Beware of cliffs and waterfalls in renewable perspectives (Observations from the front lines)

02/27/2013 by US Capital Markets and Accounting Advisory Services

Observations from the front lines provides PwC's insight on current economic issues, our perspective regarding the business impacts, and actions we have seen companies taking to effectively address those issues.

Companies are attracted to renewable energy investments for different reasons, including regulatory, financial, and other social motivations. Renewable investments are frequently structured to balance the various goals, including allowing investors to achieve returns through certain tax credits.

Tiered capital structures that facilitate a “waterfall” of returns and allocations are commonly used to ensure efficient use of tax credits. Companies have frequently found that gaining an understanding of the income statement impact of these structures in renewable energy investments can be particularly complex.

Highlights in this issue:

  • Renewable energy investments in the US are largely fueled by the availability of tax credits and structures to monetize the credits.
  • Complex tiered capital structures are commonly used to facilitate the allocation of returns for the efficient use of tax credits.
  • Income pick up from these renewable energy investments may not be as simple as taking the contractually-allocated percentage of income or loss.
  • Be prepared to balance the economics and the accounting objectives upfront.

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