Originally posted in NRF’s Project Finance NewsWire April 2021 edition by Keith Martin.

About 15% of US solar projects will reach the end of the recapture period for investment tax credits this year, presenting opportunities for private equity and pension funds looking to buy assets and for lenders looking to do refinancings. Many US solar projects are financed in the tax equity market.

Tax equity accounts for roughly 35% of the capital stack in a typical solar project, plus or minus 5%. A sale of a project within the first five years after it is put in service will cause part of the investment tax credit claimed on the project to have to be repaid to the US Treasury. This lock-in effect makes it hard to sell such projects directly for at least five years. However, private equity and pension funds can still buy the developer interest without triggering significant recapture in cases where projects have been financed with tax equity to the extent the tax equity papers allow the developer to shed its interest during that period. The sale of the developer interest usually triggers recapture at most of only 1% of the investment tax credit claimed.

kWh Analytics expects more refinancings of large solar projects in the next few years as solar projects that were installed in the last five years start to roll off tax equity financings. Its Lendscape survey of solar project finance lenders in March found that little to none of their business in 2020 was refinancings. About 14,000 megawatts of projects were put in service in 2016. Seventy-nine percent of lenders surveyed said that their spreads on loans are currently at or below pre-COVID levels.