‘Tax equity’ comeback in Wells Fargo wind deal

Wells Fargo’s $141m investment in a US wind project marks the return of a type of transaction in which big banks buy into wind farms in order to take advantage of their tax credits.

Wells Fargo has invested $141 million in a portfolio of US wind projects owned by Texas-based wind energy developer Horizon Wind Energy.

Horizon said the deal will “accelerate the monetisation” of the tax benefits being generated by the wind farms, which are located in Kansas, Oregon and Iowa. All three projects are operational, according to the Horizon website, and total 604 megawatts in generating capacity.

The deal, commonly referred to as a “tax equity” transaction, is a type of investment structure commonly seen before the financial crisis but which has since become a scarce occurrence. Banks like Wells Fargo used to buy the equity in wind projects as way to shield their earnings from tax liabilities, since the projects’ equity ownership comes with tax credits that can be used to offset taxable income. Developers typically didn’t have large enough incomes to take full advantage of the tax credits, while banks did, so the deal made sense to both parties.

But with the huge losses stemming from their investments in mortgage-backed securities, banks had very little, if any, income to shield from taxes so the bank market for so-called “tax equity” dried up in the wake of the financial crisis.

The Horizon deal, however, indicates that such transactions may again become mainstream as banks' balance sheets become healthier and they again find a need to shield some of their income using tax credits from wind projects.

Aside from Wells Fargo, Horizon Wind Energy said in a statement that four other firms had invested in the project: JPM Capital Corporation, New York Life Insurance Company, New York Life Insurance & Annuity Corporation, and GE Energy Financial Services.

Their commitments total $376 million and bring the wind portfolio’s total financing to $517m, Horizon said.