Financing is the lifeblood of renewable energy projects, dictating the pace and scale at which clean energy can be deployed. The integration of project development with financing processes is critical, yet the industry has long grappled with a lack of sophistication and standardization in this area. CapeZero's platform addresses this gap, enabling developers to simultaneously align capex, revenue, and transaction decisions. This not only maximizes returns but also minimizes the risk of value destruction during the development and closing period, ensuring that clean energy projects are financially viable. Our philosophy is that value creation is achieved by finding the optimal financing or sale outcome against the next best alternative.

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To understand the importance of financing, it helps to dive into a few scenarios. Let’s start with a representative solar project as shown below:

Note(1): Assumes election of Section 48 Investment Tax Credit (ITC), with no adders, and in compliance with prevailing wage and apprenticeship requirements.

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Scenario 1: Developer acting on their own (Equity Only)

A solar developer (or “sponsor equity”) can solely own and operate this project without accessing the tax capital markets. Earned tax credits and depreciation benefits can be carried forward to offset taxes owed during the project’s life. These are valuable benefits, but they are not sufficient for most deals to pencil. Even the addition of project debt may be dilutive to returns in the current high interest rate environment.

Scenario 2: Developer working with a tax credit buyer (Transfer)

Under a new provision in the Inflation Reduction Act (IRA), developers can now transfer (or sell) earned tax credits to a buyer for payment in cash (“transferability”). For the developer, there is a realization that they will pay more taxes over the life of the project, but that is greatly outweighed by the time value of receiving cash payment for the upfront value of the credit earned. Tax credit buyers can purchase this credit at a discount (~$0.91/credit) after the project is operating (~4 months) and still prove to be a value-enhancing participant in the financing (+2.73% above Scenario 1).

The credit buyer’s contribution represents “additionality”⁽²⁾ because it enables the developer to move forward and build the project at a return commensurate with the level of development and construction risk involved. If the credit buyer instead pays the developer $0.25/credit for the tax credit, it would equal the returns seen in Scenario 1, leaving the developer at a point of indifference. While such a level of discount is unexpected in the market, any incremental payment above that threshold offers the developer a better outcome than it would have otherwise had. While the market for tax credit purchases is still in its early days, participants are expected to compete for these valuable benefits and drive up pricing. The purchase of these credits was reported to be ~$4B in 2023⁽³⁾ and is expected to increase significantly as the transferability market matures.

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Scenario 3: Developer working with tax equity (Tax Equity)

For nearly two decades, developers have negotiated equity partnership agreements with banks, insurance companies, and corporations to enjoy the benefits of tax credits and depreciation. “Tax equity”⁽⁴⁾, as the investment class is known, is a ~$21B⁽⁵⁾ industry by volume, enabling ~$45B of new project value each year. For developers partnering with tax equity, there’s once again a realization of paying more taxes over the life of the project. And again, this penalty is greatly outweighed by the time value of receiving cash investment in return for the upfront value of the tax credits and deprecation. Tax equity investors can receive an attractive return with low risk⁽⁶⁾, yet prove to be a value-enhancing participant in the financing.

This value proposition is oftentimes the most beneficial to developers seeking tax-efficient capital (+4.13% above Scenario 1 and 1.40% above Scenario 2). Tax equity provides a forward-committed investment for tax credits, depreciation, and the portion of tax benefits attributed to de-risking the project and bringing it to completion and sale (also known as entrepreneurial profit, developer fee, or “FMV step up”⁽⁷⁾).

The tax equity investment in this example represents “additionality” at Target Flip IRRs up to 75%! Tax equity’s investment represents additionality because it enables the developer to move forward with the project at returns that pencil. If the tax equity investor increased its Target Flip IRR to +1000%, developer returns would equal those in Scenario 1, leaving the developer at a point of indifference. While such levels of return are typically unrealized in the market, any reasonable tax equity investment above the threshold will generally offer the developer a better outcome than it would have otherwise had by self-utilizing the earned tax benefits.

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Scenario 4: Developer working with a hybrid structure (Tax Equity Transfer)

The IRA legislation introduced new tax credits for clean energy and expanded existing ones, providing a significant boost for clean energy over the next decade. Financing via tax credit transfers and tax equity partnerships is critical to enabling this growth. Furthermore, CapeZero expects mastery of these two structures’ intersection to be the key factor for maximizing the tax credit opportunity presented before us. By pairing the ability to transfer tax credits with investors who are proficient in underwriting the associated project and tax risks, the most effective capital markets solutions can be achieved. While we don’t expect these structures to be the most cost-effective (additional complexity always invites more transaction costs), we believe that matching sufficient tax equity and tax credit investment & financing with developers seeking to monetize that capital, hinges on this combination to materialize.

In one example of these structures, if the tax equity investor transfers (or sells) 75% of their tax credits and retains 25% for their account, they can also provide a monetization path for the additional tax benefits typically included in tax equity structures (i.e. depreciation and FMV step up value). If the tax equity investor maintains its pricing level, the overall economics to the developer will be lower than a pure tax equity deal, but higher than a pure transfer deal. A modest concession in pricing levels by the investor can close that gap and provide it a means to quickly recycle and redeploy fee-generating capital. Tax equity syndication (or selling) has been a business model for well over a decade. The introduction of transferability simplifies this distribution process, yet there is still considerable effort and education required for proficient deal execution.

