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Direct pay is altering the renewable energy investment projections

ByAdam Kowalski

Apr 13, 2021

Congress and the White House have developed a plan that offers direct payments to the US entities running renewable energy projects. The US President Joe Biden supported this proposal and came up with a $2 trillion American Jobs Plan in the Growing Energy and Efficiency Now Act (Green Act) and section 45Q carbon capture legislation (ACCESS 45Q). These acts’ success will allow the energy developers to enjoy tax credits through direct pay for their renewable energy projects.

Initially, renewable energy projects depended partly on tax equity financing, which generated investments that allowed huge corporations to enjoy tax credits for the projects. These tax credits would allow the companies to reduce the impact of tax liability. However, the pandemic changed this narrative because the energy developers are pessimistic about the tax credits and their likelihood of becoming profitable through tax equity investments.

Direct pay would help the energy developers evade tax credits utilization since it has no tax liability links. This direct pay structure would allow the developers to assume that the renewable energy projects’ tax credit is payment for tax returns filed. Some of the credits in this category include investment tax credit (ITC) or production tax credit (PTC). This decision places developers as the receivers of tax refunds since direct pay surpasses tax liability. The previous tax equity structure would absorb the tax credits’ value to the level of the tax liability. However, this new structure allows the taxpayer to feel the tax credit effect without regarding the individual’s tax liability.

Direct pay proposals place developers of renewable projects in line to receive tax credits that were promised in Section 1603 Cash Grant program of 2009. The developers won’t have to wait for approval of cash grants by the treasury to convert their tax credits into cash. Moreover, direct pay eliminates the need for various bureaucratic processes like taking the proposal to Congress to approve the grant program and allocating the necessary funds to support them.

Furthermore, direct pay is executable through the IRS procedure, just like companies usually file their returns annually. Direct pay would enable the developers of renewable energy projects to run the other projects when they can’t access tax equity financing. Finally, the strategy seems plausible since President Biden has recommended it in his American Jobs Plan and congressional legislation.

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