Will the Fortune 500 Fund Solar for Small Biz?

Investing in renewable energy in exchange for tax credits could spur large corporations to get into the field of tax equity financing

By Jennifer Kho

The economy may be giving renewable energy companies plenty to fear in the year to come, but not all the forecasts are gloomy. At a time when analysts are predicting shrinking venture capital investment and companies are shelving plans for new factories, some industry insiders are predicting at least one financing trend that could increase renewable energy projects: tax equity financing.

It might sound boring, but according to Michael Butler, chief executive of investment bank Cascadia Capital, tax equity financing for renewable energy projects—that is, investing in renewable energy in exchange for the tax credits—is being considered by large corporations, including Microsoft (MSFT), Google (GOOG), and others. If Microsoft entered this market in 2009, "that would be a big deal," Butler says. Financing options are hard to come by, and a surge in corporate tax equity financing could significantly boost the U.S. market.

Why might corporations be considering these investments now? Well, new and improved federal renewable energy tax credits took effect at the beginning of this year. And because the U.S. incentives come in the form of tax breaks, only companies that pay enough in taxes can take advantage of them. In other words, if a company or individual doesn't make enough money, it can't use the credits. But plenty of smaller customers would like to install solar power.

Reducing Upfront Costs

Here's how it works: A company buys a stake in a renewable energy project in exchange for the tax credits over several years. So-called power-purchase agreement (PPA) providers act as the middlemen, selling those stakes to help finance the projects and also signing long-term agreements with customers who buy the resulting power.

At a time when capital is tight, many renewable-energy customers would like to avoid paying all the upfront costs by financing projects this way. But not enough companies with big tax appetites are involved in these financing schemes to satisfy that demand. "The tax equity hole is the biggest hole right now," Butler says.