The Biden Administration’s Inflation Reduction Act of 2022 (IRA) which was started in August 2022 allows US tax-exempt entities to receive the full value of the tax credit for qualifying clean energy projects.
Infrastructure companies, including Startups and Scaleups in the Renewable sectors are now eligible for tax-exempt entities starting in 2023, and the credit availability will remain until 2032 after which the tax credits begin to phase out under the IRA.
One of the main attributes of the IRA is the Investment Tax Credit (ITC) which will play a pivotal role in infrastructure financing by providing financial support for projects that might otherwise face challenges in attracting private investment.
Infrastructure projects often involve significant risks, making them less attractive to private investors. The ITC will help mitigate these risks, making the projects more appealing to angel investors, venture capitalists, and private equity firms by improving the overall risk-return profile.
Another benefit of the ITC will be to encourage innovation in infrastructure projects. This innovation can attract early stage investors like angels and VCs who are often drawn to groundbreaking and high-potential ventures. Venture capitalists, specializing in supporting innovative ventures, may also find the ITC infrastructure projects appealing.
The main purpose of the IRA and the ITC in particular was to help lower the capital costs associated with infrastructure development. This can be a key factor in attracting private equity firms that seek opportunities with favorable financial structures and returns.
For private equity, infrastructure projects often have long payback periods, which may deter private investors seeking quicker returns. One of the benefits of the ITC will be to extend the investment horizon, making these projects more compatible with the patient capital approach of private equity investors.
Lastly, the ITC will contribute to the overall viability of infrastructure projects by bridging financial gaps and ensuring their economic feasibility. This increased viability is attractive to all types of investors, as it reduces the likelihood of project failure.
One year on, we have already seen how the Inflation Reduction Act has played a significant role in infrastructure financing by addressing various financial challenges, thereby making these projects more attractive to angel investors, venture capitalists, and private equity firms. The combination of reduced risks, increased viability, and improved financial returns enhances the overall appeal of infrastructure investments to the private sector.
This article was taken from a post on LinkedIn