The renewable energy field is currently stifled because many renewable energy developments require tax equity investors to provide additional funds to get the projects off the ground and running. The Tax Code provides credits to incentivize investors to invest. Currently, the Investment Tax Credit (“ITC”) is the only available credit remaining for renewable projects. Tax credits are a step in the right direction to encourage renewable investment; however, the credits are limited in application, mostly to large financial institutions. Moreover, investing into one specific renewable energy project can be risky because there is no assurance that the development will yield a cash flow or be placed in service on time to receive the expected credit amount. Additionally, investing directly on-site into a renewable energy project is mostly accomplished for the purpose of receiving a credit to offset taxes from passive taxable income. This purpose may not meet the needs of many investors. Instead of a tax credit, other investors may want some type of rate of return, either through dividends, stock appreciation or some other method.
To remedy these issues, the legislature and the IRS should focus on alternative methods to expand renewable energy investment. First, the government should continue to put pressure on large companies (finance and other) to invest in renewable energy projects and to make renewable energy investment commitments. Second, these companies may not have an objective to receive a tax credit for investing directly on-site to a renewable project. Therefore, there needs to be alternative methods for these companies to invest. Asset-backed securities, Real Estate Investment Trusts (REITs) and Master Limited Partnership’s (MLPs) are alternative investment methods that would satisfy these companies’ investment needs. Moreover, because on-site investment is mostly limited to large institutions, these alternative investment methods open the market for smaller investors to get a piece of the pie. The smaller investor pool is untested water: it could provide for a substantial amount of renewable energy investment.
These alternative methods should be used in conjunction with the ITC because companies have varying investment objectives. Large financial institutions will still want to invest on-site to receive the credits and deductions, whereas other companies that do not have enough taxes from passive taxable income (and otherwise would not be investing in the renewable project) can invest in the securities for a rate of return. This will have the effect of increasing renewable investment and development.
