By Matt Davis | June 25, 2025
Beat the tax credit blues with one big, beautiful financial model
The U.S. renewable energy industry has been abuzz lately with talk of how the budget reconciliation bill recently passed by the House of Representatives – better and more comically known as the One Big Beautiful Bill Act – will impact the economics of building and financing low- and zero-carbon power projects. Most notably, the bill threatens to significantly reduce or eliminate tax credits for solar and wind energy facilities – the Investment Tax Credit (ITC) and Production Tax Credit (PTC) – much more quickly than previously scheduled under the 2022 Inflation Reduction Act. Where the IRA had given those credits a ten-plus-year runway, the House-passed version of the bill called for those credits to be eliminated for any projects that do not start construction within 60 days of the bill being signed.
The Senate Finance Committee’s June 16 draft of the legislation offers some good news, retaining IRA timelines on credits for battery storage and other technologies like geothermal, hydro and nuclear power. The Senate text also features slight improvements for wind and solar: notably, an end-of-2025 deadline for start of construction to receive full credit, and step-downs to 60% and 20% of current credit value for projects that commence work in 2026 and 2027, respectively. However, that still leaves solar and wind developers facing a significant loss of tax credit value for their projects in the very near future.
A reduction or loss of tax credits would no doubt materially impact the economic prospects of new wind and solar projects. But just how much value would be lost if the credits were to be repealed, and how would project developers need to adjust to persevere? As graduates of Pivotal180’s Renewable Energy Project Finance Modeling program know, a well-built financial model help us find the answers!
ITC you later
The ITC makes up a substantial portion of the value of a new solar or wind project that elects it. But just how much? To test this, I set up a version of our training model for a fairly vanilla 100 MW solar project: ~24% capacity factor, $30/MWh PPA for 20 years, 20-year debt at market terms, etc. I set the ITC at 30% of project costs (no adders) with 90% costs being eligible. Massaging some inputs, I brought the project to a nice round 8% levered after-tax (efficient) IRR in my Base Case (Case 1).
In Case 2 of the model, I turned off the tax credit, leaving everything else the same. The impact was stark, but unsurprising. The project IRR dropped by over half, to 3.92% — less than satisfactory for any equity investor. To make this project pencil again, I’d need to squeeze some of my (imaginary) project partners and find some more value.
IT-seeking solutions
Three of the most important counterparties for a renewable energy project are the PPA off taker, the O&M provider, and the EPC contractor. The contracts with these parties – defining the price to be received for energy generated, the cost and parameters for ensuring high-quality project operation, and the cost and timeline to build the facility, respectively – determine several of the key inputs for any project financial model.
One common way that developers use project finance models is to determine what prices or costs must be achieved (or can be borne) in order to achieve a desired return. This can be done by using Excel’s Goal Seek functionality on certain inputs to achieve a given hurdle rate.
I set up three new cases in my model, one each to increase the PPA price, reduce operating costs, and reduce capital expenditure costs. For each case, I set up a scaler cell to adjust the specified input by a fixed percentage up or down. I then ran a Goal Seek on all three to figure out how much any one of my three inputs would need to move to reclaim my 8% return.
For PPA price, my model told me that I’d need an increase of over 35%, to a new price of more than $40/MWh. Ouch! Even the most climate-focused potential off taker would be likely to balk at such a hefty increase and decide to shop elsewhere for power.
Results for operating and capital expenditure weren’t much more encouraging. In my model, I’d need to reduce my operating costs by over 90% to get back to an 8% IRR – hardly realistic for any project. My capital expenditure costs, originally set at $1.00 per watt, would need to come down by nearly 29% to achieve the same result. While my model had done a great job of determining how much value I needed to claw back, any one of these results seems highly optimistic at best. But what about a middle ground?
The ‘Goldilocks’ case
Negotiating such massive changes in key contracts (or bringing operating costs to near zero!) seemed like a stretch. What if, instead, the changes could be spread around a bit?
I set up one more case in my model, which I nicknamed ‘Goldilocks.’ In that case, I used a single scaler which would be equally applied to the PPA price (increase), operating expenses price (decrease), and capital expenditure costs (decrease). Running one more Goal Seek, I found something that looked a lot more achievable. A relatively modest 13.5% increase in my PPA price, paired with equivalent decreases in my operating and construction costs would bring me back to my desired 8% levered post-tax return. That quantum of change might not be easy to negotiate with my pretend partners, but it could at least be in the realm of possibility.
There’s no doubt that losing tax credits (in part or completely) will require some renegotiation of terms for impacted projects. How best to do so will be up to each developer and vary from deal to deal. A best practice financial model is a key tool that developers can use to identify which contract terms need to be reopened and how much of an impact each might have on project returns and success.
Become a model master
Want to learn to build a best practice financial model to help you and your business understand, evaluate and optimize your projects, no matter which way the economic or legislative winds are blowing? Enroll in a Pivotal180 course! We offer a range of training programs for modelers of different backgrounds and experience levels:
- Renewable Energy Project Finance Modeling
- Infrastructure & Project Finance Modeling
- Introduction to Project Finance Modeling
- Advanced Project Finance Debt Modeling
While tax laws may be changing, tax equity is likely to continue to be a critical part of renewable energy financing for years to come. Master the secrets of one of project finance’s most challenging topics with Pivotal180:
Come model with us!
