Biden's green energy plans may face challenges due to the unexpected threat posed by Basel III bank rules.

• Clean energy and climate goals are at risk from a proposed banking regulation, as warned by banks, renewable energy groups, and congressional Democrats.
• Banks would need to maintain higher capital levels for specific investments, including tax equity investments in renewable energy projects under the "Basel III endgame" framework.
• In recent years, the renewable energy sector has attracted $18 billion to $20 billion through tax equity investments, and it is predicted to grow to $50 billion in the near future.

In Washington, D.C., Julian Torres, standing on a rooftop overlooking Gallaudet University, looks at the row after row of solar panels his company, Scale Microgrids, helped install as part of a larger system of renewable energy that has saved the college about $1 million per year in utility costs.

The planned change in banking regulations is causing concern among many people and institutions, including Torres, the company's chief investment officer, that such projects will be nearly impossible in the coming years.

The Basel III endgame plan aims to prevent a global financial crisis by increasing the capital banks must hold for certain investments, thereby cushioning them against potential losses.

According to Torres, the proposed rule may make projects unfinanceable due to the implied costs, and he has already received feedback from bankers stating that they won't be able to continue funding renewable energy projects like those designed and installed by Scale Microgrids at Gallaudet.

The Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency are preparing a framework for change, which has been met with concerns from major banks, renewable energy companies, environmental groups, and over 100 lawmakers.

Renewable energy projects receive funding from banks through tax equity investments, which provide the banks with federal tax credits. According to the American Council on Renewable Energy, renewable energy currently receives $18 billion to $20 billion annually through tax equity investments. This market is expected to more than double to $50 billion in the near future due to increased demand for tax credits.

The proposed framework would quadruple the amount of capital banks would need to fund renewable energy projects through tax equity investments.

According to Capstone, annual tax equity investments in the renewable energy sector could decline by as much as 90%.

"Renewable energy presents a significant challenge, as many individuals humorously refer to it as a "solar-coaster" due to its fluctuating nature, Torres stated."

Jerome Powell, the Federal Reserve Chair, informed lawmakers that significant modifications are necessary to the proposed framework, and he acknowledged the public's opinions regarding the influence on green energy.

The Biden administration's push for cleaner and greener energy sources is at odds with the higher capital requirements for renewable energy projects under Basel III regulation. Biden signed a 2022 law that expanded tax credits for clean energy.

Gallaudet's chief operating officer, Dominic Lacy, stated that the university must replace its outdated infrastructure and opted to switch to more sustainable energy sources. The resulting system incorporates Tesla batteries, solar panels, and engines capable of utilizing renewable natural gas as a potential future energy source.

"Without the tax credit, we would have struggled to replace the infrastructure; it would have been extremely challenging," he stated. "To be honest, I'm not sure we could have replaced our energy at the same scale without it."

Over 200 comments were submitted to the financial regulators regarding the 1,087-page proposal.

The American Bankers Association and the Bank Policy Institute, representing the largest banks, stated in a joint letter that the proposed rule's new capital requirements would make renewable energy projects "uneconomic."

The Clean Energy State Alliance, a bipartisan coalition of state energy agencies, expressed concerns to regulators about a higher capital requirement, stating that they saw little reason for those investments to be considered riskier than they currently are.

"The clean energy industry's experience with tax equity investments does not justify such a drastic shift, the group's letter stated. We urge you to take into account the effects of such a rule on state and national climate objectives, as well as the economic consequences of slowing down the clean energy transition."

Rep. Sean Casten, D-Ill., spearheaded a group of 106 Democrats in writing to the agencies to reconsider the proposed rule change and explore options that accurately reflect the risk profiles of tax equity investments.

A final framework is anticipated to be released by financial regulators after taking comments into account later this year.