By Fiona Wilson | August 14, 2023
In Conversation w/Andy Moon
In this episode of Pivotal180 in Conversation, we interview Andy Moon, CEO and Co-Founder of Reunion Infrastructure. We discuss recent changes in the United States’ tax equity market, most notably the transferability of tax credits, and how Reunion has seized on the opportunity presented by transferability and created a marketplace to connect sellers and buyers of tax credits. Andy shares how Reunion’s digital platform supports developers of solar, wind, battery, biogas, and other clean energy projects in connecting with potential buyers of credits, and how the platform standardizes due diligence on these transfers to de-risk the process for buyers and minimize transaction costs for all parties.
Interview Transcript
Fiona Okay, welcome, everyone, back to in Conversation, which is Pivotal 180’s interview series where we can share every episode a conversation with a leader in the renewable energy or clean tech or energy finance space. We have a really fascinating conversation I think for you today. We’ve got Andy Moon here who’s the Founder and CEO of Reunion Infrastructure, and we are going to be talking a little bit about tax equity markets, how they’ve changed recently, what opportunities that’s presenting, both for, you know, developers in the market, potential new investors, and then also entrepreneurs who are looking to find new and interesting ways of adapting to the changes in the tax equity market.
We are going to assume that you know a little bit about tax equity already. Pivotal 180 has, you know, plenty of resources from blogs to full fledged courses on tax equity. So we can definitely point you to resources if you want to check that out. But for now, we are going to assume a base understanding of what tax equity is and, you know, the fact that it’s really been a driver of a lot of renewable energy finance in the US recently.
There have also been a few changes recently. One of these key changes being the fact that tax equity credits are now transferable, which opens up a lot of new opportunities, and Andy’s the perfect person to talk to about this. Reunion is building a platform to connect, developers who are leading or sponsoring projects that are eligible, for tax equity equity with other potential investors.
So Andy, welcome. Thanks for joining us today.
Andy Thank you. Thank you for having me today.
Fiona Yeah, it’s great to be here with you. Before we dig into the more detailed questions, I’d love it if you could just share a little bit about your background, what led you to found Reunion, and kind of what Reunion is aiming to change or impact in the market.
Andy That sounds great. So Reunion’s mission is to accelerate investment into clean energy projects, such as solar, wind, battery storage, and biogas, and this really came out of my co-founder Billy Lee and I. Our entire careers have sort of built up towards starting Reunion. We met over 15 years ago working at SunEdison, which was one of the leading solar energy development companies, and Billy and I were early employees, and we were involved in the early days of solar energy finance. So Billy led many of the early tax equity deals with major banks, and I was involved in some of the first investments in solar from private equity and bond investors. So we’ve been exposed to renewable energy finance for many years, and while tax equity is amazing and has enabled a lot of the important clean energy projects you see today, we’ve always recognized that there is a challenge and a bottleneck on the renewable energy financing side.
There is a few reasons for that. You know, one is that tax equity is complex and expensive to set up, and as a result on the project side, you know, there’s always been many projects that have struggled to get access to financing. So one great example is commercial rooftops and solar. You know, it’s very difficult to get the attention of large tax equity investors to finance projects like commercial rooftops, and as a result, those projects often do not get built. At the same time, we’ve tried for years to try to convince more corporate and other investors to become tax equity investors, and that’s always been a difficult proposition because it is a complicated asset class and it requires a lot of specialized expertise. So over the years, you know, many corporations have considered and ultimately have decided not to become tax equity investors and so part of , why we are excited is because transferability solves a lot of the challenges in the bottlenecks to finance. It’s a much simpler and more straightforward transaction process. It shouldn’t require nearly as much sort of upfront and ongoing cost to sort of fulfill a transaction, and we think that, you know, Congress’s intent really was to expand the pie from a handful of tax equity investors to really any corporate in America can be involved in a clean energy transition by becoming a, you know, tax credit buyer. So we’re super excited about that democratization on the sort of access to finance side, both from, you know, bringing more investors into the space, but also enabling many, many projects that have struggled or have not been able to get financing or that just want a simpler way to transact, to sort of use this, you know, new structure that, you know, every renewable energy developer is very, very excited about.
