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Experts Only Podcast #98:

Understanding Direct Pay

[ With Shannon Maher Bañaga, Managing Director, Public Affairs, Energy & Natural Resources, FTI Consulting Strategic Communications & Frank DeRosa, Senior Policy Advisor, 8minute Solar Energy ]

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Transcript

Jon Powers:

Welcome to Experts Only Podcast, sponsored by CleanCapital. You can learn more at cleancapital.com. I’m your host, Jon Powers. Each week, we explore the intersection of energy, innovation and finance with leaders across the industry. Thank you so much for joining us.

Jon Powers:

Welcome back to Experts Only. I’m your host, Jon Powers. Today, we are going to talk about tax policy. One of everyone’s favorite topics, but really as many people know, tax equity is just a key tool to financing projects. And right now in Congress, there’s legislation moving not only to extend the investment tax credit, but also to implement something called Direct Pay.

Jon Powers:

Folks may not understand what Direct Pay is, so we’re going to walk through that today, and also talk about an amazing coalition that started the Partnership for Clean Energy Investment that will help us really push this forward. It’s important, I’m going to ask all our audience to take some actions at the end of this podcast, so please give it a listen, think about what you can do, go to cleancapital.com to learn more.

Jon Powers:

But we’re joined today by Shannon Bañaga, who’s the spokesman for the Partnership for Clean Energy Investment and Frank DeRosa, who’s a senior policy advisor at 8minute Energy. And as always, I’m your host Jon Powers. I hope you enjoy the conversation.

Jon Powers:

Shannon and Frank, thanks so much for joining me in Experts Only.

Shannon Maher Bañaga:

Thanks for having us.

Frank DeRosa:

Yeah, great to be here.

Jon Powers:

Really important topic today, with all the things happening in Washington. There’s a lot of motivation to really accelerate the clean energy space. And as you know, tax equity is a key tool to financing our renewable energy projects here at home. We’ll talk a lot about tax equity. We are going to talk about the efforts around Direct Pay.

Jon Powers:

But for folks that aren’t aware, the government offers tax credits and accelerated depreciation really to help push forward projects. It’s helpful to help finance these projects and it’s been a critical tool to get us to where we are today. The challenge we’re facing is many developers struggled in 2020 to find tax equity. The supply definitely ran short of the demand. Just to give you some sense, in 2020, the volume reached $17 to $18 billion up from $12 to $13 billion in 2019. And honestly it could have been much more than that.

Jon Powers:

As Frank knows and we at CleanCapital, being in the market, it’s really hard to find these projects. They’ve got to be really vanilla for tax equity investors be to be pursuing them. How do we change that and really accelerate the space? That’s what we’re going to talk through today and some of the timely proposals coming from Congress to help try to resolve this and really what you can do to help drive action, to solve it as well. So, Frank, before we get into Direct Pay, can you give some background on the current tax system, tax equity financing, and why it’s important for the solar industry?

Frank DeRosa:

Sure. Tax equity is a tranche of the capital stack of a typical utility scale or a distributed generation project along with sponsor equity, the developer and debt. The tax equity investors invest in a project to utilize the investment tax credit and the accelerated depreciation tax benefits that otherwise a sponsor equity participant, a developer, might not be able to fully utilize.

Jon Powers:

In the current tax system, why is it a constraint to, I think what many of us see is the opportunity to really grow the market?

Frank DeRosa:

Yeah, the growth of the renewable energy industry, the aggregate of the investment tax credit and the production tax credit typically used for wind has far outpaced the supply of tax equity. Tax equity is provided by a relatively small group of corporate and institutional investors. In short, Jon, the demand for equity, and in this case for tax equity, has outstripped the supply.

Jon Powers:

Yeah, absolutely. I think we’re seeing a lot of equity moving the space and you’re still lacking folks with tax appetite who really understand the investment and are willing to make the play.

Jon Powers:

For folks that don’t understand, what does it mean for projects if you don’t secure it? Likely your returns are going to be relatively tight and more importantly, that project just might not get built. What does that mean? If you’re looking at things like community solar, for instance, only a few tax equity players will play in that space and that can really handcuff the growth of what could be a pretty exciting market for many.

Jon Powers:

Shannon, in order to sort of unleash the capital needed to meet some of the ambitious climate goals and really to continue to support America as a clean energy leader, it’s not just about simplifying and streamlining the tax credits, but it’s about 100% Direct Pay. So proposals with some level of Direct Pay are a band-aid on the bigger issues and they fail to really address the root cause. What we need is a permanent fix to a broken tax equity finance system. Can you help walk us through what 100% Direct Pay option is and how it would work?

