Q&A: Capital stacks for investment in the US renewable energy sector


Financier Worldwide Magazine

October 2018 Issue

FW moderates a discussion on capital stacks for investment in the US renewable energy sector between Chris LeWand at FTI Consulting Inc., Brian Greene at Kirkland & Ellis LLP, Eli M. Katz at Latham & Watkins, and Lance Brasher at Skadden, Arps, Slate, Meagher & Flom LLP.

FW: Reflecting on the past 12-18 months, what do you consider to be the key investment trends that have defined the US renewable energy sector? How would you characterise the sector’s access to capital during this period, and what are the prevailing sources of this capital?

LeWand: Demand for project assets has been profound over the last 12-18 months, and the sector has experienced strong liquidity. Access to equity and debt capital remains favourable, while the tax equity market, which had stalled prior to the implementation of the tax reform, has recovered. Key trends include lower risk investors, such as pension funds, looking at the more mature end of the spectrum while those with higher risk-return profiles seek projects earlier in the development cycle. There is also a continued appetite for renewable energy platforms. Foreign players, especially from Europe, have become increasingly active in the sector. This has been partially driven by the low cost of capital and the relatively lower sector returns available in Europe. Another trend to watch is the increased interest from Big Oil in the renewables sector, with BP’s strategic partnership with Lightsource, Shell’s investment in Silicon Ranch and Exxon’s recently announced solar and wind request for proposal (RFP) in Texas.

Katz: The renewable energy sector in the US continues to attract waves of capital from both domestic and international capital providers. The industry is showing strength across almost all segments, including wind and solar, both utility scale distributed, as well as some new asset classes, such as energy storage and offshore wind. Many projects have moved away from the typical utility revenue contracts to corporate power purchase agreements (PPAs), all manner of commodity hedges and various insurance-like products that provide some certainty on power availability and price. Relatively clear guidelines from the Internal Revenue Service (IRS) on the tax credit step-downs have contributed enough investment certainty to allow projects to obtain development and financing capital. The project finance debt markets are heavily oversubscribed, pushing down yields for traditional project finance banks and a general loosening of deal terms. A range of new financing mechanisms, such as term loan B, mezzanine and leveraged loan style deals, securitisations, and equity and debt warehouse products continue to push the frontier as sponsors search for the optimal way to raise capital for assets in this maturing sector. The tax equity market remains well supplied with a number of new investors entering the market, a growing trend of tax equity syndicators filling financing gaps and many of the historical tax equity providers pushing hard to fill the investment quotas. Sponsors are enjoying one of the best capital raising environments in recent memory. The M&A market for US renewable energy remains robust, with a number of major platforms and assets trading hands. New market entrants continue to push the envelope on price and terms as they seek to gain a foothold in the market. Energy storage and offshore wind have begun to stir as the first wave of these projects approach the capital markets.

Brasher: We continue to see strong demand for renewable energy assets and large amounts of liquidity for construction, debt, tax equity, back-leverage and portfolio financings and acquisitions. We are seeing a willingness of sponsors, lenders, tax equity and investors to take on greater risk through a reliance on hedging for off-take contracts in applicable markets, rather than traditional utility PPAs and acceptance of shorter off-take contract terms. We also see more transactions being executed on a portfolio basis and sales of development project portfolios and project development platforms. The sources of capital are robust and represent both domestic and inbound sources from pension funds, insurance companies, infrastructure funds and others. We continue to see the formation of funds with increasingly direct access of investors to fund assets and non-traditional fee structures. A growing number of transactions are technology driven and focus on capitalising on trends for batteries, storage and electric vehicles. With recent RFPs, offshore wind is gaining momentum.

Greene: The renewable energy sector has remained remarkably resilient, despite uncertainty about the effects of tax reform and tariffs at the end of 2017. There are actually more tax participants in the market today than prior to the tax reform, although the percentage of tax equity in the capital stack for a typical deal is lower, due to the decreased value of tax benefits following the reduction in the corporate tax rate. There is fierce competition for deals among lenders, with spread continuing to tighten and more lenders willing to take merchant-tail risk. More institutional investors are entering into the renewable energy space due to the consistent and reliable terms of renewable energy projects, and such investors are showing increasing interest in early-stage development projects and pipelines.

Many or most assets have contracted output, low operating costs and predictable revenue and cost streams. The sustainable feature of the asset class is attractive.
— Lance Brasher

FW: What types of renewable energy projects seem to be attracting the most attention from investors?

