THE SITUATION:
The Inflation Reduction Act (IRA) has changed the clean energy project finance landscape in the United States. In an industry first, it now allows developers to sell tax credits generated by their projects to unrelated parties, a change that deepens the pool of potential clean energy investors.
This shift helps both domestic and foreign investors boost their returns when they invest in US companies that properly monetize federal tax credits under the IRA.* It also allows renewable energy tax credits to be transferred to corporations, ultimately saving them tax liability and money.
THE CHALLENGE:
The IRA’s tax incentives attracted the attention of Korea’s leading energy company, SK Gas, and leading green developer, SK Eternix. They sought to enter the US market through a joint venture (JV) with US-based renewable energy giant Apex Clean Energy (represented by McDermott).
Apex recognized the benefits: A JV with SK Gas and SK Eternix would provide significant additional capital, allowing Apex to invest in more clean energy projects. To make it happen, a multidisciplinary McDermott team handled antitrust review, trade work on the supply chain components, and other cross-border deal issues. McDermott’s leading IRA team, including several renewable tax credit and renewable energy practitioners, worked with Apex’s commercial, legal and tax teams to structure a first-in-kind JV that allowed for the JV to realize an all-important tax “step up” (to improve the economics of the investment).
The companies ultimately entered a JV structured as a springboard to launch other clean energy project finance deals. Together, they are known as SA Grid Solutions.
At around the same time, McDermott worked with the Apex team on a contract with a leading consumer packaged goods (CPG) company, which sought to invest in tax credits in the clean energy space – a deal made possible by the IRA.
Leveraging the SK and CPG company partnerships and the IRA’s newly available investment tax credit for standalone storage, Apex uncovered opportunities to finance utility-scale battery energy storage projects in Texas.
OUR OBJECTIVE:
Apex asked its cross-practice McDermott team, led by Carl Fleming, Philip Tingle, Heather Cooper, Jim Salerno, and Seth Doughty, to pull off a bespoke, innovative JV arrangement – enabled by the IRA – to provide debt, equity and tax credit financing for one of the Texas projects.
The team combined their deep understanding of the IRA, tax credit and tax equity finance skill, and energy storage savvy to find a way forward. Taken together, their approach was one of the first of its kind.
THE OUTCOME:
McDermott represented Apex throughout the transaction for the financing of Great Kiskadee Storage, a 100-megawatt battery energy storage system (owned by Apex and SK together as SA Grid Solutions).
Working as a full-service, integrated team, lawyers from multiple practice groups at McDermott collaborated closely with Apex to bring this bold strategy to life. Through the JV, SK participated in Apex’s Great Kiskadee project ownership as an investor, delivering an influx of clean energy investment dollars and establishing themselves as an important partner for Apex.
McDermott’s energy team also navigated complex regulations and streamlined the required documentation to facilitate the Texas financing, which supported construction of the Great Kiskadee battery energy storage system.
Critically, when the Great Kiskadee project was sold to SA Grid Solutions, the team deployed a sophisticated structure to maximize the project’s step up in valuation and resolve possible concerns from a tax credit buyer regarding potential lender remedies. This structure enabled Apex and SK to achieve the full benefits of the partnership while not limiting the size of tax credits that SA Grid Solutions could monetize later through the tax credit sale.
The Apex team also used this structure to maximize the financing available to the JV (with a tax credit bridge loan based on the full tax credit sizing). The financing’s innovative structure reduced interparty recapture concerns between the project’s lenders and the tax credit buyer. That smoothed the way for the tax credit sales transaction and will provide SA Grid Solutions with another source of revenue, facilitated by the IRA.
GO FURTHER:
Great Kiskadee Storage, along with other Texas battery energy storage systems, will further Apex’s mission by enabling reliable, cost-effective power generation and helping speed the shift to clean energy.
Learn more about our energy capabilities.
*Historically, most credit-incentivized investments came with a capital structure that included sponsor equity, tax equity and debt. Tax equity capital typically came from a tax equity investor’s investment into a complex partnership or leasing structure. Now, the IRA lets developers and investors avoid obtaining tax equity financing. They can opt to wholly own the assets, transfer the credits to an unrelated third party for cash, and, if needed, raise debt. They can also consider hybrid structures, with a tax equity partner monetizing depreciation and participating with the developer in the revenues from the sale of the credits.