Catalyst with Shayle Kann - How the US climate bill will finance the energy transition [partner content]

Episode Date: October 24, 2022

In this episode, produced in partnership with CohnReznick, we explore the market implications of the Inflation Reduction Act. The Inflation Reduction Act is an incredibly important win for climate. It puts the U.S. back on the global stage as a serious climate negotiator. It puts the country within reach of a net-zero grid. And it will put hundreds of billions of dollars toward renewables, storage, carbon-capture, and hydrogen. In reality, it’s a very practical – and very complicated – tax bill. We support clean energy in America through the tax code, and this legislation builds on that framework in a big way. This episode was produced in partnership with CohnReznick and CohnReznick Capital.  CohnReznick’s Renewable Energy Industry Practice can help your business move forward by proactively addressing even your most complicated challenges and needs.  And CohnReznick Capital’s industry-leading investment banking team can help your company break through the dynamic and evolving sustainability sector by simplifying project finance, M&A, capital raising, and restructuring.

This is a branded podcast from PostScript Studios. It took almost two years of political negotiations and citizen pressure to get America's national climate bill passed. The voices dominating the public discussion included activists, scientists, academics, progressive politicians, and environmental groups, but the people implementing the bill, turning policy into actual deal flow, are not typically the pundits offering hot political takes on cable television. They're people like Brita von Osen.

So I spend about half of my time focused on project finance. The other half of what I do is more traditional investment banking, corporate M&A, project sales, bond deals, things of that nature. And people like Kayla Schultz. I help companies invest in renewable technologies by taking care of the boring accounting. Kayla is a partner at Kohn-Resnick. That's where she advises multi-billion dollar corporations that are investing in clean energy on things like technical accounting. and financial structuring. And Britta is a partner in managing director at Cohn-Resnik Capital, where she's helped

close billions of dollars worth of renewable energy projects. Both of them were watching the political drama around the Inflation Reduction Act closely, trying to figure out how it could accelerate deals or upend them. I was fairly pessimistic. I thought this was relatively dead in the water. Most of the transactions I were working on were moving forward, kind of based on the status quo, not expecting, at least in the near term, any kind of significant changes. So it was a delightful surprise that way. It certainly sent a number of deals into a bit of a frenzy where numbers had to be

rerun and offers had to be reapplied. It was a little bit of a roller coaster there. Kayla, where did you sit on the optimism versus pessimism spectrum as this bill unfolded? I would say somewhere in the middle in the beginning, after it, past the Senate, I think there was, you know, some of my clients started putting deals a little bit on pause so they could rerun the numbers. For example, I had one client that was entering into an ITC transaction, had already had most of the negotiations with the tax equity investor, and then all of a sudden they're wanting to run it in a PTC scenario, and that kind of put things on pause with that project for a while. Financial experts like Britta and Kayla are at the front lines of the

energy transition. They both sit at the table with investors and project developers making the numbers work so that clean energy can go to work for decarbonization. How does this bill supercharge the changes that we're already seeing, all the activity that you are witnessing? What do you think the outlook today for America's energy transition is compared to a world in which we didn't have the bill? Brita? I think it provides some of the groundwork and the path to truly achieve some of these aspirational goals that have been laid out, both by states and federally and globally, as far as carbon neutrality. I think without some of these incentives, that is a much tougher path to tread and a much tougher goal to achieve. So I think this really puts a realistic

path of us achieving this neutrality, which is great. Yeah, I mean, obviously there's a, there's been a large push in this country to decarbonize and that push is only getting stronger, With the passage of this bill, the renewable technologies is expected to increase by 30% or so. And it's expected to generate upwards of $300 billion of incremental investment just due to the passage of this bill. So I think this is definitely going to propel the industry forward. And it's already started to create some momentum. And I think we're going to see that continue. The Inflation Reduction Act is an incredibly important symbolic win for climate.

