• Firms such as EnCap Investments seek to help clean-energy developers make the most oftradable tax credits

Private-equity firms are beginning to tap a nascent market for clean-energy tax credits, betting on a boost to returns from helping project developers get better terms for the tradable credits.

For example, EnCap Investments, an energy-focused private-equity firm in Houston, earlier this year formed Bildmore Clean Energy. The new business backs renewable-energy projects and helps developers sell tax credits they generate. The federal government has long provided tax credits for solar and wind plants as a way to stimulate adoption of renewable energy and reduce costs.

But until recently only project investors could share the benefits from the credits. Clean-energy developers often don’t produce profits soon enough to fully use their credits, as those benefits only last so long. Instead, they have used tax-equity partnerships to lock in some of that value. In these arrangements, investors provide project capital upfront and then use their portion of the credits for the development to offset their own taxes.

Under a 2022 law, developers can now sell project credits to third-party buyers. The law also broadened the types of clean-energy projects that can generate credits, adding such things as standalone battery systems and hydrogen plants. Tax credits can offset 30% or more of a project’s cost.

“All of a sudden you could buy these credits without having to invest in a project,” said Bryen Alperin, a managing director at investment firm Foss & Co., which makes traditional tax-equity investments and now also backs projects with the aim of selling tax credits to thirdparty buyers. He added that the recent legal change opened a vast market for the credits.

“Let’s say we have a large corporation that pays a lot in taxes and they just want tax credits in the simplest way possible,” Alperin said. “We can just sell them the tax credits and they don’t need to have an actual equity ownership in the project.”

At EnCap’s Bildmore, plans call for investing $20 million to $100 million in projects per deal and deploying as much as $1 billion annually, said Chief Executive David Haug. The strategy hinges in part on convincing developers that Bildmore can help them get better terms when they trade away credits.

“We’re trying to give developers a better economic result than if they just sold the tax credits straight into the market,” he said.

Tax-credit sales were projected to total at least $7 billion last year, the first year sales could take place under the new law, according to a report by Crux Climate, a provider of systems that match tax-credit buyers and sellers.

Crux forecast such deals could reach $83 billion by 2031, citing estimates from Swiss bank Credit Suisse. In one transaction, Bank of America last year agreed to buy $580 million in wind-energy tax credits from developer Invenergy and investors. Chicago-based Invenergy is backed by asset manager Blackstone.

Traditional tax-equity investors such as Bank of America and JPMorgan Chase are expected to be large participants in the new market, but many more buyers are needed to meet demand unlocked by the new law. That is creating opportunities for private-equity firms to factor expected tax-credit sales into their clean-energy deals as the credits can help them recoup some invested capital more quickly, renewable-energy entrepreneurs and fund managers said.

These executives added that private-equity investments through joint ventures with clean-energy developers can help substantiate and increase the value of the underlying projects. As a result, the tax credits become more valuable.

“There’s still a gap between entering into a tax-equity partnership, on one hand, and just selling the credits into the market,” Bildmore’s Haug said. “We’re in that middle area.”

Blackstone has also stepped up its participation in the market. In February, the New York private-equity and credit investor said it financed a utility-scale battery project in California developed by clean energy company Arevon Energy. The deal included a commitment from investment bank Stifel Financial to buy the project’s tax credits, “eliminating the need for traditional tax-equity financing,” according to Arevon.

“Banks only have so much tax-credit appetite and the economy is not growing fast enough for their appetite to increase and absorb all the new tax-credits themselves,” Alperin said. “It requires new companies coming in.”

Prospective tax-credit buyers can insist on discounts of as much as 10% to do a deal, reducing the developer’s benefits, according to taxcredit specialists. Bildmore figures it can help sellers reduce such discounts partly by giving buyers more confidence about the quality of the credits, Haug said.

Bildmore focuses on so-called merchant projects, particularly some battery systems, that sell electricity daily into competitive power markets, making their ability to generate cash less predictable than renewable-power generators with long-term supply agreements, Haug added. The firm expects to benefit from EnCap’s experience in backing such businesses, including two energy-storage companies—Broad Reach Power and Jupiter Power—the firm sold in the past 18 months, according to Haug.

