Are Opportunity Zones Truly an “Opportunity” for Renewables?
Over the last year, as renewable energy developers, owners and investors have continued to seek avenues for enhanced project returns, the concept of Opportunity Zones has gained increasing focus. At FTI Consulting, discussions with our clients and other market participants have led us to several conclusions – first, that Opportunity Zones may, in fact, represent a form of project development alchemy, and second, that the concept is not well understood by most in the renewables industry.
Like the investment tax credit (“ITC”) and production tax credit (“PTC”), the concept of Opportunity Zones was born out of federal tax schemes designed to tilt the flow of funds toward investments deemed to be in the interest of the greater common good. However, unlike the ITC and PTC, the underlying tax incentives were not designed with renewable project development in mind – to wit, the fundamental tax incentive associated with Opportunity Zones is deferment, or forgiveness, of capital gains tax with respect to a qualifying investment. Given the depreciable nature of renewable projects, a deeper review of the underlying qualification requirements is necessary to understand the potential for value to a developer or owner of renewable projects.
In this article we provide the reader with a basic framework of Opportunity Zones, their intent, and headline qualification requirements, as well as key investor and portfolio considerations. To be sure, not all developers and investors will be able to benefit from Opportunity Zones; however, those market participants who are able to efficiently deploy capital under the umbrella of this new tax incentive will stand to gain a key financial advantage.