It puts the U.S. back on the global stage as a serious climate. climate negotiator. It puts us in reach of a net zero grid. It will put hundreds of billions of dollars toward renewables, storage, carbon capture, and hydrogen. In reality, it's a very practical and very complicated tax bill. We support clean energy in America through the tax code, and this legislation builds on that framework in a big way. So in this episode, produced in partnership with Kohn-Resnik and Kohn-Resnick Capital, Britta von Osson and Kayla Schultz breakdown what this historic tax bill means for financing the energy transition. I started our conversation by asking Kayla for an overview of what's in the tax package, and then we moved into market impact.

Sure. So other than the extension of the ITC and PTC, there's the option to elect PTC, which is the production tax credit for solar. And that's definitely exciting. And then there's the transferability provisions under which companies who generate the investment tax or production tax credit can sell those credits to companies that can utilize them. There's also some amount of direct pay, so for tax-exempt organizations, they can take the direct pay of the investment tax credit or ITC. And then for certain technologies such as carbon sequestration, those direct pay options are available for the first five years. And then, as Britta mentioned, there's adders where the ITC can be increased, basically, the percent based on if there's domestic content included in the project. to a certain extent. And then if the facilities in a designated energy community or low-income community, there's the potential for up to a, I believe, 50% ITC rate. So, Britta, how much of a shift is this compared to the current tax regime? It's a decent shift. I mean, we were seeing tax

credits slowly phasing down. So projects that were at a 22% eligibility are now potentially 50% ITC projects. I mean, that's significant in economics. That's, you know, 30%, 50%, 100% increase in value on what some of these projects are selling for. So it is really, really meaningful. I think there's still a number of questions to be answered about a handful of the newer provisions, including the adders and how do you confirm eligibility for those. But also how the transferability works, how the direct pay potentially works, factors like can you include a development fee step up and still do a transfer? So there's a number of questions structure-wise that need to get worked out in the next year. So it's a lot of work to be done still. How does this impact the tax equity market?

The investors that can take advantage of these tax credits, is there a supply demand imbalance that might be created as a result of all this new activity? So there continues to be a supply demand imbalance. The supply of tax equity is limited. What this does is extend the time frame of when tax credit investing is a viable option for a lot of these groups, which is bringing new investors into the industry. These are groups that we're looking at the window and thinking this is an investment we can do for another two, three, four years, does that make a ton of sense to do the brain damage to figure

out the complex structuring components? And now there's a much longer kind of window and view of positive investing results. Secondly, again, there is a lot of work to be done on the transferability, but ideally if this is creating a more liquid marketplace and ease of monetizing these tax credits, that opens up the investor pool significantly as well. If people aren't having to necessarily get their heads totally around the complex structuring and the complex accounting and all of these various components, at least hypothetically, and I think based on initial conversations we're having on the buy side for tax equity, that should increase the pool.

Now, demand has also skyrocketed, right, with the carbon capture, with the storage, with all of these new technologies. So I think the imbalance continues, but both demand and supply are increasing. I think it'll extend the tax equity investor pool to the extent that companies were hesitant to invest in tax equity transactions before due to the complexity. There's a lot to get your arms around when you're first investing in tax equity structures. A lot of corporations that we work with have to set up established teams, hire advisors, legal and accounting advisors, just to get their heads around the tax equity transactions.

But the transferability is a lot simpler to digest. So Britta, M&A activity has been really hot in recent years. What will the expansion of these tax credits, what does that do to the murders and acquisitions landscape? It continues to keep it hot. There's a different kind of short-term and long-term result, though. I think we are seeing long-term continue-slash-renewed interest from a variety of financial and strategic investors looking to acquire pipeline, looking to acquire platforms, and seeing the value of developing renewables or other storage or carbon capture projects in the U.S. market.

In the short term, some of the active problems. processes have been put a little bit on hold because all of the sudden values of this pipeline are potentially, you know, 30%, 50%, 100% more valuable than they were the week before this past. And that hasn't kind of trickled down and made its impact known yet on the corporate valuation side. But we absolutely anticipate an uptick in the active processes we are seeing. We are seeing upticks and really strong interest from investors. Among the many historic additions in this bill was the storage tax credit. This is something the storage industry has been pushing for for a long time.