“Merchant projects have the hardest time getting bank financing and tax-equity financing,” Haug said.

San Francisco-based Foss also targets energy-storage projects in its deals. In January, Foss invested $118.5 million in the Longbow battery project near Houston, which is owned by a U.S. subsidiary of Japanese utility Tokyo Gas.

Foss invested in the project through a vehicle backed by a clean energy-focused fund, Alperin said. He declined to disclose the alternativeinvestment firm that manages the fund. Foss is in the process of selling the tax credits it acquired in the deal to another business, according to Alperin.

As the tax-credit market evolves, Foss expects to attract more private-equity firms to its funds, as well as other investors such as pension systems and insurers, Alperin added.

“Most private-equity firms have not been in the business of tax credits,” he said. “They’re either going to have to build out that expertise themselves or partner with someone like us.”

Written By: Luis Garcia ©2024 Dow Jones & Company, Inc.

• EnCap Energy Transition Fund II is focused on low carbon power infrastructure, low carbon fuels and carbon management investments.
• EnCap Energy Transition has been a dynamic provider of capital supporting the decarbonization of the energy industry since 2019.

HOUSTON--(BUSINESS WIRE)--EnCap Energy Transition (EnCap) today announced it has successfully closed EnCap Energy Transition Fund II (EETF II) with commitments of approximately $1.5 billion. EnCap’s second energy transition fund was created to invest in solutions to decarbonize the power industry, while also opportunistically investing in low carbon fuels and carbon management.

“The EnCap Energy Transition team is proud to have raised a sizeable pool of capital to continue to invest in the opportunity created by the shift to a lower-carbon energy system. We greatly appreciate the strong support from our existing investor base and are pleased to have added a number of new, high-quality investors, both domestically and internationally,” said EnCap Energy Transition Managing Partner, Jim Hughes. “Since our inception in 2019, we now manage approximately $2.7 billion of capital commitments to invest in decarbonization and are excited for the opportunities ahead of us.”

EnCap Managing Partner Jason DeLorenzo said “We are pleased EnCap has closed our second Energy Transition Fund and are proud as an organization to continue the tremendous success of the platform established in 2019. We continue to believe all sources of energy are needed to support the world’s growing energy needs and that our Energy Transition Team will build off the significant success achieved to date.”

EnCap has already made investment commitments to five portfolio companies through EETF II including Linea Energy, Parliament Solar, PowerTransitions, Arbor Renewable Gas, and Bildmore Clean Energy. EnCap also has a robust pipeline of other potential investment opportunities pursuing strategies in clean energy, energy storage, clean fuels, and carbon solutions and expects to have 8-10 portfolio companies in EETF II in total.

The second energy transition fund follows EnCap Energy Transition Fund I that had $1.2 billion of total commitments with seven material portfolio company investments and four fund realizations to date including Broad Reach Power, Jupiter Power, Triple Oak, and Paloma Solar & Wind.

Vinson & Elkins LLP served as legal counsel to EnCap on the formation of the fund.

About EnCap Investments L.P.

Since 1988, EnCap Investments has been a leading provider of growth capital to the independent sector of the U.S. energy industry. The firm has raised 25 institutional investment funds totaling approximately $41 billion and currently manages capital on behalf of more than 350 U.S. and international investors. Founded in 2019, the EnCap Energy Transition platform is led by four Managing Partners, each with 30-35 years of experience in the development and operations of clean energy and power generation. For more information, please visit www.encapinvestments.com.

Written By: Morgan Moritz © 2024 Business Wire

512-745-2575

• The EnCap Energy Transition Fund’s newest portfolio company, Bildmore, will make equity investments in IRA tax credit-eligible energy transition assets via a holdco structure.

EnCap Investments, via its EnCap Energy Transition Fund II, has formed a new portfolio company, Bildmore, to invest in what it perceives as more challenging battery storage projects. The vehicle was launched in 2022 and is targeting $2 billion.

