July 27, 2018
Interviewed by: Privcap
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Renewables 2018 – Tax Policy, M&A and the Future of the Industry

John Gimigliano, the principal in charge of federal legislative and regulatory Services at KPMG, surveys the progress made by renewables, and the obstacles that lie ahead—on Capitol Hill, in technological development, and in the private sector.

John Gimigliano, the principal in charge of federal legislative and regulatory Services at KPMG, surveys the progress made by renewables, and the obstacles that lie ahead—on Capitol Hill, in technological development, and in the private sector.

Renewables 2018: Tax Policy, M&A, and the Future of the Industry

Privcap: How would you characterize the growth in renewables in the past decade?

John Gimigliano, KPMG:
If you look at renewables as a share of the total sources of energy in the U.S., it’s more than doubled in the last ten or so years. And that’s really impressive, especially when you consider during that time, most renewables, at least on pure price, were more expensive than what they compete against—Coal or natural gas. So, the fact that they were able to grow so remarkably in that period of time, even though they’re in some ways more expensive than what they’re competing against, it tells you that something important was going on.

Gimigliano: I worked on Capitol Hill in 2005 for the Energy Policy Act of 2005, when we enacted the Solar Investment Tax Credit.

Between 2005 with the enactment of the investment tax credit to today, the cost of solar has come down so substantially, so much so, that back in 2005 when we created that tax credit, we weren’t sure that anybody would ever honestly, actually use it. It was almost a throwaway in the Energy Policy Act of 2005, putting that credit in there. And now, these years later, looking back on it, it was probably the single most important piece of that whole bill, in terms of really fundamentally transforming energy in the United States.

How is the phase-out of subsidies likely to impact the industry?

Gimigliano: The phasing out or the elimination of those subsidies I do think will change the economics of investment, and ownership and development of renewables. They’ll be greater rigor around the economics because there won’t be any subsidy to fall back on. I think you can see a shift in ownership from the traditional owners to maybe non-traditional owners. Or maybe you’ll see the strategic investors, like utilities, play a larger role, relying on things like rate base and other things to subsidize in part, some of the cost of renewables.

Subsidies are going away just as tariffs are hitting the industry. What’s the likely impact?

Gimigliano: I think it’s safe to say, at least to date, the impact of those tariffs on solar industry have been very minimal. Those are relatively modest tariffs, and I just believe the momentum behind the solar sector is so great right now that there’s just not sufficient to really slow it down in a material way.

What advances are required to increase the penetration of renewable energy sources?

Gimigliano: The next frontier I think, for the industry, is not so much the technologies of wind and solar, which are well on their way to being mature. The next frontier is battery storage, and that could be somewhere where the government chooses to jump in and figure out a way to develop a federal strategy or subsidy or program that can further development of battery storage.

The reason that battery storage is going to be such an important—Already is an important issue, it’s going to be a growing issue for the industry—is that wind and solar and many other sources of renewable energy are intermittent. They aren’t 24/7 like coal or nuclear or other things. And so, to provide power, all the time, you’re going to need some method of storing that energy, so you’ll produce solar during the day, wind in the evening or at night, but then using battery technology you’re going to be able to deliver it when people actually want it.

What’s the most important risk factor institutional investors thinking about deploying capital in renewables?

Gimigliano: One of the risks to think about for renewables is to get significantly higher than 20 percent, to approach 50 and beyond, you’re really going to have to have a breakthrough on storage technology or battery technology. That’s not here yet. A lot of people are working on it, but it’s something that’s going to have to be solved.

As the industry matures, what’s the opportunity for private equity?

Gimigliano: I think for private equity or institutional investors, investing in renewables was always a little bit of a challenging item. In part because, for the reason we talked about, renewables at least, renewable finance, over the years, has been very tax leveraged and if you’ve got mostly tax indifferent parties looking to invest, it’s always been a challenge. So, I think one of the coming opportunities is that we now have assets that have been in operation for five or ten years that are now coming out of that tax period, where you’re relying on their tax attributes. It’ll be sold again into the secondary market with still long, useful lives ahead of them, with contacted sales of power, et cetera. And I think it’s an opportunity for non-tax-motivated investors to take a second look at those assets as they come back out.


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