Overcoming Barriers to Scalability in Sustainable Finance (Part 3 of 3)
Today, the sustainable infrastructure industry is at a pivotal turning point. More capital is available than ever before, but there exist barriers to efficiently connecting that capital to new opportunities.
This post, which is the third and final installation of our blog series on sustainable infrastructure financing barriers, discusses how modern technology and automated processes can alleviate barriers to scalability in sustainable project finance.
Barrier #3: Complex tax credit requirements make compliance challenging to manage and track
One year after the landmark passing of the IRA, a lack of clarity around project eligibility and compliance has resulted in a tax credit market that is mired in complexity and sluggish processes. For example, it took more than nine months after the passage of the IRA for the IRS to propose initial guidelines for direct pay – a fundamental mechanism of IRA tax credits. Thus, while many of the IRA’s tax credits created significant financial benefits for sustainable infrastructure projects, the tardiness and ambiguity of these new guidelines have made it difficult for both financiers and developers alike to decipher a given project’s eligibility for tax credits and their various adders.
Beyond basic tax credit qualification, it is also critical for project developers and financiers to understand what is necessary to access the credits and maintain compliance with their requirements. This process involves navigating a maze of documentation creation and tracking, data integration from various sources like payrolls, permits, and interconnection documents, and other data management tasks that must be actively maintained and easily auditable throughout a project.
While the tax credit market has lagged, deals have skyrocketed.
By April 2023, a staggering $150 billion in capital investment in domestic utility-scale renewable energy projects and manufacturing facilities had already been announced, totaling nearly 96 GW of renewable energy capacity. This massive inflow of projects translates to mountains of data and documentation that deal teams must manage and organize to track project tax credit eligibility. Already small and overworked teams can’t keep up with new deals and project-level data, as they are too busy preparing accurate, relevant documents for timely submission.
It’s becoming increasingly clear that current processes and systems do not provide sufficient support for growing operations to take full advantage of IRA tax credits. In order to meet fundamental requirements and maintain auditable and organized documentation, the industry must digitize and unify its data.
While the IRA has been an incredible financial boost to the industry, the reality is that only some organizations can take full advantage of its tax credits. As with the first two financing barriers discussed in this blog series, the current processes and tools will not solve current problems. Critically, a single source of truth can enable organized and transparent obligation tracking while minimizing the risk of manual error or missing required documents.
Dependence on static tools also limits the ability of the industry as a whole to evolve with new financial opportunities like the IRA. By embracing digital project finance solutions, the industry will scale and develop a more diverse, liquid, and lucrative market.
Leverage software to tackle tax credit compliance.
Today, the sustainable infrastructure industry is full of promise. Now at cost-parity with fossil fuels, established renewable energy technologies like wind and solar are proliferating and reaching new customers; emerging technologies like battery energy storage, green hydrogen, and carbon capture have also started to gain traction. Smaller distributed project economics have improved and have received a big financial boost from the Inflation Reduction Act. The market is poised for massive growth and diversification, and developers, financiers, and the entire global community will benefit from it - if the industry can modernize its approach.
There remains a considerable gap between deployable capital and the increasing volume of projects that need funding. Despite advances in data availability and technology, investing in sustainable infrastructure consists mainly of manual and inefficient processes that depend on spreadsheets and siloed systems. The industry needs proper data digitization, cloud-based software, and automated processes necessary for deal transparency, velocity, and a diverse, liquid market. When it comes to project tax credit requirements, this can’t be overstated. To participate in a complex and constantly-evolving market, technology like automation and data room management must be leveraged to squeeze every cent out of the IRA.
Sustainable investing is time-consuming and costly, and its lack of efficient processes will continue to hinder the urgently-needed acceleration of the sustainable infrastructure industry. While the IRA will undoubtedly inject much-needed capital into the renewable energy industry, the full potential of global decarbonization will not be realized until existing barriers to financing and development are addressed head-on.
“The Key to Unlocking the Full Potential of the Inflation Reduction Act, Bridging the Sustainable Investment Gap with Automation, Digitization, and Optimization” is the latest white paper from Banyan Infrastructure. It further discusses how technology can alleviate the problems faced by the sustainable infrastructure finance industry so it can take full advantage of the capital unlocked by the IRA. Download it here.