While the exact amount of money allocated to Bildmore is unspecified, David Haug, Bildmore's chief executive, said it will comprise a nine-digit amount of seed capital.

"EnCap has been able to bring in as much capital as their portfolio companies need, historically," he told Infrastructure Investor.

Bildmore plans to execute its dual tax equity and structured equity-based transactions with a mixture of private debt, bank debt and EnCap's equity capital. The company is looking to make 10 to 15 minority investments annually, each $20 million to $100 million in size for a 15 to 20 percent stake. Projects will range from 100MW to 500MW, with a total portfolio size of anywhere from 3GW to 5GW, Haug said. The strategy will target an IRR in the mid-teens.

In many ways, this will be a typical energy transition equity investment strategy, but with one additional end goal: to increase the number of large corporations on the buy side of Inflation Reduction Act production and investment tax credits.

"Our investment is designed to make it easier for corporates to play in the tax credit market and fill in the market shortage for this particular type of financing," said Haug.

"The revenue model has shifted with energy projects post-IRA, from just monetising electrons or molecules to now including tax credit monetisation," he continued. "After the IRA passed, we asked ourselves: where are the opportunities in the market, in addition to development? Developers need to be able to monetise tax credits. And there is a shortage in the market to monetise tax credits via upfront commitments."

Indeed, the traditional tax equity market's size has been just over $20 billion in 2023. According to a survey conducted by the American Council on Renewable Energy, the market will likely need to grow to more than $50 billion by 2026 to meet post-IRA demand.

This gap in financing will be felt most by the more fringe, less straight-forward technologies that are awarded tax credits under the IRA.

"Within the additional demand beyond what the big banks can do, there will be some projects that are relatively straightforward and others that are more challenging. We will be targeting the more challenging projects - often the projects that have more merchant exposure, or projects without deep, seven-year balance sheets for future indemnities," said Haug.

"In 2024-25, we're going to see a lot more of these complicated projects, projects that have to check a lot more boxes to comply to get these tax credits. In 2023, most of the projects built already had plans in place and their tax credits were far less challenging to monetise."

Bildmore's core area of focus will be standalone battery storage.

"EnCap as a PE fund was one of the early movers in merchant batteries. Even before the energy transition fund was created. EnCap has expertise in battery development that goes back to the earliest part of utility-scale battery storage. Within that field, merchant batteries without long term contracts - another specialised area where there's a particular funding challenge - is an area of expertise," Haug explained.

Indeed, in 2019, EnCap formed Broad Reach Power alongside Apollo Infrastructure, Yorktown Partners and Mercuria Energy. Last year, the portfolio comprising 350MW of grid-scale battery assets in operation and 880MW under construction predominantly in the Electric Reliability Council of Texas market, was sold to ENGIE for $1 billion.

Written By: Isabel O'Brien ©2024 PEI Group

• EnCap Energy Transition Fund II is focused on low carbon power infrastructure, low carbon fuels and carbon management investments.
• EnCap Energy Transition has been a dynamic provider of capital supporting the decarbonization of the energy industry since 2019.

HOUSTON--(BUSINESS WIRE)--EnCap Energy Transition Fund (ETF) announced today it is launching Bildmore, a platform focused on investing in passive minority equity positions in third-party battery storage, solar, and other energy transition projects that cannot attract traditional renewable “tax equity” financing.

The 2022 Inflation Reduction Act (IRA) provides numerous incentives to targeted clean energy projects, including the ability to sell their tax credits to corporate taxpayers. The projects will require access to significant private capital from a variety of sources and forms in order to be built. Tax equity, a traditional financing source historically provided by a limited number of large banks, is in chronic short supply as a result of the IRA’s significant expansion of tax credit eligibility.

Bildmore expects to make 10 to 15 minority investments annually, initially focused on utility-scale projects and sponsors who cannot meet the traditionally narrowed requirements for tax equity but want to improve their economics beyond only transferring tax credits at a discount. ETF has a track record of backing wind and solar development and was a pioneer in investing in utility-scale battery storage with the establishment of Broad Reach Power and Jupiter Power, two of the leading US battery storage platforms.

