployed or the financial risk (e.g., inability to honor 

warranties) associated with weak manufacturer balance sheets.

The situation could result in a further impediment to innovation and manufacturing 

competitiveness. Well-respected and financially strong manufacturers have the market credibility 

and financial wherewithal to introduce a product offering newer, innovative features. Smaller, 

newer, and/or less well-known manufacturing firms generally have not had such capabilities. Tax 

equity investors generally view the latter companies’ products (and their warranties) as untested 

and risky. Even where such manufacturers have been able to tap state-backed debt financing for 

showcase projects using their technologies, tax equity investors have preferred to focus their 

attention elsewhere.

4.5 Impact on Cost of Renewable Power

The direct financial impact of an end of the §1603 Program on the cost of renewable power is 

uncertain. If tax equity yields increase significantly, as some financial leaders predict, it is 

reasonable to assume an increase in the cost of renewable energy from projects exposed to such 

market changes. To comprehend the impact of the predicted increases in required tax equity 

yields on generation cost, an analysis was conducted using NREL’s System Advisor Model 

(SAM). To simplify the effort, the evaluation was conducted on a single generic utility-scale 

(20 MW) PV system in Phoenix, Arizona. Although the analysis is limited in scope, the results 

are illuminating.

Using SAM’s capability to assess advanced financial structures, an analysis was conducted on 

both all-equity project structures and levered project structures (i.e., those with project-level 

debt). For the all-equity structures, a 200 basis point increase in tax equity yields increases the 

real levelized cost of energy (LCOE, a common metric representing the cost of energy over the 

life of the contract) by about 29% from $0.177/kWh to $0.228/kWh (assuming $3.70/watt

installed for a Phoenix-based system with single-axis tracking). Leveraged project structures 

fared far better with only a 4% increase in the LCOE. However, acquiring project-level debt is a 

 68 Meares, M. Email, Amonix, 20 June 2011.
31

difficult and extensive process and unavailable for many projects.69 This analysis suggests an 

increased cost of tax equity with the end of the §1603 Program that could constrain certain power 

projects, particularly those unable to attract debt. Developers would be happy to pass on the 

incremental cost of securing tax equity in the form of higher power prices. The current soft 

economic conditions, however, have shifted the price-setting power even more to off-takers. Flat 

load growth and reduced natural gas prices have enabled most utilities to slow their renewable 

power purchases and hold down prices under solicitations for new power purchase agreements. 

In states such as California where RPS requirements are increasing, the negotiating balance of 

power is more nuanced. Similarly, customers for distributed solar and other renewable power 

projects are reluctant to pay premiums for renewable power. The ultimate ability of developers to 

secure higher contract prices for their power to offset higher financing costs remains uncertain. 

 69 Mendelsohn, M.; et al. The Impact of Financial Structure on the Cost of Utility-Scale Solar. NREL, 2012. The 

analysis conducted in this report was not meant to be representative of all projects. Different project structures or 

investment terms may yield unique changes in LCOE. 
32

5 Conclusion

In its short life, the §1603 Program has supported significant deployment of new renewable 

power capacity. While impacts associated with program termination are highly uncertain, 

industry experts predict projects implemented by smaller developers and those utilizing newer 

technologies may have difficulty in raising financial capital. Even for those entities able to attract 

tax equity, renewable energy facilities may be more expensive to develop due to increasing 

transaction costs and potentially higher required yields in the third-party tax equity market. Over 

time, the incremental cost to obtain third-party tax equity could increase the cost of renewable 

power if additional supplies of tax benefit monetization capital are not attracted to the renewable 

power market or if offsetting capital cost savings are not achieved. Forthcoming analysis will 

evaluate the impact on renewable energy project costs associated with financing structures and 

terms after §1603 Program expiration.