Changes in Washington are having a material impact on the solar energy industry. The Consolidated Appropriations Act, 2021 (signed into law December 2020) extended the solar investment tax credit (ITC) for 2-years. Pursuant to the new legislation, solar energy projects that commence construction by 12/31/2022 and place into service by 12/31/2025 are eligible for a 26% ITC. Furthermore, solar energy projects are eligible for a 22% ITC so long as they commence construction in 2023 and place into service by 12/31/2025.
Based on our market forecasts, Blue Rock estimates the 2-year extension will drive an additional $45B in new solar energy investments in 2024 and 2025 and will result in over $20B in new tax equity investment opportunities over those two years. In total, Blue Rock estimates the solar tax equity market between 2021-2025 to be over $55B in new tax credit investment opportunities.
In addition to the extension of the solar ITC, Blue Rock anticipates an effort in Washington to increase the corporate tax rate. Although the new administration has not yet shared their specific goals on corporate tax reform, Blue Rock thinks that Congress and the White House will push for an increase in the corporate tax rate to 28%, which would have the effect of improving tax equity investment returns.
Blue Rock estimates a corporate tax rate increase to 28% would increase returns for an average solar tax equity investment by 18%, due to the increased after-tax value of depreciation allocations. Under current tax rules, one dollar of depreciation allocated to an investor reduces their federal tax expense by twenty-one cents. If the rate increases to 28%, the after-tax value of the depreciation increases to twenty-eight cents. Investors closing transactions before an increase in the corporate rate can take advantage of the potential legislative change – these investors are locking in investment returns that have a significant upside if the corporate tax rate increases. Should the corporate rate increase, Blue Rock anticipates project sponsors would push for higher tax credit pricing so as to capture some share of the increase in value of these investment opportunities. In conclusion, investors that act before further legislative changes take effect may realize a nice bump to their returns precisely at a time when their overall tax liability would increase.