As the renewable energy industry prepares for a low-subsidy future, the Opportunity Zones program, which provides tax benefits for those investing in low-income areas across the United States, may help provide renewable energy developers with an attractive and competitive source of capital.
This is according to a new report from the Global Clean Energy Practice at FTI Consulting, entitled Are Opportunity Zones Truly an “Opportunity” for Renewables? However, to fully capitalize on the incentive, investors must act by the end of 2019 or miss out on the full 15% tax exemption.
Opportunity Zones are part of a federal program. By offering the ability to defer and eliminate up to 15% of unrealized capital gains taxes, and to remove taxes on capital gains going forward for so-called, Qualified Opportunity Funds (QOFs), the program aims to boost investment as a way to revitalize struggling areas.QOFs have clear benefits for both investors and developers in Opportunity Zones.
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 subsidies wane.
“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,” said Chris LeWand, Global Clean Energy Practice Co-Leader at FTI Consulting. “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.”
LeWand added: “Moreover, 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.”
FTI Consulting notes that there are still some open questions regarding the nature of Opportunity Zone Funds, including how investors will be able to exit the funds and how distributions will be treated for tax purposes if they are made during the investment period.
“Securing these funds is, ultimately, all about realizing the opportunity available,” said LeWand. “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.”