FOR COMMUNITY BANKS, THE SUN ALSO RISES Solar Tax Credit Investments Now More Accessible By Josh Miller, CEO, KeyState Renewables For more than a decade, large financial institutions nationwide, joined by Fortune 500 giants like Apple and Google, have been the dominant players in solar investment tax credits (ITCs). Driven by federal incentives, these companies have provided funding for the largest solar projects in the country, collecting healthy returns while raising their corporate profiles as environmental/social/governance (ESG) leaders. The benefits of solar ITCs are hard to ignore. Tax credit investors funding renewable energy projects can significantly offset their federal tax liability and recognize a meaningful annual GAAP earnings benefit. From 2005 to 2020, renewable energy tax credits have fueled the explosive growth of solar and wind power production nearly 18-fold. Large corporate investors continue to focus on major, utility-scale renewable energy projects in an effort to deploy their capital at scale. However, the landscape is beginning to shift, catalyzed by higher natural gas prices and stark geopolitical realities that make the call for sustainable energy more urgent. State legislatures across the U.S. have passed renewable energy generation targets and mandates, creating a growing pipeline of midsize solar projects that must be built and financed. Community banks are a logical source of financing for these mid-size renewable projects. Solar ITCs have a notably better return profile than other tax credit investments commonly made by banks. Solar ITCs and the accelerated depreciation associated with a solar power project are fully recognized once it is built and begins producing power. This is quite different from other tax credit investments, such as new markets tax credits (NMTCs), low-income housing tax credits (LIHTCs) and historic rehabilitation tax credits (HTCs), where credits are recognized over the holding period of the investment (5, 7, 10, or 15 years). Like other tax equity investments, solar tax equity investments require complex deal structures, specialized project diligence and underwriting, and active ongoing monitoring. Specialty investment management firms like KeyState support community banks hoping to make solar tax credit (i.e., “solar tax equity”) investments by syndicating the investments across small groups of community banks. Without support, community banks may struggle to consistently identify suitable solar project investment opportunities built by qualified solar development partners. Not all solar projects are created equally, and it is critical for a community bank to properly evaluate all aspects of a solar tax equity investment. Investment in particular types of solar projects, including utility, C&I, municipal, and community solar projects, can provide stable and predictable returns. However, a community bank investor should perform considerable due diligence or partner with a firm to assist with the diligence. There are typically three stages of diligence: 1. The bank should review the return profile and GAAP model with their tax and audit firms to validate the benefits illustrated by the solar developer and the anticipated impact of the investment on the bank’s earnings profile and capital. 2. The bank should work with regulatory counsel to identify the path to approval for the investment. Solar tax equity investments are permissible for national www.coloradobankers.org 12
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