Shannon Maher Bañaga:

Absolutely. You teed it up perfectly. So Direct Pay works as an alternative to the tax equity system that puts those tax credit funds directly into action improving our power system the way Congress really intended. The tax equity system will continue to exist and thrive for those who choose to utilize it, but under Direct Pay entities that are eligible to those clean energy tax credits, such as the ITC and PTC, would receive essentially the equivalent funds directly rather than a tax credit that can’t be monetized until a later date or ever in the case of non-profits and public power.

Shannon Maher Bañaga:

As Frank explains, the clean energy projects are growing rapidly and they’re outpacing the availability of tax equity. I think a recent BloombergNEF report said that 59% of solar projects and 67% of wind projects that were scheduled to start construction in 2020 and into this year, were still in need of tax equity financing.

Jon Powers:

Can you say those numbers again one more time?

Shannon Maher Bañaga:

Yeah. So it’s 59% of solar projects and 67% of wind projects that were scheduled to start construction in 2020 and into 2021, were still in need of tax equity financing. So with the tax credit expansion, the market is getting increasingly flooded. You’ve got new proposals coming in across the clean energy spectrum: storage, hydro, biofuel, carbon capture, hydrogen, you name it. That pool is going to get increasingly flooded.

Jon Powers:

Totally agree. I think it’s great that we continue to do vanilla projects, but to really expand the market and hit our goals, we need to start going into some new verticals. Frank, why should 100% Direct Pay be a policy priority for the finance community alongside some of the other priorities being pushed?

Frank DeRosa:

Direct Pay is a vault of all of the proposals out there, the whole clean energy and climate agenda. It is the most impactful provision. To put a few additional numbers on Shannon’s report there by Bloomberg, that deficit translates, just in 2021 and 2022, to 31 gigawatts of renewable energy projects. And that translates to 220,000 jobs. Those are jobs that would not occur. These projects just can’t get financed and go into construction unless we have Direct Pay.

Frank DeRosa:

It’s the most immediate, the most impactful provision that will get us jobs and gigawatts as early as possible.

Jon Powers:

It’s important to know this is not some proposal that’s sort of coming out of a think tank and floating out there. This is actually being discussed right now on the hill, as part of the package is moving forward. Shannon, for folks that aren’t in Washington today, you hear a lot about the infrastructure bill, for instance, or people that don’t know Washington lingo, you hear about the reconciliation bill, but most people don’t know how to even translate what that means. Can you just step back for a second and walk folks through what the different sort of legislation moving through Congress looked like and where this would fit in?

Frank DeRosa:

Absolutely. It’s a complicated and messy process for sure. But what we have happening here is essentially two very different legislative processes that operate under different rules merging together into one single political battle royale, if you will. So on one hand, you’ve got the infrastructure bill, think traditional surface transportation, broadband water infrastructure, that’s moving through Congress under a traditional rules process. It received a lot of attention this summer, as everyone probably saw. It was negotiated by a bipartisan group of senators and the White House and the Senate passed that bill earlier this month in August with enough votes to overcome the Senate filibuster, which is 60 votes. That bill includes a lot of the president’s priorities, but not all of them.

Frank DeRosa:

On the other hand, you’ve got the reconciliation process, which is a privileged process whereby a simple majority of 51 can pass spending and tax measures, following the passage of a budget resolution that dictates the rules and instructs the process, if you will. I won’t even pretend to be an expert on this. I’ll leave the tough calls for my law school colleague, Miss McDonough, the Senate parliamentarian, by Direct Pay, although it enables energy infrastructure, it actually fits more squarely into the reconciliation process because it functions as a component of our tax policy. And that’s why we also saw the issue marked up in Senate Finance Committee under Chairman Wyden’s jurisdiction.

Jon Powers:

Can you talk for a second about the role that Wyden and that that committee plays in this?

Frank DeRosa:

Sure. So Senator Wyden is obviously chairman of the Senate Finance Committee, key committee of jurisdiction when it comes to tax policies. Frankly, over the last, as long as I’ve been an energy practitioner and arguably probably since the 1930s, energy policy in our country has largely been dictated through tax policies. His committee and the similar committee on the House side with ways and means, are really important in terms of laying out the energy strategy for any legislative vehicle. Earlier this summer, he actually did a markup of a number of energy items, including a Direct Pay proposal. That’s where we’re seeing a lot of the Senate momentum on this right now. We’ve got a lot of support and I’m happy to talk about this a little bit later in terms of other proposals from Senator Carper, for example, and on the House side Congressman Blumenauer. We’re pretty optimistic that Direct Pay, especially at 100%, is going to remain within the reconciliation conversation going forward.