Fiona Yeah, makes sense. I think there’s a lot to be said just on the access side of this topic, that there are some areas where maybe there wasn’t a regulatory barrier designed to prevent certain stakeholders or investors from taking part in tax equity, but in effect that’s what’s happened over the years. Can you also just tell us a little bit about what Reunion’s doing? Like what is Reunion’s value add in tax equity, what’s the offering, and why should we be excited about it?
Andy Definitely. So I’ll start by saying transferability is a completely new market.
Fiona Yeah.
Andy So it only applies to projects that were placed into service generally for ITCs, applies to projects, place, and service after January 1st, 2023.The Department of Treasury just released the final guidance, or almost final guidance, on June 14th, 2023. So this is a very, very new program, and I think what’s really exciting is that, you know, we are playing a key role in walking both developers as well as potential corporate tax credit buyers through the process. There’s definitely a lot of questions from both sides of the market. So an important role we play is to help answer all those questions and get both sides comfortable with what a transaction is and what risks they’re taking and sort of how to enter into a transaction.
I think where we add value is, first of all, we have a very deep pool of both tax credit sellers, as well as potential corporate buyers. On the tax credit sellers side, we’re actually launching our digital marketplace this week, and it has more than a billion dollars worth of near-term tax credits looking to be sold from projects. Then on the tax credit buyer side, you know, we work mainly with CFOs and treasury tax teams and to really educate and sort of inform them on how this transaction works. What we bring to the table is we provide a streamlined transaction process where, you know, a buyer or a project developer can find, you know, a buyer through a deep pool of buyers and then have a standardized legal structure, standardized due diligence process, and many times insurance is also needed, and so we can help arrange the insurance as well.
Fiona Okay. that is great, and I guess along those lines, I’m thinking about, you know, what are the key considerations that a buyer, or in this case, we might call them the transferee, would have when they’re looking to purchase tax credits? Like how would you as Reunion Infrastructure be aiding those parties?
Andy Sure, so one important distinction between tax equity and a tax credit transfer is that a tax equity investment, you have to enter into a partnership, and it’s a true equity investment. So if the sun shines a little bit less or production is a little bit low, that impacts your financial return. With a tax credit transfer, you are just purchasing a tax credit and you’re not an equity investor in the project, and for that reason, the list of diligence items is narrower than it is for, you know, a full tax equity investment, and, you know, I think the main points that a buyer needs to consider are things like qualification of the tax credit. In other words, you know, was the project actually constructed? Was it connected to the electrical grid? You know, does it qualify as energy property, and therefore it is, you know, eligible for a credit from the IRS. You know, was the basis properly calculated? Meaning, you know, tax credits are typically calculated on a percentage of fair market value or cost, and so, you know, was the sort of cost basis properly calculated and not fraudulently overinflated sort of when calculating the tax credit amount? I think examples of how we would diligence those items are things like, you know, we require a utility PTO letter that certifies that a project was actually built and connected to the utility. To validate cost basis, we would look for, you know, a cost segregation analysis from a certified, you know, third party accounting firm. And you know, the list goes on. But, you know, it’s a discreet manageable list. I think the other big piece is that, you know, in the case of investment tax credits, there is a five year recapture window.
Fiona Yeah.
Andy So if, the IRS realizes that there was, you know, an over inflation in the basis or, you know, a project was actually ineligible for the tax credit, then that’s a risk that needs to be mitigated, mainly on the buyer side. And the way we mitigate that risk is through, you know, indemnities from the project developer and also insurance and diversification. So, you know, there’s a number of items that need to be diligence, you know, risk mitigation has to be done properly, and that’s where we play a key role.
Fiona I’m also imagining that, you know, you’ve described some of the diligence that would be required or sought after by a buyer of a tax credit. I’m imagining that that’s also a pretty clear benefit to project developers to have an upfront understanding of what’s gonna be required from them in the due diligence process, and so that goes both ways actually as a benefit.
