Direct pay proposals contained in the proposed Build Back Better Act promise to establish a system that would allow renewable energy developers to elect to receive ITC and PTC tax credits as a refundable credit. This would allow developers, who, under the current system, usually cannot efficiently utilize the non-refundable ITC and PTC credits due to not having sufficient tax liability to offset all of the otherwise available credits. This blog has covered the direct pay proposal in greater detail here.
Below is a conversation with Shannon Maher Bañaga, spokesperson for The Partnership for Clean Energy Investment (“PCEI”). PCEI is a diverse coalition working to unlock 21st century opportunities, unleash economic growth, and deliver on climate and clean energy goals by advocating for a better system of clean energy financing that includes 100% direct pay.
Q: Tell us a bit about PCEI.
A: PCEI is a broad-based coalition of stakeholders that are united in the solitary goal of advocating for 100% direct pay. Our members include think-tanks, developers, utilities, and other NGOs.
Q: What would you like people to know about direct pay?
A: It is important to remember that it is an alternative to the current tax equity financing system that would allow clean energy tax credits to be used more efficiently and expedite clean energy investment. Direct pay is a tool that would put those tax credit funds directly into action, improving our power system in the way we think Congress originally intended.
Also, this is not intended to be a knock-on tax equity investors or the current tax equity financing system. The current tax equity financing system helped finance a lot of renewable projects, but there are some inefficiencies in that system. That is where we see direct pay fitting in, addressing those inefficiencies by helping finance projects that are having a hard time finding tax equity investors. Typically, tax equity tends to be wary of newer technologies and we see Congress pushing to incentivize such newer technologies, such as hydrogen and carbon capture and sequestration. So, direct pay can be a great tool that could help bring these newer technologies to market and help ensure we have a diversified clean energy stream. Ultimately, even projects that would qualify for direct pay may end up choosing to use tax equity financing. So, we just see direct pay as another tool in the toolbox helping us achieve our clean energy goals.
It is also important to remember that there is a significant backlog of projects looking for tax equity financing. There was a Bloomberg NEF report from a year ago that found that something like 60% of solar projects and almost 70% of wind projects were held up in 2020 by the inability to find tax equity financing. Therefore, direct pay would make a huge difference towards bringing these shovel-ready projects to fruition quite quickly without adding additional red-tape or administrative complexities.
Q: Are there any common misconceptions that you run into about direct pay?
A: One is that direct pay is just a new version of the Section 1603 program [ed note: a program enacted as a part of the American Recovery and Reinvestment Tax Act of 2009 where the Department of Treasury made payments in lieu of ITCs, to eligible applicants who were required to submit a detailed application in order to receive the payments]. There were a lot of problems with the Section 1603 program that went along with the due diligence and oversight performed by the bureaucratic regime created to run the Section 1603 program. Direct pay does not create such a bureaucratic regime and would be much more efficient.
Q: What do you think about the current direct pay proposal? Do you advocate for any changes?
A: We are supportive of the House passed version. The most important thing for us is for direct pay to be established and to be predictable. Predictability is key if companies are going to be able to use direct pay as a tool for financing renewable energy projects. One-year extender bills just don’t give companies the certainty they need to bring projects on-line expeditiously. We also think it is important to retain the current 100% direct pay proposal. A few years ago, people were talking about only 85% of the applicable credit being paid out through direct pay, and that doesn’t get our country to where it needs to be in terms of clean energy investment and steel in the ground.
Q: Shifting from substance to inside baseball, what are your thoughts on the practicalities of direct pay becoming law?
A: I’ve been in Washington for over 20 years, so, while optimism isn’t necessarily my strong suit, I still remain optimistic here. Senator Manchin has signaled many times that he is fairly good with the climate and tax provisions of the Build Back Better Act, but as the portfolio of BBB possibilities has narrowed, so has his focus on direct pay. Direct pay is not a blank check to those building clean energy infrastructure. It’s a more efficient monetization of the tax credits Congress has granted. Without direct pay, a good chunk of the value of the tax credit goes to the financial markets rather than clean energy development itself. Is this what Congress envisioned? We don’t think so.
It’s important to note that over the past year, Senator Manchin has indicated his support for the use of direct pay for nascent technologies, such as hydrogen and carbon capture and sequestration, which could benefit his home state. A lot of states could benefit from the use of direct pay for clean energy investment, no matter the fuel or technology used and, more importantly, the jobs that come with it.
Obviously, there is a lot going on in the world right now and the war in Ukraine has taken up a lot of the oxygen in the Senate, but this reconciliation window shuts on September 30th. For our part, we are absolutely focused trying to support the inclusion of 100% direct pay in whatever form it comes through.
We also don’t expect a lot of Republican support, given the dynamics of the reconciliation process. So, we will need to make sure we have every Democrat on board.
Q: For the readers who are interested in this topic, do you have any recommendations for resources where people can go to dive deeper?
A: There are a lot of organizations that have had things to say about this. PCEI has tried to gather all of this in once place on our website (https://www.partnershipforcleanenergyinvestment.com/). You can also follow PCEI on Twitter at leCleanEnergy and on LinkedIn for timely updates.
Q: Is there anything else you would like to say before we wrap up?
A: One of the things that has been interesting to me is how generally on-board tax equity investors have been with the direct pay proposal. You had Marshall Salant with Citigroup who stated in an S&P article that “there has always been a supply-demand imbalance in the tax equity market. They’ve never had enough tax equity investor dollars to supply all the good projects. ” JP Morgan has also reached out to us and expressed support and asked how they can help. I think it shows that they recognize the value of the projects that are not getting the tax equity dollars that they need – and the difference direct pay can make for our country.