Jon Powers:

I guess more for our audience, if you sort of step back and look at tax credits, the original solar tax credit passed in the seventies and legislation again, as part of the energy security act of the nineties, but then had an off-ramp. And then in 2016, there was a negotiation at the most senior levels that allowed the tax credits to extend again, as long as we were liable to do things like send oil overseas. This concept that’s being pushed today is more of a long-term solution to this so we’re not having to push over and over again to solve this at the end of every, what do they call it in Washington, the tax extender’s period, right?

Shannon Maher Bañaga:

Absolutely. Every December. exactly. It’s like clockwork and that’s part of the purpose here. Not necessarily talking about the duration of Direct Pay, but really offering a permanent six to this tax equity system, as you described earlier, and to really give industry some certainty moving forward. From a regulatory basis, give the financial institutions some certainty in terms of this is the direction that our country needs to go to enable the clean energy transition that we know needs to happen. Without that certainty, without this constant boomerang, if you will, of the December tax package that comes up every year, you don’t move forward in a reasonable fashion here.

Jon Powers:

Yeah, and industry groups like solar energy industry association, SIA, and others, this is on their agenda, but they’ve got a lot of things on their agenda. To really focus on this, recently there was a launch of the Partnership for Clean Energy Investment. In full disclosure, CleanCapital’s a member of it. We’re really pretty active in it, but can you talk for a second, Shannon, what is the partnership, the role of the coalition and sort of who some of the members are?

Shannon Maher Bañaga:

Absolutely. We’re very appreciative of your membership as well as Frank’s membership from 8minute Solar. The Partnership for Clean Energy Investment represents a variety of stakeholders that are committed to investing in a clean energy future. We want to deliver on the promise that the U.S. Leadership can have for clean energy investment, climate action and economic prosperity, just like Frank said with respect to jobs and coming out of the economic downturn that we’re in.

Shannon Maher Bañaga:

Our membership includes a lot of different companies, workers and thinkers that are driving that transition. We’ve got folks like Ameresco, Apex Clean Energy, Blue Horizon Energy, Blue Wave Solar, Clean Capitol, Clear Path, Colorado Solar and Storage Association, 8minute Solar Energy, National Ocean Industries Association, Novus Energy Advisors, Renewable Energy of Vermont, Third Way and Xcel Energy. The partnership is advocating essentially right now for urgent action on 100% Direct Pay, utilizing the proposals that are already being talked about in both the Senate and the House. We’re working with the administration and we’re also working alongside other key stakeholders across the clean energy value chain from project developers like yourselves to national trade associations, environmental groups, think tanks and buyers of clean energy.

Jon Powers:

Frank, why did 8minute Energy decide to join the partnership?

Frank DeRosa:

8minute Energy is a utility scale solar development company. We have about 2,500 megawatts, big, active throughout the southwest and the west. And as I said, Direct Pay at 100% is a most important policy issue for us and other like-minded members of the industry. No doubt about it. We feel like we need to get that word out and provide some education on that point. Shannon talked about the reconciliation, the infrastructure bill, the reconciliation bill, and at some point, there’s going to be in Congress a session where lots and lots of priorities, some are going to get left on the cutting room floor. Direct Pay is not only the most impactful for clean energy. Shannon mentioned Senator Carper’s bill. Senator Carper asked the joint committee on taxation to, what they call score, the expenditures under a Direct Pay provision. The taxation committee came back with a cost of $500 million. That’s million, not billion.

Jon Powers:

In a multi-trillion dollar piece of legislation.

Frank DeRosa:

Because the investment tax credit is already law, so Direct Pay is just slightly changing the timing of the expenditures.

Jon Powers:

Oh, that’s interesting. Yeah.

Shannon Maher Bañaga:

You brought up a good point in terms of the overall cost of all of this, and that’s part of the political calculus as well. What speaker Pelosi is trying to navigate politically is the Senate infrastructure package that passed was essentially only the Senate negotiating that. It involved none of the House in that negotiation. In terms of the priorities, it didn’t really address any House priorities. So a lot of moderate Democrats in the House aren’t comfortable signing onto a $3.5 trillion dollar budget bill, especially looking at the numbers in the House right now. You’ve got, I think, 220 Democrats in 212 Republicans. They’re razor thin on that. Look over to the Senate, essentially one vote can kill this thing.