Bildmore’s team is led by energy veteran David Haug, who has three decades of working relationships with the principals at ETF. Together they bring decades of power and energy project experience from a developer’s perspective, the key to fast transaction approval and funding. In the coming weeks, Bildmore will be announcing the addition of experienced team members from across the industry and welcoming specialists who are excited to grow in the expanded clean energy funding space.

“For IRA projects, just selling tax credits leaves developer value on the table. Tax equity is great for sponsors who can check all the boxes, but lots of projects don’t fit,” says David Haug, Bildmore’s CEO. “Bildmore will focus on the battery storage and solar projects, particularly those which have chosen to leave all or part of their energy output available for 'merchant' sale rather than be sold under long term contracts. We want to help those development teams lacking the deep balance sheets typically required by tax equity providers,” Haug said.

“We are excited to back the Bildmore team in addressing an important need in the multi-pronged efforts to decarbonize the US energy sector,” said Shawn Cumberland, one of ETF’s four managing partners.

About EnCap Investments L.P.

Since 1988, EnCap Investments has been a leading provider of growth capital to the independent sector of the U.S. energy industry. The firm has raised 25 institutional investment funds totaling approximately $41 billion and currently manages capital on behalf of more than 350 U.S. and international investors. Founded in 2019, the EnCap Energy Transition platform is led by four Managing Partners, each with 30-35 years of experience in the development and operations of clean energy and power generation. For more information, please visit www.encapinvestments.com.

Written By: Morgan Moritz © 2024 Business Wire

512-745-2575

As the shift from fossil-based energy production to renewable energy sources continues, growth in renewable energy projects under development has been staggering. But moving projects from early-stage development to commercial operations requires navigating complicated methods of financing their development, construction, and operation via structures that vary depending on project ownership, size, technology, and the regulatory environment.

Renewable energy generation assets in the U.S. are largely owned by electric utilities (for-profit, nonprofit, or publicly owned) or independent power producers. Each has different expectations for investment return and different rules governing selling electricity and raising capital. They also have differing abilities to monetize any tax benefits generated by a project.

Understanding financing options requires understanding the typical structure of a renewable project. A “project company”, a subsidiary of a project “sponsor”, will be formed to own the project assets, manage the construction, operation, and maintenance of the project (either directly, or in conjunction with contractors), and generate the revenue. In the context of a renewable electricity project, it will sell the power generated into the wholesale market or through a power purchase agreement (PPA), a long-term contract whereby power is sold at a fixed rate. PPAs provide secure, long-term revenue streams for the project company, making it attractive to lenders and investors.

While a project can be financed through a traditional corporate finance structure, where a single party owns and finances a project with its own resources and receives all the project's benefits, this is not always an available option. Project finance structures involving multiple parties, on the other hand, are popular because they spread project risk among several parties, minimize the use of a sponsor's balance sheet, protect key assets, and isolate liabilities away from the sponsor.

A typical project capital structure consists of both debt and equity, the equity being held by both the sponsor and an investor. Investors include those seeking primarily to utilize the tax benefits of the project.

Short-term and Long-term Debt

Lenders loan money for the development of a project solely based on the specific project's assets and expected future cash flows. This method of financing provides either no or limited recourse against the sponsor. In non-recourse financing, unless a guarantee is required from the lender, recourse will be limited to the assets of the project company, its revenue stream, and equity in the project company held by the sponsor.

The type of debt used depends on the needed timing of advances. Loans can be taken in the form of early- or late-stage development loans, construction loans, bridge loans, term loans, and working capital lines of credit.

Early-stage development loans. These loans are risky for lenders because they are made prior to project commercialization, and thus expensive and often only available from a lender with a well-established relationship with the sponsor.

Construction loans. These loans are made during the construction phase of the project and are intended to be short-term and rolled into permanent financing or repaid with the proceeds of longer-term financing or cash raised from equity investments. Advances are made in stages based on milestones and performance thresholds. Loans made during the construction period will be due upon completion of construction. These loans are secured by project assets. The interest rate on these loans is typically higher than loans in place during commercial operation to account for construction risk.