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Scenario 5: Developer working with a hybrid structure (Cash Equity Transfer)

While banks and other existing tax equity investors (and aggregators) are the most experienced at syndicating tax credits, a new entrant to tax credit syndication (“cash equity”) is quickly emerging to take the role of facilitation or accommodation party. This investor class has experience with making project equity and debt investments. They require a high return and low risk, and in turn, may shift most of the tax credit syndication burden to the developer.

The primary benefit these investors deliver, above what a developer can do on their own, is to provide forward-committed capital to help progress projects through their de-risking phase and ultimately achieve an FMV step-up. Similar to tax equity transfers, there’s some inherent inefficiency in these structures due to their complexity and cost. However, a well-optimized cash equity partnership can deliver value (+2.81% above Scenario 1), particularly in situations where project developers incur significant development and construction risks to achieve an FMV step-up. CapeZero expects this pool of capital to be a key contributor to the evolving landscape of renewable energy project finance as new forms of "synthetic tax equity" take shape.

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Pioneering the Future of Clean Energy Finance with CapeZero

In the dynamic landscape of clean energy, CapeZero aims to redefine the way investment, financing, and sale decisions for clean energy projects are evaluated. As a software-as-a-service company, we're not just participants; we're facilitators of change, offering state-of-the-art financial technology solutions that navigate the complexities of structured tax credit investments with unparalleled efficiency. Our goal is to equip developers, investors, advisors, and syndicators with real-time tools for making decisions that optimize profits. We aim to facilitate connections among them, fostering a collaborative effort towards creating a sustainable energy future.

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Simplifying Financing

The journey of financing renewable energy projects is often fraught with complexity and a lack of standardization, making comprehensive decision-making a challenge for developers. Often more of an art than a science, the process involves a blend of quantitative analysis and qualitative decision-making. This fragmented approach results in a myriad of unforeseen challenges, from inadequate project due diligence to surprises in capital markets outcomes. CapeZero's solution streamlines this tangled process, offering a clear and standardized path forward for developers, ensuring that each project not only advances sustainability but also realizes financial efficiency.

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The Cost Dynamics

It is paramount that developers understand the cost structure for their renewable energy projects. From development, acquisition, build, and transaction costs to financing, asset management, and operations & maintenance expenses, every aspect plays a critical role in determining a project's viability. Our platform enables fast and informed cost decision-making, providing developers with a comprehensive overview that aligns closely with their project goals and financial strategies. By offering insights into the intricacies of cost management, CapeZero ensures that developers can navigate the financial landscape of renewable energy projects with confidence.

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Harnessing Revenue and Savings through Offtake

Offtake agreements are the catalyst for contractual action in renewable energy projects, but they vary significantly across project types and markets. CapeZero's platform facilitates a nuanced understanding of these agreements, enabling developers to secure favorable terms that align with their financial and operational objectives. Whether it is navigating the complexities of front-of-the-meter or behind-the-meter projects, our solution provides the economic insights needed to maximize revenue (or savings), from energy, REC, and capacity payments to local and state-level incentives.

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Accelerating the Shift to Net Zero Emissions

The path to achieving net zero emissions is paved with challenges and opportunities. It necessitates a swift transition towards renewable energy sources, alongside enhancing the efficiency of older existing equipment. At CapeZero, we understand the pivotal role developers play in this ecosystem – from meticulous planning and procurement to negotiating contracts and financing, every step is crucial. Despite the overwhelming support for clean power, navigating the available options remains a formidable challenge for most. Our software solution is designed to demystify this process, enabling developers to optimize their renewable energy pipeline through a standardized evaluation process. By focusing on creating value through optimal financing or sale outcomes, we are not just participating in the market; we're leading it.

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What's the Cost of Zero emissions ("CoZe")?

Within the CapeZero platform is CoZe, a supplementary tool designed to streamline the way developers approach early-stage project finance and investment evaluation. With as few as ten simple inputs, you can have directional answers to complex financial decisions — including but not limited to choice of deal structure, offtake contract terms, and equipment selection. By quickly providing fully structured returns, CoZe empowers developers to make real-time informed choices that drive the clean energy sector forward.

Schedule a demo today and learn how we can help you optimize your clean energy projects, one decision at a time. Together we can build a sustainable future powered by renewable energy.

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1. Assumes election of Section 48 Investment Tax Credit (ITC), with no adders, and in compliance with prevailing wage and apprenticeship requirements.

2. Schneider Electric: What You Need To Know About Additionality

3. 2024 Cost of Capital Outlook | Norton Rose Fulbright

4. Rev. Proc. 2007-65 established the requirements under which the IRS will respect the partnership allocations of wind energy PTCs by flip partnerships in accordance with Section 704(b).

5. 2024 Cost of Capital Outlook | Norton Rose Fulbright

6. Acore: The Risk Profile of Renewable Energy Tax Equity Investments

7. An FMV step up can increase the amount of ITC eligible basis and depreciation for a project. SEIA