Katz: Experienced sponsors developing well-tested technology continue to attract the most attention from investors. Utility scale wind projects and utility scale and distributed solar are the mainstays. A number of investors have historically focused on projects that have achieved notice to proceed (NTP), but as the returns compress, many have opted to invest their capital at an early stage in the development cycle or purchase development pipelines and bring projects to market. A lot more attention is now being paid to energy storage projects as they begin to gain scale and the offshore wind market in the US looms as a potential opportunity for financing in 2019.

Brasher: We are seeing more transactions being executed on a portfolio basis, with some large portfolios changing hands. In some cases, transactions are structured as portfolios because of the size of the projects, as many are smaller commercial and industrial (C&I) projects and, in other cases, the portfolio transaction presents an opportunity to manage transaction costs and allows investors to increase the size of investments. In the US, we are seeing an increasing number of regulated utilities contracting for the construction of renewable energy projects and acquiring renewable energy projects through a build-transfer model. Until recently, regulated utilities have not been significant owners of renewable energy projects due to tax-related and other reasons. Under the build-transfer model, utilities are contracting with developers to construct a project, and the project is transferred to the utility either before being placed in service or upon substantial completion.

Greene: Onshore wind and solar are now considered mature asset classes, and there continues to be strong interest from investors. Approximately 6.4 gigawatts of new wind capacity was added to the US grid in 2017 and 10.6 gigawatts of new solar capacity. Since 2015, more solar has been installed in the US than any other type of energy. Solar and onshore wind are beating new gas generation in many regions. Investors are also beginning to turn their attention toward offshore wind and energy storage. Lithium-ion storage installations could grow 55 percent year-on-year to 2022, according to GTM Research. There are at least six offshore wind projects that are in advanced stages of development and will be looking to obtain financing over the next year or so.

LeWand: Solar and onshore wind represent the majority of activity, however energy storage is gaining momentum. This is especially true where integrated with solar, though the market remains comparatively small and equipment costs high. The stage of investment in the development cycle depends on the risk/return parameters of the investor, with significant pressure on returns for mature development projects or operating assets. Investors seeking higher returns are looking at a range of options, including taking PPA risk, repowering aging wind assets, accepting early stage development risk and funding development platforms. On the storage side, the primary participants are utilities and other large, well-capitalised entities, such as independent power producers (IPPs) that view storage as an add-on to their core activities.

Experienced sponsors developing well-tested technology continue to attract the most attention from investors. Utility scale wind projects and utility scale and distributed solar are the mainstays.
— Eli M. Katz

FW: What market and policy changes are driving the flow of capital investment into renewable energy? To what extent are technology innovations raising investor interest?

Brasher: There are a number of traditional factors leading to the demand for renewable energy assets. Many or most assets have contracted output, low operating costs and predictable revenue and cost streams. The sustainable feature of the asset class is attractive. For foreign infrastructure funds looking to diversify infrastructure investments into the US, there is a shortage of transportation and other non-energy infrastructure transactions and, within the power sector, there are relatively few opportunities for distribution and transmission assets. These investors may be reluctant to invest in fossil fuel generation output which generally is not contracted, other than short-term hedging and for corporate policy reasons. Technologically, energy storage has become a topic of increasing investor interest. As significant improvements in storage capacity and cost reductions continue, the development of storage projects has accelerated. According to an Energy Information Administration report, at the end of 2017, two-thirds of the energy capacities of large-scale battery storage projects operational in the US were installed in the past three years. Energy storage can act as a generation and transmission source, in addition to its ability to alleviate load stresses. We are seeing some states emphasising and including energy storage in their electricity RFPs.

LeWand: Recent federal actions have created headwinds for the industry, most notably through the imposition of tariffs on solar cells and modules, subsequent tariffs on steel and aluminium, the threat of tariffs on solar inverters and continuing uncertainty around US trade policy. The Renewable Electricity Production Tax Credit (PTC) and the Solar Investment Tax Credit (ITC) continue to support the industry, though they are set to phase out or step-down in the intermediate term. The impending sunset on the PTC is driving record development and investment in wind, for now. In addition, on the policy front, the US Environmental Protection Agency (EPA) recently proposed the replacement of the Clean Power Plan (CPP) with the Affordable Clean Energy Rule (ACE). The latter provides lower targets for the reduction of CO2 emissions and delays coal replacement in favour of encouraging improved efficiency. The impact on the sector should be muted given the demand drivers for renewables at state, corporate and residential levels.

