The Inflation Reduction Act (IRA) was front and center two weeks ago at Novogradac's Renewable Energy conference. We entered the event with several questions - many were answered, but as we peel back the onion, even more questions emerge.
There is no doubt that the IRA will bring about a favorable investment environment across the renewables spectrum, but there is still a lot of dust that needs to settle.
Here are three things we learned:
1. Everyone is waiting for IRS guidance
Getting that guidance could take up to a year. The IRA offers investors 10 years of certainty around tax treatment, but as always, the devil is in the details. As guidance emerges from the IRS, the devils will be revealed, but it will take a long time before anything binding is issued. This bill represents the first time that workforce protections and content requirements have been attached to tax incentives. That, coupled with the sheer size and scope of the bill, lead us to believe that guidance will be slow to emerge.
2. Direct Pay and Transferability will have limitations
Direct pay is useful but is limited to a narrow set of circumstances - tribal lands and other tax-exempt entities. The main winner of direct pay is the manufacturing sector, which will be able to benefit from direct pay to stimulate working capital investment. Similarly, transferability will likely be more limited than initially thought - at least in the near term. IRS guidance will certainly help add clarity, but there remain numerous nuances to consider.
3. Up to 70% of the capital stack in tax equity!
Given the amount of tax equity now available, many are asking whether there is a place for debt in the capital stack. The answer across the conference was a resounding yes, and not just because most of the attendees were bankers. Getting to 70% tax equity requires taking advantage of every adder available, which is unrealistic. The thought does leave us with two unanswered questions:
(1) Will lenders relax their sponsor equity requirements?
(2) If lenders are seeing their ticket sizes drop in favor of tax equity, will they need to identify ways to expand their appetite or addressable market in order to deploy the same capital volume? Time and IRS guidance will likely reveal an answer.
If you have thoughts on likely impacts of the Inflation Reduction Act, reach out or leave your thoughts in the comments.
We’ll keep you posted as we learn more.