New Regulations Threaten the Future of Tax Equity Investments in the Renewable Energy Sector

New Regulations Threaten the Future of Tax Equity Investments in the Renewable Energy Sector
New regulations could significantly impact tax equity investing for renewable energy developers. The renewable energy sector has recently attracted $18 billion to $20 billion through tax equity investments, with projections to grow to $50 billion in the coming years. However, impending US regulations could affect this market, which JPMorgan Chase & Co. and Bank of America Corp largely dominate.
Senior Wall Street bankers warn that new banking regulations overhauling tax-equity investing rules could impact how renewable energy developers secure project financing. The concern revolves around the perceived risk of tax-equity investments, a financing method where banks provide capital to green projects in exchange for tax credits. JPMorgan and Bank of America handle over 50% of this market’s approximately $20 billion.
Potential Changes and Bank Concerns
The plan, known as the “Basel III endgame,” is part of an international agreement to prevent a global financial crisis by increasing the capital banks must hold for specific investments, thus providing a buffer against potential losses. Currently, banks assign a 100% risk weight to tax-equity investments. The Basel III Endgame proposal would raise the risk weight for equity investments, including tax-equity investments, from 100% to 400%.
This proposed rule would quadruple the capital required for a critical funding source for solar and wind farms, making it prohibitively expensive for many banks. According to policy advisory group Capstone, some banks are already pausing their activities. If the proposal passes, it could reduce annual tax equity investments by 80-90%, as estimated by Acore. While the private credit market might eventually make up for some or all of the shortfall, this disruption could hinder the financing of many projects envisioned by the IRA.
Written by: Gia Mattu from Hazel Trade, Inc.
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