The Solar Investment Tax Credit Opportunity
Congress has set the Investment Tax Credit (“ITC”) for eligible solar projects at 30%. The ITC was renewed in December 2015, providing seven plus years of new runway.
Tax equity often comprises 40% – 50% of a project’s capital structure. Therefore, the tax equity investor monetizes the 30% ITC and receives other benefits and cash flows commensurate with its ownership stake.
The Tax Equity Investment
Generally, the term of the tax equity investment ranges from 6-8 years, and power purchase agreement (PPA) terms with utility off-takers range from 10-20 years.
There are four return drivers for tax equity investments in solar projects:
- The ITC,
- Depreciation associated with the asset,
- Operational cash flows over the life of the investment, and
- The exit payment to the investor when it divests its interests in the partnership and associated tax benefits.
The ITC is awarded to the investor once a project is placed into service, and due to this timing, approximately 85% of an investor’s capital outlay is returned to them in year one. This mechanic provides solar tax equity investors a great internal rate of return on their investment.
Investment returns for solar tax equity investors are often superior than other tax-advantaged investments such as LIHTC. Additionally, solar tax equity investors benefit from a shortage in the market, securing better rights and protections than comparable types of equity investments. Sol focuses on solar tax equity investments in distributed utility projects, providing our clients a diverse portfolio of projects backed by strong credit and proven performance.
How Sol Systems Can Help
Sol Systems acts as an asset manager for its institutional clients: Sol originates, underwrites, structures, funds and ultimately manages the developed portfolio of solar assets. Sol originates transactions based on criteria developed with its clients, and works collaboratively to structure transactions to achieve targets and hurdle rates.
Sol Systems has eight years of experience focusing 100% of our time and resources on distributed solar – we do only solar all of the time, and we:
- Mitigate risks within the solar asset class, whether technical or financial
- Deploy our expert teams of engineers, lawyers, and asset managers who work together to underwrite and manage each solar project
- Aggregate portfolios across multiple states, utility territories, and/or offtakers to diversify risk