WASHINGTON, DC – On a rooftop overlooking Gallaudet University in Washington, DC, Julian Torres stands next to row after row of solar panels that his company, Scale Microgrids, helped install as part of a larger renewable energy system that saved the university about $1. million per year in utility costs.
Torres, the company’s chief investment officer, is among many people and institutions who worry that such projects will be nearly impossible in the coming years because of a planned change in banking regulations.
The plan, part of an international agreement widely known as the “final phase of Basel III”, aims to prevent a global financial crisis by increasing the amount of capital that banks must hold for certain investments to protect them against potential losses.
Torres said the proposed rule “potentially makes projects unfundable with the implicit costs” and that he has already heard from bankers that they would not be able to continue financing renewable energy projects like those designed and installed by Scale Microgrids in Gallaudet.
Major banks, renewable energy companies, environmental groups and more than 100 lawmakers also expressed concerns about the proposed framework for the change being prepared by the Federal Reserve, FDIC and Office of the Comptroller of the Currency .
Banks help finance the vast majority of renewable energy projects through tax equity investments, which allow them to qualify for federal renewable energy tax credits. Currently, renewable energy generates between $18 billion and $20 billion annually through tax equity investments, according to the American Council on Renewable Energy. Spurred by demand for tax credits, this market is expected to more than double to $50 billion in the coming years.
However, the amount of capital banks would need to finance renewable energy projects through tax equity investments would quadruple under the proposed framework.
This could result in annual tax equity investments in the renewable energy sector falling by up to 90%, according to policy analysis firm Capstone.
“A lot of people joke that we’re on the solar roller coaster,” Torres said of the ups and downs of renewable energy. “But this is probably the biggest challenge we face right now.”
Federal Reserve Chairman Jerome Powell told lawmakers that “significant and significant changes” were needed to the proposed framework and that he was “aware of the comments” regarding the impact on green energy.
The higher capital requirements for renewable energy projects in Basel III put the regulations on a collision course with the Biden administration’s push for cleaner, greener energy sources. Biden has championed a 2022 law providing an expansion of clean energy tax credits.
Dominic Lacy, Gallaudet’s chief operating officer, said the university needed to replace its aging infrastructure and decided to transition to more renewable energy sources. The final system includes Tesla batteries, solar panels and motors that can run on renewable natural gas if that becomes a viable option in the future.
“If we didn’t have access to this tax credit, we would have had to find another way to replace the infrastructure; that would have been incredibly difficult,” he said. “Frankly, I don’t know if we could have replaced our energy on the scale that we did.”
Financial regulators overseeing the framework received more than 200 comments on the 1,087-page proposal.
In a joint letter, the American Bankers Association, which represents the largest banks, and the Bank Policy Institute warned that renewable energy projects would be “unprofitable” under the new capital requirements proposed by the rule proposed.
The Clean Energy State Alliance, a bipartisan coalition of state energy agencies, also wrote to regulators raising concerns about a higher capital requirement, saying it sees no reason why these investments should be considered riskier than they currently are.
“The clean energy sector’s experience with tax equity investments does not warrant such a drastic change,” the group’s letter said. “We invite you to consider the impacts of such a rule on state and national climate goals as well as the economic impacts of slowing the transition to clean energy.”
Rep. Sean Casten, D-Ill., led 106 Democrats in a letter asking agencies to “reconsider this change in the proposed rule and consider alternatives that accurately reflect the risk profiles of equity investments tax”.
Financial regulators are expected to take the feedback into account and publish a final framework later this year.
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