Greene: We expect that the Trump administration’s recent decision to replace president Obama’s CPP with the ACE will have a limited effect on the continued growth of the renewable energy market. There are new headwinds in the form of tariffs and ongoing threats of additional tariffs, but the effect of these has yet to be fully realised. Most of the solar projects financed to date have been constructed with pre-Suniva tariff panels. People instinctually think of tariffs as affecting solar because of Suniva and the prevalence of Chinese panel manufacturers, but wind projects use lots of steel, and tariffs could materially affect project costs for wind as well. The cost curve for wind and solar projects has followed a steep downward trajectory and it is possible that tariffs will either slow the pace of cost reductions or actually result in increased costs. Battery storage costs are dropping precipitously and should continue to do so for the foreseeable future. These reductions are being driven by increases in production capacity from electric vehicles and technological innovation. The levelised cost of energy for batteries is still high, but as costs continue to decline and regulatory markets adjust to compensate energy storage for the different ancillary services that it is capable of providing, the adoption of energy storage should accelerate.

FW: Is any specific legislation or regulation having a significant impact on investment levels? How have the Trump administration’s 2017 tax reforms influenced the sector’s potential for new investors?

Greene: The 2017 tax reforms have reduced the size of most tax-equity tickets, but the impact has not been as dramatic as some had feared. In particular, cash equity investors have continued to emerge in the market to help developers efficiently plug gaps in the capital stack. These investors are attracted by the long-term revenue streams from renewables projects, which are now taxed at a lower rate. Likewise, we do not expect the replacement of the CPP to result in a dramatic decrease in renewable energy investment as renewables will continue to be cost-competitive vis-à-vis coal. State policy will also continue to be a driver of the renewable energy market. In late August, the California assembly approved and the senate confirmed SB100, which would require California to generate 60 percent of its energy from carbon-free sources by 2030 and 100 percent by 2045. The bill is now awaiting signature by governor Jerry Brown, who is expected to sign. On the regulatory side, the Federal Energy Regulatory Commission (FERC) has implemented two orders, No. 841 and No. 845, that should have positive effects for the renewable energy industry and energy storage in particular. Order No. 841 requires regional transmission organisations (RTOs) and independent systems (ISOs) to remove barriers for participation of energy storage in capacity, energy and ancillary services markets. Order No. 845 directs RTOs and ISOs to revise interconnection procedures for facilities above 20 megawatts, and provides for a host of beneficial reforms that facilitate the incorporation of energy storage and make it easier for developers to evaluate and plan for interconnection costs.

LeWand: Trade tariffs are a key regulatory issue currently impacting the renewable energy industry. The tax reform was a factor in 2017; however, the actual impact of the new tax law has been limited. Tariffs and the tax reform created uncertainty, however the tariffs did not typically affect mature projects that had already procured panels. Those most heavily impacted were projects that had not locked in panel supply and had committed to aggressive PPAs. For example, both Cypress Creek and Southern Current have cancelled the development of large portfolios as a result of the tariff regime. Despite the trade environment, solar development has been healthy in 2018. On the tax equity front, while appetite among tax equity investors is strong, the decline in the overall corporate tax rate is resulting in tax equity comprising a diminished percentage of the capital stack for new financings.

Katz: The 2017 tax reform was a scary point for an industry that relies so heavily on tax subsidies, but the dust has settled and the seas are once again calm. Almost all major tax equity investors have remained active in the tax equity markets and a number of tax equity syndicators have organised to fill in some of the financing gaps. Structures have largely stayed the same with more emphasis on change in tax law risk written into the documents, but most investors and sponsors remain comfortable with the risk profile in this sector. Regulatory clarity around energy storage projects appears to be giving the markets a lift in this area and more insurance and hedging products designed to put a floor around power production are helping sponsors leverage their projects under attractive terms in both the equity and debt capital markets.

Brasher: Much of the developer and investor behaviour regarding renewable energy projects in the US is a function of the rules and deadlines related to investment tax credits and production tax credits. With both winding down, substantial efforts have been undertaken to qualify assets for safe harbours and construction commencement requirements. Beyond tax policy, energy activities are still significantly affected by energy policy at the state and federal level. Many states have been leaders in mandating the use of renewable energy through utility portfolio requirements or otherwise, and the percentage requirements for renewable energy usage continues to step up with some states, such as California and Hawaii, looking at 100 percent renewable energy sourcing. At the federal level, as the current administration considers its own power plan, a 2018 order of the FERC allows regional transmission organisations and independent system operators to revise tariff rules which will facilitate the expansion of energy storage in these markets.

There is so much competition for later-stage assets that investors are looking to how they can achieve a higher return. One way to do that is getting in earlier in the game.
— Brian Greene

FW: To what extent are investors in the sector now moving away from the traditional project finance model of constructing a capital stack for each renewable energy project?

