Industry veterans discuss the outlook for tax equity, tax credit sales, and debt in the project finance sector for 2024. Topics include tax equity volume estimations, buying tax credits, tax equity yield stability, regulatory changes, corporate participants, debt in the market, financing green hydrogen products, and financial challenges and potential opportunities.
The tax equity volume for 2023 is expected to remain steady despite a shift towards tax credit transfer.
Tax equity volume for 2024 is expected to be stable with the growth of the tax credit transfer market potentially impacting traditional tax equity.
The cost of capital outlook for 2024 is uncertain due to various factors, including geopolitical tensions and global government deficits.
Deep dives
Tax Equity Volume for 2023 Estimated Around $20-21 Billion
The estimated tax equity volume for calendar year 2023 is around $20 to $21 billion, similar to previous years. Construction delays and multi-asset transactions contributed to the volume, with some deals involving tax credit transfer outside of traditional tax equity. The market is experiencing a shift towards tax credit transfer, which could impact traditional tax equity volume, but overall tax equity volume is expected to remain steady in the coming years.
Expectations for Tax Equity Volume in 2024
For 2024, it is expected that tax equity volume will remain fairly strong. Commitments that rolled over from previous years and continued interest from serial issuers indicate a stable tax equity volume. However, the growth of the tax credit transfer market may impact traditional tax equity volume. While some are predicting a dip in traditional tax equity, additional income from the tax credit transfer market is expected to align with the original congressional intent.
Outlook for Cost of Capital in 2024
The cost of capital outlook for 2024 is uncertain due to various factors. Economists seem unconcerned about a slight uptick in inflation rates, and the Federal Reserve aims to guide the economy through a 'soft landing.' However, geopolitical tensions and global government deficits pose potential sources of instability. Labor shortages and ongoing uncertainties in the market are expected to influence the Federal Reserve's decision on interest rates. The overall outlook for cost of capital in 2024 is murky.
Trends in Debt Financing for Projects
Debt financing in the project finance market showed strong volumes in 2023, with a prospect of continued growth in 2024. Noteworthy trends in debt financing include an increase in ESG-focused deals, such as renewable energy projects, and a rise in pre-NTP (Notice to Proceed) development finance. The market is also seeing potential opportunities in onshore manufacturing, and there may be some financial challenges faced by thermal power assets requiring refinancing or amendments to existing financing structures.
Challenges and Developments in the Tax Credit Industry
The tax credit industry experienced various challenges and developments. The implementation of Basel III regulations and the risk classification on tax equity investment pose concerns for lenders. The market remains cautious about the final rules and hopes for engagement with regulators to address potential issues. Tax credit sales and tax credit transfer markets have shown growth, but pricing and structuring remain complex. Additionally, trends indicate increased interest in standalone utility storage projects and the development of tax equity bridge loans.
Four project finance industry veterans talk about what to expect in the year ahead for tax equity, tax credit sales and debt. The four are Jack Cargas, managing director and head of tax equity origination, Bank of America, Ralph Cho, Co-CEO, Apterra Infrastructure Capital, Rubiao Song, managing director and head of energy investments, JPMorgan, and Elizabeth Waters, managing director - project finance Americas, MUFG. The moderator is Keith Martin in Washington.
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