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Will The Fortune 500 Save the Solar Industry?

The economy may be giving renewable energy companies plenty to fear in the year to come, but not all the forecasts are gloomy. At a time when analysts are predicting shrinking venture capital investment and companies are shelving plans for new factories, some industry insiders are predicting at least one financing trend that could increase renewable energy projects: tax equity financing.

It might sound boring, but according to Michael Butler, CEO of investment bank Cascadia Capital, tax equity financing for renewable energy projects – that is, investing in renewable energy in exchange for the tax credits — is being considered by large corporations including Microsoft (s MSFT), Google (s GOOG) and others. If Microsoft entered this market in 2009, “that would be a big deal,” Butler says. Financing options are hard to come by, and a surge in corporate tax equity financing could significantly boost the U.S. market.

Why might corporations be considering these investments now? Well, new and improved federal renewable-energy tax credits took effect at the beginning of this year. And because the U.S. incentives come in the form of tax breaks, only companies that pay enough in taxes can take advantage of them. In other words, if a company or individual doesn’t make enough money, it can’t use the credits. But plenty of smaller customers would like to install solar power.

Here’s how it works: A company buys a stake in a renewable energy project in exchange for the tax credits over several years. So-called power-purchase agreement (PPA) providers act as the middle men, selling those stakes to help finance the projects, and also signing long-term agreements with customers who buy the resulting power.

At a time when capital is tight, many renewable energy customers would like to avoid paying all the upfront costs by financing projects this way. But not enough companies with big tax appetites are involved in these financing schemes to satisfy that demand. “The tax-equity hole is the biggest hole right now,” Butler says.

That’s not to say that these financing models are new. Power purchase agreements (PPAs) have been around for years, taking advantage of state incentives, as well as the previous federal credits to make large-scale installations affordable for smaller buyers. And some state incentive programs have built-in partnership incentives. Oregon’s Business Energy Tax Credit program, for example, enables nonprofits, public agencies and others to use “pass-through partners,” businesses that finance energy projects and receive the tax benefits their partners wouldn’t otherwise be able to use. Nike (s NIKE) is one corporation that has participated in the program, committing $1 million to energy-efficient lighting for schools.

According to a state report, Oregon approved $60.86 million in business energy tax credits in 2006 — and that was before it increased its energy credits in 2007. The state estimates the tax credits will cost it $144 million from 2009 to 2011, The Oregonian reported earlier this month.

For now, it’s still too early to tell if corporations will make their move or if they’re just weighing their options. A Microsoft spokesperson would only comment that the company is “fully evaluating all opportunities that are available and could help the company reduce its impact on the environment.” Google also didn’t confirm or deny by press time that it was looking into tax equity investments. And calls to a dozen other Fortune 500 companies generated “no comments.” But industry insiders speculate that the new federal incentive could sweeten the pot, leading Fortune 500 companies to invest in these types of projects in a much bigger way.

Chris O’Brien, head of North American market development for Swiss solar manufacturer Oerlikon, says he thinks it makes sense for large corporations to take advantage of the investment tax credit for solar, which was last year extended through 2016. “The [extension of the credits] was almost immediately followed by the collapse of the available pool of structured equity to finance those projects,” O’Brien says. “It wouldn’t surprise me that corporate players with significant profits and tax burdens would be looking at PV projects as a way to invest their money into sustainable energy and, at the same time, capture significant tax benefits from that,” he says.

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