LeWand: While project finance remains the predominant approach to the financing of renewable energy projects, an alternative approach has been for project sponsors to raise dedicated funds for investment in the sector. This approach enables the sponsor to draw on a committed pool of capital, based on a specified investment strategy over multiple projects for a defined investment period. In addition, a number of investors in the sector are taking a balance sheet approach to funding renewable energy projects. Typically, these are deals involving large corporate entities with competitive costs of capital and a high level of tax capacity, which is needed in order to put tax credits to use efficiently. Under these circumstances, financing projects at the corporate level enable the streamlining of financing and construction timelines.

Katz: The traditional project finance debt markets are heavily oversubscribed, and both banks and private equity and infrastructure funds are searching for ways to differentiate themselves. Few, if any, can provide tax equity capital, so they are left to move higher up the capital stack and find arbitrage opportunities by investing in assets that are not ‘yield-ready’. Many sponsors are closely watching the movements in capital cost between the private and public markets and looking for opportunities to re-leverage into cheaper forms of capital. Once assets are producing a relatively safe stream of yield, the best holders are likely pension funds, many of which have become direct equity investors in the sector.

Brasher: While we see a larger number of debt and tax equity financings and acquisitions being carried out on a portfolio basis, and we see the competitive aspects of the market forcing investors to bear more off-take risk, we continue to see project finance principles at the core of these transactions. We also see sponsors looking to create their own funds for investing in their renewable energy portfolios and seeking to take advantage of their proprietary deal flow. Some of this is an evolution away from publicly held yieldcos. In any case, there is an unceasing drive to obtain the lowest cost debt and equity capital sourcing.

Greene: We have seen a trend in the last year toward the financing of development projects, pipelines and even entire development companies. Examples include Ardian’s partnership with TPH to create Skyline renewables, AES and AimCo’s investment in SPower and OMERS’s purchase of Leeward. There is so much competition for later-stage assets that investors are looking to how they can achieve a higher return. One way to do that is getting in earlier in the game.

This is a highly liquid market with strong demand that will remain well served by equity investors and debt providers, albeit with the possibility of an increasing compression of returns.
— Chris LeWand

FW: With the renewable energy sector a major focus of infrastructure investment in the US, how are capital stacks likely to adapt?

Greene: The market is trending away from the traditional project finance model of projects with a 20-year utility offtake. Deals are being financed with shorter-term corporate PPAs and hedges. There are term sheets out right now with different products to help owners manage offtaker payment risk and merchant tail risk. We recently saw a solar project receive tax equity financing based on a solar revenue put, which is a form of insurance that guarantees a percentage of expected output of the solar project. For deals that do have traditional offtakes, debt service coverage ratios are decreasing and leverage increasing.

Brasher: Project sponsors continue their drive toward attracting the most competitive capital sources. Following some disappointment with the publicly held yieldco and master limited partnership (MLP) models, we are seeing a substantial effort aimed at establishing private arrangements for asset portfolios, including through the use of mezzanine debt and convertible preferred stock structures. Sponsors also wish to capitalise on their proprietary deal flow, as well as an increasing interest by pension and similar funds in making more direct investments into assets, alongside, rather than only through, traditional funds and the need for infrastructure funds to deploy large amounts of capital. With renewable energy investments seen as expensive, and returns too low for many investors, we see these and other investors looking for ways to invest with creative structures and to modify traditional fee arrangements.

LeWand: This is a highly liquid market with strong demand that will remain well served by equity investors and debt providers, albeit with the possibility of an increasing compression of returns. Another trend to note is access to mezzanine funding for development platforms. Tax equity has been the primary differentiator with regard to the capital structure for renewable energy projects in the US. With the recent reduction in the corporate tax rate, the allocation to tax equity will decrease with other sources of funding filling the gap. Moreover, as tax credits step down and are phased out, there is likely to be a transition toward a more traditional project finance structure comprised of sponsor equity and project debt. This could lead to less complex, more efficient financing structures, albeit with offsetting margin pressure from declining tax credits available for sale.

FW: Looking ahead, how do you expect investment trends to unfold in the US renewable energy sector? What issues are likely to influence the continued growth or otherwise of capital flows?

Brasher: We will see more portfolio-based transactions from a debt and tax equity financing and M&A perspective and as large investors seek to deploy substantial amounts of capital. We will also continue to see sustained efforts by sponsors to attract patient and competitive sources of capital, including through the development of ‘private yieldcos’ and proprietary funds and a greater structuring of investments having both equity and debt-like features. The nature of the renewable energy investment continues to be attractive; however, the enormous demand for renewable energy assets has led to compressed returns in this sector, causing a number of investors to shy away from renewable energy. Investment structures will continue to evolve, with the aim of satisfying the need of project sponsors to obtain the most cost-efficient capital and investors to obtain the required returns.

