Banks find clean-energy allies in fight against stricter capital rules

US banks pushing back against tougher capital rules have found an ally in the renewable power industry, as project developers warn that a proposal to guard against a financial crisis risks slowing down the clean-energy transition.

The so-called Basel III endgame proposal, being drawn up by the Federal Reserve and other banking regulators, aims to make the system safer by increasing the amount of capital that lenders have to hold on their balance sheets. 

The biggest US banks — including JPMorgan Chase and Bank of America — have criticised the measure, arguing that higher capital requirements would increase borrowing costs and push lending outside the regulated banking sector.

Some of the same banks have historically been among the biggest sources of renewable finance through a system called tax equity, which enables them to claim credits against tax liabilities by investing in green energy. 

Energy developers and industry groups say that by requiring banks to hold four times more capital against each project, the proposed capital rules threaten the economics of tax equity.

“It would be a disaster for the industry,” said Guy Vanderhaegen, chief executive of Origis Energy, a Florida-based developer with about 6 gigawatts of projects in its portfolio.

The comment period for the Basel III endgame proposal ended in January and attracted more than 300 letters from bank lobbyists, groups representing borrowers and from various industries and individuals. Regulators are expected to make changes before enacting a final rule. 

Long-standing tax credits for US wind and solar-power projects were extended for years under the Inflation Reduction Act, the landmark climate law that passed in 2022. Because projects often lack the tax liability to utilise these credits, developers enter transactions with major banks, with JPMorgan and Bank of America making up half of the current $20bn tax equity market. 

Industry groups and the largest US developers have submitted letters warning that the proposed requirements “threaten to derail the clean-energy transition” and could shrink the tax-equity market by 80-90 per cent.

The American Clean Power Association estimated that renewable energy tax-equity investments could be reduced to $10bn this year, down from a projected $25bn, due to the uncertainty from the proposed capital rule.

“At a time when tax equity needs to expand, we’re seeing it contract,” said Sheldon Kimber, founder of Intersect Power, a US developer, adding that banks had been anxious to make long-term commitments. “It just is a huge detriment to our business and the industry.”

Rubiao Song, head of energy investments for JPMorgan, said in a January webinar with the Norton Rose Fulbright law firm that he expected “major bank investors to stop issuing new commitments” if there was no resolution by mid-year.

“It is the elephant in the room,” Song said. “As of now, there is still significant uncertainty around how the final rules will read. We are proceeding cautiously.”

More than a hundred Democratic members of Congress have voiced concerns over the provision in the Basel III endgame and its consequences for the energy transition. Senator Joe Manchin of West Virginia, an architect of the IRA, warned that the proposed rules “will harm American energy security and undo years of Congressional progress”.

Federal regulators have suggested they would be amenable to altering the risk-weighting on renewable projects in the final rule. 

“We’re open to comment that is evidence-based, that’s analytic, that demonstrates that the risk-calibration should be different,” said Michael Barr, the Fed’s vice-chair for supervision, on a Bloomberg podcast in November.

While developers have the option to “transfer” or sell tax credits under the IRA as an alternative, tax equity is expected to remain the preferred option for financing because it allows developers to sell the tax benefits of depreciation.

“We’ll still find a way to function, but we won’t function at the same level,” said Keith Martin, co-head of projects at Norton Rose Fulbright. “The IRA incentives will be less meaningful. They’ll spur less activity than if there were a functioning tax-equity market.”

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