S&P Looks at How the Expiration of Federal Renewable Energy Tax Credits Could Affect Utilities


 
Author: Mimi Barker
Location: New York
Date: 2012-06-20

The U.S. government offers tax credits to developers of renewable energy projects to make such alternatives more competitive with traditional power projects and, ultimately, to increase the proportion of power that clean energy sources generate. In a report published recently, Standard & Poor's Ratings Services looks at what influences the market for renewable projects, which tax incentives help finance them, and what the expiration of these incentives might mean for the U.S. utility sector.

Some renewable energy tax incentives will expire in the next few years unless Congress renews them. And the November U.S. Presidential and Congressional elections cast some doubt on that prospect—and on the extent of future federal regulation, according to the report, "The Credit Impact On U.S. Electric Utilities Of Federal Renewable Energy Tax Credits."

Sponsors of small renewable energy projects have limited taxable income if any, but large multinational corporations have plenty and they're willing to partly fund projects up front to reap tax benefits. Investors in these tax equity markets employ several different methods to finance such projects depending on the type of project.

The same principle underlies each transaction: The renewable project needs an upfront cash infusion and the equity investor provides that in exchange for an effective reduction of taxes. The U.S. Partnership for Renewable Energy Finance estimates that developers will demand between $7 billion and $10 billion in such investment during 2012.

"Renewable power projects and the utilities that use their power have benefitted from meaningful tax incentives, but this tool may soon be gone," said Standard & Poor's credit analyst Michael Ferguson. "While we don't foresee any cataclysmic shifts in credit quality, we will monitor the impact less prevalent tax incentives might have."

The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com.

 

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