Andy That’s right. That’s right.
Fiona Yeah, okay.
Andy Yeah, I mean, one of the key ways to bring down the cost of the transaction is to make the process very standardized and predictable. I think one of the challenges, you know, many tax equity deals are very bespoke, and there’s a lot of custom negotiation that has to happen between parties, and that’s when, you know, it becomes very expensive from a legal tax opinion, accounting services, independent engineer. You know, there’s a lot of different items that need to be diligence and also negotiated, and so our aim is to really minimize the amount of back and forth, which will save time for both parties, but also, more important, it will save a lot of that transaction cost. Because if you have a million and a half dollars of transaction cost, that’s fine if it’s a $200 million deal. But if you’re doing a, you know, $10 million portfolio of rooftop solar projects, you know, that will kill a deal, and so it’s very important to us that the diligence process, the legal documentation, sort of all of those processes are very streamlined, predictable, and use technology to sort of make it efficient.
Fiona Yeah, makes sense, makes sense. So the proportion of transaction costs to the total transaction is pretty key in a lot of contexts.
Andy Right.
Fiona Andy, could you also maybe just share your perspective and insights on who you expect to benefit most from a platform like Reunion’s? You know, maybe there’ll be lots of different types of developers and investors that use it, but, like, is there a particular group or groups that you think are really going to benefit more than others due to the platform and due to these recent changes in tax equity?
Andy It’s a great question. One thing that’s very exciting about transferability is that this regulation was passed, and I think it was hard to predict who it would resonate with and who would be most excited by it. But I think what, a couple items I’d say. One is that I think at first there was sort of thinking that tax equity and transferability would be very adversarial and there’d be competition. That is absolutely not the case, and I’ll say one reason why is because tax equity is about a $20 billion a year market, and I don’t think, most people don’t assume that that will grow too much around, you know, $20 – $22 billion a year. Whereas many estimates are saying, you know, by the end of 2024, there’s going to be demand for upwards of $50 billion in credits just from PTC and ITCs alone, and when you add hydrogen, you know, CCUS manufacturing, all these other credits that can be transferred, we could be looking at $80 billion plus per year of demand. When I say demand, I mean tax credits looking to be sold. so there’s just a huge gap between what tax equity can provide and the amount of tax credit monetization that’s needed. and for that reason, you know, what we’re hearing is, we’re hearing a lot of tax equity investors looking at combining tax equity with transferability. In other words, doing a tax equity deal, but then selling some of the credits in the deal. And so I think that’s been an interesting development. On the developer side, we always anticipated, you know, very small developers, newer developers that couldn’t get the attention of, you know, large tax equity to be excited by transferability. But I’ll say we have many medium and large developers that are committed to transferability, and I’d say there’s multiple reasons. You know, one is that, you know, there are developers that have very large volumes of projects and a very small team, and so for them, they just really need a more efficient transaction structure. I think there is portfolios where it makes sense to do a transfer because, you know, the time and expense required to set up a tax equity partnership is just a little bit too much, and I think in the last six months, it’s gotten a lot harder to get tax equity. So we’ve heard of developers that previously could very easily get tax equity financing on a hundred million, on a hundred megawatt portfolio now saying it’s really hard, and they’re looking at transferability as an option as well.
Fiona I guess as a last thought following on that idea, can you speak a little bit more about maybe the trade-offs between traditional tax equity and then also transfers of credits and, you know, maybe a halfway between that would be what you mentioned, is selling part of the credits or, you know, we might call that tax equity light, for example. Do you think that that’s also an opportunity to leverage Reunion’s platform, or are you thinking it’s really going to be more geared towards developers who wants to sell all their credits?