It finally passed. What is going to happen to battery storage, energy storage generally, but battery storage in particular here in the U.S. Kayla, what does this mean for the storage market? Yeah, so the storage credit you're referring to is probably, a combination of the fact that standalone storage can now claim the investment tax credit. And then there's also a new advanced manufacturing production credit that will go into effect in 2023. And that includes some provisions for equipment manufactured for energy storage.

So I think the combination of those two credits being available is going to be a real, you know, it's going to really propel the storage industry. Obviously, intermittency and conjecture issues have been a problem, and it's only going to grow as the percentage of the overall energy generation in the country shifts towards more renewables. And I think storage is going to be the solution to that, and the introduction of these new storage credits is really going to propel that. I recently read that the 10-year market outlook for storage represents over $160 billion of investment, which, I mean, that's a lot of money. Will storage outpay solar? I'm not sure about that only time will tell, but it definitely has a better chance now with the new credits available.

So, Britta, what does this all mean for storage pipelines? So we expect to see storage pipelines continue to skyrocket. I think projections have them increasing something like three times over the next 18 months, primarily driven by markets like California and Texas. The interesting component of this is that it's both standalone storage, but but also solar plus storage, which we're seeing being an increased ask for many RFPs that utilities are putting out. It's a strong component of any community solar programs that are being rolled out throughout the country.

And so I think we're expecting to see both of these continue to make up a huge portion of that pipeline. What is the outlook for some of the other emerging sectors? So the bread and butter of the energy transition on the grid is wind, solar, and batteries. but we're going to see a significant increase in carbon capture, hydrogen, and other forms of renewable gas. Where do you expect to see additional activity? Kayla? I would say that all of these technologies are going to see a boost. So investors typically want to limit the amount of risk, and with new technologies like carbon sequestration, there's added risk.

You know, these are new technologies that haven't had the time to fully prove themselves out. And so the direct pay provisions related to carbon sequestration really offer the companies an opportunity to take those tax credits and benefit from those while giving the technology time to prove itself so that investors will be more comfortable investing in those. But, I mean, even now, there are investors that are interested in investing in these technologies. And I think, you know, with these new tax credits and the extension of tax credits, like the carbon capture credit rate is increasing pretty significantly. I think that's going to, you know, drive investor appetite. So a lot of people were surprised that the bill passed. And it sounded like

there were parties that had to put down their pencils and reassess the economics of deals. In terms of what is actually in the bill, were there any surprises that emerged for you, Britta? I mean, the passage of the bill absolutely was. was the surprise. I think back to my perfect track record of being wrong, every year I've predicted the storage standalone ITC coming through and been wrong. So that was a nice one to finally see get across the line, because I think it truly is a critical component to achieving a lot of these carbon neutral goals. So that one, I was particularly pleased to see. Kala, any surprises jump out at you in terms of what's in the bill? Yeah, I mean, definitely the passage of the bill. I think what's in

the bill at all could have been contemplated at some point, you know, before the bill had passed. But what I would say is that there could be some additional surprises down the road. There's still going to be further guidance released on, you know, what what these provisions mean. There's definitely a lot of momentum. We're getting a lot of calls and inquiries from clients trying to understand how the bill's going to impact their business. They're thinking about potential ways of entering into new transactions. So there's definitely a lot of momentum and excitement in the industry right now. Kayla Schultz, thank you so much. Thanks. It's been a pleasure. Britta Von Osen, really good to chat with you. Thanks, Stephen.

This episode was produced in partnership with the Renewable Energy Advisory Specialist, Cone Resnick and Cone Resnick Capital. Today's renewable energy industry is complex, it's evolving, and companies active in this sector face a range of finance. tax and audit issues. And with the passage of the Inflation Reduction Act, there is a lot more complexity in the market. Conn Resnick's renewable energy industry practice can help your business move forward by proactively addressing even the most complicated challenges and needs. And Con Resnick Capital's industry-leading investment banking team can help your company break through the dynamic sustainability sector by simplifying project finance, mergers and acquisitions,

capital raising, and restructuring. Find out more by following the links in the show notes.