Tax breaks offered to investors in so-called ‘opportunity zones’ in the US may provide extra capital for renewables developers as production and investment tax credits wane, says FTI Consulting.
The opportunity zones programme, which gives tax benefits for those investing in low-income areas across America, could provide renewable energy developers with an a competitive source of capital, according to an FTI study titled ‘Are Opportunity Zones Truly an ‘Opportunity’ for Renewables’.
These zones are part of a federal programme, often used to raise cash for real estate developments.
The programme aims to boost investment to revitalise struggling areas by offering the ability to defer and eliminate up to 15% of unrealised capital gains taxes and to remove taxes on capital gains going forward for so-called ‘qualified opportunity funds’ (QOFs).
The report advises that in order to fully capitalise on the incentive, investors must act by the end of 2019 or miss out on the full 15% tax exemption.
QOFs have clear benefits for both renewables investors and developers in opportunity zones, according to FTI Consulting.
On the investor side, they offer an opportunity to defer and reduce existing and future capital gains.
For developers, they may offer access to incremental capital for projects from investors willing to invest at a competitive cost of capital driven by the tax benefits.
As renewable energy projects would typically be expected to meet the criteria required to benefit from opportunity zones, the funds may provide a welcome pool of competitive capital for developers as the production tax credit (PTC) and the investment tax credit (ITC) taper off, according to the consultancy.
FTI Consulting global clean energy practice co-leader Chris LeWand said: “While real estate is the most prevalent target of opportunity zone investments, commitments are being made to renewable energy projects as well, and these are incremental to the capital pool traditionally available.”
According to LeWand there will be a high level of demand for shovel-ready renewable energy projects, as only investments made in 2019 will benefit from the full 15% capital gains reduction.
“However, post-2019, opportunity zones will continue to offer significant benefits to investors from a capital gains deferral or avoidance perspective,” he said.
As the PTC expires and the ITC steps down in subsequent years, opportunity zones may provide a “means for certain renewable energy investors to enhance returns, given the tax incentives available,” LeWand added.
FTI Consulting notes that there are still some open questions regarding the nature of such funds, including how investors will be able to exit them and how distributions will be treated for tax purposes if they are made during the investment period.
LeWand said: “Securing these funds is, ultimately, all about realising the opportunity available. For developers with projects in opportunity zones, the funds can provide an attractive pool of capital – but only if developers take the initiative by attracting investors or even raising their own opportunity zone funds.”