Andy That’s a great question. I think that we see all of the above happening. So there will be many developers that will want to do a straight, you know, keep it really simple and do a straight transfer of credits. There will be others that really want to monetize depreciation, or that have existing tax equity relationships, that may want to do a hybrid structure where they work with a tax equity partner that helps monetize depreciation, and then, you know, part of the credits get sold to a third party, and then there will be developers that do traditional tax equity, as it’s been. But I think, as I mentioned, the tax equity market at $20 billion just, is way too small to service the number of developers and number of projects that need help monetizing credits. So I think that the way we see it is not that there’s so much trade-offs, but more that there’s just so much more demand that’s needed. We really need to bring new investors into the fold. We need to bring, you know. we have really great early adopters on the tax credit buyer side, very forward-thinking CFOs and corporations, but this has to become very mainstream, where it just becomes part of the tax planning process for, you know, any Fortune 500 company, and we think that’s going to be very meaningful, both for big companies to get involved in the energy transition, but also for them to make, you know, a solid return on their capital.
Fiona Right. Makes sense. I’m asking you a lot of questions, trying to get you to predict the future for us. I didn’t tell you to bring your crystal ball, but next time you’ll know. Yeah, that makes a lot of sense. I’m excited to see what happens in the market too. This will be my last question for you actually. So recently we saw some guidance from the US government that touched on transferability and a number of other issues. It also, you know, includes a period of comment or request for clarifications where interested stakeholders can comment on the existing guidance and ask for more clarification. Are there any particular issues that you are really, either you’re going to be asking for clarification on at Reunion, or that you’re just really waiting to see where the guidance lands? I know, this is kind of like the almost final guidance, but do you expect it to kind of be more of a formality in the future or any particular issues that are going to really make a big difference for Reunion or its users on other side of the platform?
Andy Sure. I’d say overall the industry was very pleased with guidance. I think that just having guidance has been huge. I think tax credit buyers in general are not fans of risk, and there always was the worry that guidance would come out with some very negative surprises, and that certainly did not happen. I think they provided a very clear description of how the transaction process works. There was some nice bonuses in there. For example, they validated that the discount amount on a tax credit sale is not taxable. They also said that tax credits or the intention to purchase tax credits can be used to offset estimated quarterly tax payments, which from a, you know, it makes it very attractive from a IRR or a time value of money perspective for the buyer. So overall guidance was very well-received, and I think, you know, participants in the ecosystem are very pleased with sort of what we’ve gotten so far. I think we view the additional guidance as potential, you know, bonuses on top, but we have enough to take it and sort of, you know, make deals and close transactions. You know, I’d see a few areas where I think there still are question marks, you know, one is of course to what degree individuals can participate in the purchase of tax credits. So yeah, I think, you know, I think there’s some some items around the margin like that. But I would say that, you know, we feel that we have the green light and sort of we’re open for business, and I think, you know, tax credit buyers and developers feel the same way.
Fiona Awesome. Okay. Well, I think, you’re right, it helps to just know what you’re working with regardless of what the guidance is. So that’s a positive, but we’ll stay tuned. Well, I might have to check in with you in, you know, a few months or next year on that one, really.
Andy Absolutely.
Fiona Yeah, lots more to discover. Thank you for joining today, Andy. This has been really interesting, and I think a lot of our viewers are also going to be interested just to be watching the tax equity market and really the success and functionality of platforms like Reunion. So thank you again for joining. We’ll let our viewers know how you can connect with them. But yeah, we’ll catch up soon, and thank you for being here.
Andy Thank you. Yes, if anybody has questions, please feel free to reach out, and we’re excited to see how the market develops.
Fiona Great. Thanks, Andy. Take care.
Andy Great, thanks so much. Appreciate it.
Pivotal This interview assumes a base knowledge of tax equity, but Pivotal180 has a plethora of resources on the topic if you’d like to learn more. You can check out our Tax Equity Modeling course, or read these free Pivotal180 blogs:
If you’d like to get in touch with Reunion, either as a project developer with transferable credits to sell or as a potential buyer of credits, you can email them at info@reunioninfra.com You can also reach out to them about employment opportunities (they’re hiring!) using the same email address.
We’d love to hear your feedback on the interview, and you can comment with questions or reflections on our LinkedIn post or the YouTube video itself. Thanks for watching!
If you’d like to be connected to their team, please reach out to Pivotal180 at alison@pivotal180.com
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