Katz: Load growth in the power markets in the US have been almost non-existent for the past decade or more and so renewables have grown up, largely as a replacement to fossil fuel power generation. The administration has signalled a desire to slow the retirement of coal plants which might turn into a headwind for the renewables sector. Tax policy continues to be a major driver of capital into the renewables sector. The production tax credit is scheduled to expire for projects that begin construction after 2019 and the investment tax credit for solar will begin to phase down in 2020. Many projects will be grandfathered into the tax credit regime and so the markets will need to follow and absorb these credits well into the early part of the next decade. As the tax credits decline, the sector will be adapting its capital structures, such that they look more like the oil & gas sector – perhaps with or without the help of MLPs – and project cash flows begin to occupy a more central role in the underwriting decisions of investors. Early movers with access to the cheapest form of capital, or a combination of capital sources, will retain a significant advantage.

LeWand: In the near-term, there will be a rush to complete wind projects in order to benefit from the PTC and associated safe harbour provisions. Mature development projects with safe harboured equipment will be in high demand and will command premium pricing. On the solar side, there is a longer timeline for developers to take advantage of the ITC. There will continue to be an emphasis on cost take-out by energy performance certificates (EPCs), as well as operations and maintenance (O&M), in order to offset the increased costs associated with solar tariffs. The trend toward the integration of solar with storage to optimise production and benefit from multiple revenue streams will continue to grow. With the impending expiry of tax credits for wind and the subsequent step-down in the ITC for solar, it will be critical for the levelised cost of electricity (LCOE) of these technologies to further decline. State renewable portfolio standards (RPS) will become all the more important, as will the continued growth of corporate procurement. The convergence of these factors will lead to healthy growth and accompanying capital flows based on an attractive risk-return profile.

Greene: We expect the next year to be a break-out period for offshore wind. There are projects in Maryland, New York, Massachusetts and Rhode Island that should all reach financial close in 2019. This may also be the year that energy storage enters the mainstream. Developers have said that the energy storage market feels like the solar market a decade or so ago. We are seeing many RFPs for solar that include a storage component. One developer has also stated that going forward, all of its projects in the western US will include energy storage. Finally, we expect a busy 2019 for solar and wind, as solar developers race to start construction by the end of the year to qualify their projects for a 30 percent investment tax credit and wind developers try to beat the sunset for the production tax credits. There is lot of momentum in the market with the greatest risks being tariffs or a fundamental change in overall macroeconomic conditions.


Chris LeWand is a senior managing director in FTI’s Corporate Finance Segment, clean energy practice global co-leader and a member of FTI Capital Advisors. Mr LeWand has assisted clean energy companies in many capacities, including with capital advisory needs, optimising company financial and operational structures, strategic advisory services and as interim executive. His roles have included CEO of Conergy, president of Tonopah Solar, CRO of Global Solar and transaction adviser to dozens of solar and wind companies, their investors, major banks and other capital sources. He can be contacted on +1 (303) 689 8839 or by email:

Brian Greene is a debt finance partner in the Washington, DC office of Kirkland & Ellis LLP. His practice focuses on the representation of private equity funds, institutional investors, developers and lenders in domestic and international project finance, energy and infrastructure projects. He has experience in leading renewable energy projects in both the US and throughout Latin America. He was included in Law360’s ‘2017 Rising Stars: Project Finance’ and as Euromoney PLC’s ‘2015-2016 LMG Rising Star, Project Finance’. He can be contacted on +1 (202) 879 5035 or by email:

Eli M. Katz is a partner in the New York office of Latham & Watkins and a member of the firm’s tax department. Mr Katz has extensive experience assisting clients on a wide range of complex transactions, including those in the renewable energy and financial sectors. His practice is focused on energy tax incentives, project development and financing, capital raising and deployment structures, mergers and acquisitions and leasing transactions, both internationally and in the US. He can be contacted on +1 (212) 906 1620 or by email:

Lance Brasher is global head of Skadden’s energy and infrastructure group. He is a corporate attorney whose practice focuses on M&A, financing and development transactions involving energy and infrastructure facilities in the US and around the world. Mr Brasher advises strategic investors, developers, borrowers, tax equity investors, funds, lenders and utilities in all phases of solar, wind and other renewable energy projects, gas and thermal power plants, transmission lines, electric distribution assets, LNG and gas processing facilities, natural gas pipelines, related energy companies and transportation, water infrastructure facilities and sports facilities. He can be contacted on +1 (202) 371 7402 or by email:

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