Late-stage development loans. These loans are similar to letter of credit facilities. They provide much needed capital to developers but command a premium to compensate the lenders for the higher risk. They can often be used to facilitate interconnection of the project or other development purposes.

Bridge loans. In the event capital is needed for preliminary work while permanent financing is being finalized or while the project is waiting to qualify for certain government funds or credits, a bridge loan may be an option. Like early-stage development loans, bridge financing is expensive.

Working capital loans. Typically a revolving loan, these can be used for expenses in the ordinary course of business. The principal amount is generally smaller than other types of loans because working capital loans are not intended to cover substantial upfront construction costs.

Term loans. These are longer term (7 to 10 years), floating rate loans that are repaid from project revenues.

Back-leverage. In most cases where there is tax equity financing, term loans for a project are structured in the form of back-leverage debt in which the sponsor (or some intermediate parent company of the project company) is the borrower rather than the project company. The loan is secured by the sponsor's stake in the tax equity partnership (described below) and is effectively structurally subordinated to the tax equity investor's interest in the project.

Tax Equity Arrangements

Tax equity arrangements involve the sponsor partnering with one or more investors that can take advantage of large tax benefits available to the project because such investors have sufficient taxable income and predictable tax liabilities. These arrangements allow the sponsor to monetize the available tax benefits if it does not have sufficient taxable income to utilize the tax benefits itself.

Tax benefits in a renewable electricity project take the form of investment tax credits (ITCs), production tax credits (PTCs), and accelerated depreciation deductions (Modified Accelerated Cost Recovery System deduction). The PTC is an income tax credit created by the production of electricity from wind turbines, geothermal, solar, hydropower, biomass, marine, and hydrokinetic renewable energy plants. It is calculated using the actual energy production of a project. It can be claimed for a 10-year period once a qualifying facility is placed in service. ITCs allows facilities to claim an income tax credit based on the amount invested in project infrastructure. They can be claimed only in the year that the project is placed in service and are calculated using the cost/fair market value basis of the eligible energy property.

In a partnership-flip model, the tax equity investor and the sponsor each hold interests in the tax equity “partnership” (typically, a limited liability company treated as a partnership) for federal income tax purposes which owns the project company (or a holding company that owns the project company). The sponsor retains control of the project and manages construction and daily operation of the project. The tax equity investor is entitled to a majority of the tax benefits and certain cash payments until certain pre-agreed financial metrics are achieved by the tax equity investor, at which time a “flip” occurs whereby the sponsor is entitled to the majority of allocations and distributions.

Alternative Funding Options

The above options are by no means an exhaustive list of financing methods. Funding may be available from public sources through grants and low-cost financing. Government incentives may also be available to reduce the cost of the project. A project sponsor may also have access to capital markets and have the option to issue bonds or equity to finance a project. Offtakers that want to ensure they have access to the project's output may also provide funding by agreeing to buy the project's output proportional to its investment. Finally, with the passage of the Inflation Reduction Act of 2022, some developers can now monetize tax credits through transferability and direct pay options. A significant number of these transactions closed in 2023, and the numbers are only expected to grow in 2024. These options can be utilized alone or in a hybrid model in conjunction with traditional tax investments. The new options further expanded the market of potential investors developers can look to for financing renewable energy projects.

Navigating financing options includes risk ‐ reward comparisons, as well as an analysis of any given project's development stage, capital needs, anticipated returns, and the regulatory environment in which it is expected to operate, among other considerations. Because financing decisions have long-term effects on a project's success and future access to capital, understanding project financing methods is an essential early step in any development.

Written By: Brenda Barrett © 2024, Husch Blackwell LLP

Brenda represents clients in the energy and credit union industries, overseeing corporate transactions and providing general corporate counsel.

Brenda has focused a significant portion of her practice on the energy industry for 20 years, working most frequently with clients operating in the energy

Links: Husch Blackwell | LinkedIn