The tax equity market as the vehicle to finance renewal energy projects may be inefficient, but it’s the best means currently available. The option to convert tax credits into cash immediately expires at the end of the year is an unwelcome development.

One financial analyst said there exists a vast untapped market for the renewable energy industry. That is the subject of a new report commissioned by the Reznick Group. Tim Kemper, renewable energy practice leader at Reznick described some of the research to me recently.

“What we’ve seen is that there have been new entrants to the tax equity market since 2009 but we still see there are a lot of conflicting perceptions about what tax equity actually is and how it works,” Kemper said.

Research firm Bloomberg New Energy Finance worked with Reznick Group to see where the market now stands and where it’s headed. Electricity demand is weak and stimulus funds are winding down. New sources of support are needed for renewable energy growth to continue.
Various studies have shown that the tax equity available to the renewable energy sphere is about $7 billion to $9 billion yearly, with only about $3.5 billion available. The gap has to be made up somehow, but where?

Kemper said the Fortune 500, with its $137 billion in tax liability is a largely untapped market. The participation of even a small number of these firms in the tax equity market for renewable energy could narrow the gap between demand and supply.

“What we see is a lot of efforts to revive the production tax credit (PTC) but not a lot of attention paid to the investment tax credit (ITC),” he said. “In our experience, Fortunes 500s are not going to be interested in the PTC because of the variability of the tax and a production that you get. With the ITC there is certainty and you have different types of investors that would come into the marketplace.”

The ITC is a one-time 30 percent credit on eligible costs; the PTC is claimed over 10 years, and annual credits are dependent on power production.

And stricter interpretations of the tax code by the IRS might provide a more familiar and investment vehicle, since the tax equity markets are well established. There’s also the uncertainty that dogs the market until Congress decides to extend the production tax credit, currently set to expire at the end of 2012.

That uncertainty has other consequences, not necessarily fixed by a quick resolution of federal government policy. Before these new sources are in place, there may be some upheaval in the renewables space.

“When the cash grants expire we believe there will be a shakeup some developers will fall off,” Kemper said. “A lot of people in the industry are dealing with what they have in their pipeline and not projecting what will be ahead for what happens when the grants expire.”

And that’s a trend worth noting in the months ahead.