Shannon Maher Bañaga:

Leadership knows in the Senate that they’re unlikely to get any Republican votes given that they need all 50 Democratic members plus the vice-president to pass it. They’re really going to have to make sure that everyone’s in line with this. And one of the things, as Frank said, which has been great to hear so far in terms of our interactions with folks on the hill is that we do have a lot of buy-in and support for 100% Direct Pay in both chambers. We’re really opportunistic and hopeful that this will succeed the political calculus band.

Jon Powers:

So Shannon, I’m going to play off something frank talked about, making sure that this doesn’t end up on the cutting room floor as we get closer to the goal line and really making sure that this piece of legislation that it falls in and gets pushed forward. For folks that are listening, whether they’re in the industry or they’re activists, what role can they play? What should they do? What actions should they take? We’re not talking about sitting your hands here. This is post Labor Day, a full sprint to get this done, and we need people to be engaged. What can they do?

Shannon Maher Bañaga:

Absolutely. The first thing I suggest is to contact us at partnershipforcleanenergyinvestment.com or on Twitter at @cleanenergy. We’re also on LinkedIn and there you can find more information and ask us questions as well if you’ve got questions about that. I would urge everyone to reach out to your member of Congress and urge them to support 100% Direct Pay as it works through the reconciliation process.

Jon Powers:

One of the things we did at CleanCapital, we actually identified we have 165 projects in 18 different states. We identified to the zip code where those projects are, so we can send letters to members telling them their systems and their districts. It’s not that hard. It takes a little bit of work. Find an intern to scrub that number and let’s get some messaging out. Now for folks that don’t have policy shops, sophisticated teams, will you guys help hold their hand on the actions they can take? What do you suggest for them?

Shannon Maher Bañaga:

Absolutely. We’re happy to help. I think the way that you laid out the outreach strategy is a great one and makes a lot of sense. I think there’s a lot of folks on the hill and other key stakeholders that are interested in this concept and have not necessarily understood all of the mechanics of it. Education is really primary here, especially with those that might be sitting on the fence. I think as we key in to those folks that are the fence sitters that are crucial votes in the Senate and the House, we want to make sure that they hear from all of their constituents with a variety of reasons behind that. You’ve got folks from, as we said, public power, you’ve got low-income and disadvantaged communities that are trying to invest in cleaner energy resources for their folks. They need to speak up and and describe how Direct Pay would enable that growth and that development.

Jon Powers:

Outstanding. Well, Frank and Shannon, thank you so much for your leadership on this issue. I think if there’s any final message you want to share with the audience, what would you say?

Frank DeRosa:

Sure. I’ll go. Tax policy is not the most glamorous or exciting discussion topic, but until we put a price on carbon, this production tax credit, is the proxy for this It’s really important. It’s essential. It’s just essential to getting to decarbonize our and meeting the climate and clean energy goals that we have.

Jon Powers:

Thank you. Shannon.

Frank DeRosa:

I think Marshall [There’s 00:21:21] recently said it best in an S&P article. There’s always been supply-demand imbalance in the tax equity market. It never had enough tax equity investor dollars to supply all the good projects. Direct Pay would present clean energy developers with a more efficient means of financing their projects. One that doesn’t rely on the financial institutions weighing out their own tax liability before engaging with developers like you all. At the end of the day, that means more projects on the ground in a timely manner. That means we’re well on our way to achieving the goals that we need to.

Jon Powers:

I couldn’t agree more and just understanding the structure. As somebody who finances projects all day, understanding the structure and the timing and the pricing of that would be monumental in accelerating the growth of the industry. Thank you so much for joining. We’ll have a link to the website from the CleanCapital website, as well as you’ll find a sister blog here that you can help educate yourself more. Please reach out to Shannon and the folks at the partnership to sign up to be members. And most importantly, take the time, reach out and talk to your member and tell them we really need Direct Pay. We have a very limited time to get this done and it’ll have a monumental effect in the industry. Thank you so much for joining.

Shannon Maher Bañaga:

Thanks for having us.

Frank DeRosa:

Thanks, Jon.

Jon Powers:

Absolutely. Thanks to our producers. Collin Young and Carly Battin and thanks to the team at the partnership and 8minute energy to help put this together. As always, you can get more episodes at cleancapital.com. Look forward to continuing the conversation.

Jon Powers:

Thanks for listening in today’s conversation. Find more episodes on cleancapital.com, iTunes or wherever you get your podcasts. If you like what you hear, be sure to subscribe and leave us a five star review. We look forward to continuing our conversation on energy, innovation and finance with you.