Last summer, the Office of the Comptroller of the Currency and Treasury, Board of Governors of the Federal Reserve System, and Federal Deposit Insurance Corporation together issued a Notice of Proposed Rulemaking based on the Basel Committee on Banking Regulation’s Basel III international framework developed as a result of the global financial crisis in 2007-2009.
While the draft regulations for the most part contain international standards that would apply to nearly all activities of large banks, one section particularly impacts clean energy projects. The status quo for assessing risk for tax equity is 100%. These new rules would assess that risk at 400%, the same category that private equity is placed in. Most practitioners believe this was simply a mischaracterization based on a lack of international experience with tax equity since the U.S. is the only market that uses that instrument. Tax equity, in fact, is one of the least risky financial tools, designed to not lose money and to function more like debt.
As a result of this draft rule, big banks are already starting to voice doubts as to the benefits of tax equity–which is a small part of their business, but crucial for renewable energy projects. Because of the prevalence of the tax credits in the Inflation Reduction Act, clean energy trade associations and developers are engaging with the Administration, Congress, and the regulators to try to correct for this mischaracterization. The community is hopeful a strong signal will come from the latter that can put banks at ease prior to rule finalization in 2025, given that those projects are already being negotiated with the tax equity providers.
The 38 North team has been working with our clients to advocate for these changes and we have seen positive indicators during that outreach that this issue could be corrected. Stakeholder comments, including input from Congress, will be submitted in the coming days and will provide an indication of the level of concern in the clean energy ecosystem.
More information about this issue can be found in this Latitude Media article.
Here is a more detailed background piece on the regulation and clean energy impact.