What is Renewable Energy Development?

Building Clean Energy Assets for Others

If you want to build a house, you have two choices: build it yourself, or hire a contractor to build it for you. Building it yourself can be an attractive option -- if you happen to have the experience and skill set to navigate the process. Otherwise, you're likely to hire a home builder to handle the construction. Builders differ in their approach, with some focusing on large custom homes, while real estate developers may specialize in entire neighborhoods or multi-family construction.

Likewise, with energy assets like power plants and solar systems, some contractors favor installs on single-family homes, while other energy developers build residential portfolios across many homes, or build larger scale commercial and industrial, community solar or utility scale power systems. Unlike homebuilding, very few energy assets are constructed by the user themselves -- and then, only when the user has the particular set of skills that are necessary (eg. an engineer who has extensive knowledge of grid power and municipal permitting).

This is where energy developers come in, owing to their expertise with constructing power systems and integrating them with the grid, and their access to a skilled labor force. Much like real estate development, energy development involves a complex series of tasks and interlocking variables, from site to construction to legal structure and tax implications.

As renewable energy continues to grow to meet the increasing demand for electricity over the next decade, we are likely to hear more about energy development and the key role developers play in the energy transformation to cleaner, more available and affordable power production. In the United States, tax policy provides strategic support for this transformation, helping to bring new capacity online and make it more available to users.

One bottleneck in this pipeline is that energy developers often lack both (1) sufficient funds for their capital-intensive construction projects, and (2) sufficient tax liability to take full advantage of the beneficial provisions in the Internal Revenue Code. No matter how knowledgable the energy developer, without sufficient capital and tax liability, they will be hindered in their ability to produce new power capacity, and the generous tax benefits written into the code will go unused, leaving our nation with yesterday's power supply and strained grid, rather than moving forward.

This bottleneck can be overcome by the developer partnering with a more tax-efficient, capital providing investor, known as a tax equity investor. While this person need not have specialized energy development expertise, by supplying capital and bringing higher tax liabilities to the table, the investor contributes both financial resources to accomplish the project, and the appetite to absorb the substantial tax benefits that otherwise go unused. By doing this, investors fill a vital role in the American power economy: helping our country move from an energy system originally built decades ago, towards one designed for tomorrow.

Not only does tax equity investing make the energy transformation possible, it provides investors access to an alternative asset class largely uncorrelated with public equities and debt markets. Tangible production assets built by renewable developers are expected to hold their value over the asset lifetime of 25 years, serving to hedge against inflation and economic recession. Once at-risk requirements and material participation safe harbors are met, highly favorable tax benefits of renewable energy can be appropriately allocated to investors for use on their corporate or individual tax returns.

While the renewables space is not yet well known to large numbers of advisors, the IRS has recently provided guidance sufficient to clarify transactional paths for developers and tax equity investors. Taken together with well-established partnership taxation law (as used in real estate development), we expect to see advisors implementing tax equity structures more widely over the next decade as the clean energy transformation takes place.

Visible Solar continues to cultivate productive relationships to fulfill our mission to bring clean, affordable power to low and moderate income homeowners and mobilize benefits such as tax credits to our investors who are helping to drive the most significant development in American energy since electrification.