How renewable energy companies can increase efficiencies and lower risks

These incentives, investor interest and other factors have led to soaring growth in the sector. The International Energy Agency (IEA) reports that in 2023 the world added 50 percent more renewable capacity than the prior year and predicts the next five years will see an even more dramatic rise. It’s significant that this growth is global, and many of the companies driving the boom have expanded rapidly, with existing and planned operations in multiple countries and regions.

There are however some headwinds for renewable energy companies. For one, growth varies significantly by jurisdiction, and the prospects are dim for some markets, at least in the short term. According to the IEA, China is a standout, and the US, Europe and Brazil are making notable strides. But many low- and middle-income countries simply can't afford to transition from fossil fuels. In addition, relatively high interest rates and concerns over shifting energy policies have caused some investors to move away from alternative energy funds.

These headwinds have not significantly dampened prospects for the sector. But mature alternative energy companies are facing what virtually all high-growth multinationals confront in times of global economic uncertainty — the need to promote efficiencies and lower risks to compete and survive. This article addresses some of the challenges commonly faced by renewable energy companies operating across borders and how they can effectively address them.

Incentives

The pandemic offered many lessons for multinational companies and changed the way many of them operate, including adjusting supply chains to make them more resilient. Lockdowns and other disruptions also threw into relief the importance of keeping abreast of and understanding tax concessions, incentives, exemptions and rebates. These were introduced rapidly in countries around the world during the pandemic to lessen corporate economic burdens. As we’ve mentioned, many countries have introduced similar incentives to promote inbound investment into renewable energy.

Tracking and understanding energy-related incentives on a global scale is difficult, but it’s essential for maximising profitability. Understanding incentives in just one country typically requires professional guidance. In Vietnam, for example, renewable energy companies may be eligible for a range of incentives and exemptions, including those related to land-use tax and rentals, credit loans, corporate income tax and tariffs. Failing to take advantage of any of these can lead to considerable, and needless, loss of tax concessions and rebates. Of course, the more countries an energy company operates in, the more of these risks it will face. Most will look to a third-party global tax advisor to ensure they take advantage of all available incentives in every country of operation.

Tax efficiency, reorganisation and rationalisation

As mentioned, the renewable energy sector has seen remarkable growth, and many individual companies have expanded both organically and through acquisition into multiple jurisdictions. After periods of prolonged growth and expansion, most companies will greatly benefit from a comprehensive review of their legal entities, commonly called a legal entity rationalisation.

These reviews are typically conducted by a third-party global tax expert, and even with outside help rationalisations can be time-consuming and complex. The goal is to optimise the entire organisation’s tax footprint, striking off or consolidating entities that incur significant costs without providing commensurate value.

The benefits of optimising a multinational’s legal entity and operational structure are considerable. Unnecessary entities come with recurring costs, such as preparing and filing corporate and indirect tax reports and making any payments. In addition, all entities come compliance risks — such as those related to late filings — and the possibility of tax leakage and other inefficiencies. It’s not uncommon for an organisation that has grown quickly and acquired multiple companies to actually lose track of all its entities, which of course only heightens compliance risks.

Regulatory compliance

One of the main perils of a growing multinational organisation is an inability to keep up with regulatory obligations in all countries of operation. As the company expands, internal resources are stretched thin and lack of oversight may lead to non-compliance in areas such as payroll, immigration, worker classification and more.

These risks are a reality for any multinational organisation, but energy is a heavily regulated sector, so pitfalls are compounded. To maintain compliance with what might be called common regulatory obligations — such as those related to tax filings and payroll — as well as energy-related regulations, energy companies may have to maintain vendor relationships with a number of third-party vendors, including not just corporate services providers but law firms, banks, logistics companies and engineering consultants.

Lok Kah Seng, Vietnam-based senior business development manager for Vistra, stresses that regulations matter, but so does what an energy company does. “Besides typical finance, tax and other filings that apply to all foreign companies in Vietnam, alternative energy companies must pay attention to and follow the registered business scopes of their Vietnam entities. Any increase in activities or scale requires updated licensing, which can be difficult to manage without local third-party expertise.”

Vendor consolidation

All multinationals regardless of size must at some point consider vendor consolidation to reduce administrative burdens and lower compliance risks. For example, a company that has five payroll providers in five countries will almost certainly look to hire a single global payroll provider to simplify operations. This applies in areas from HR to immigration to tax and beyond.

“One of our clients in the renewable energy space has over 200 legal entities across multiple countries,” says Tom Lickess, global head of tax and statutory accounting solutions at Vistra. “The company’s tax obligations were so complex across all jurisdictions that it made sense to hire a single provider to manage it all. Virtually no company has internal tax experts that can fulfil their corporate and indirect tax preparation, reporting and filings, but companies with operations in many countries often spend an undue amount of time and resources managing multiple local providers. Using a single global tax expert can be a huge cost savings and allow an energy company’s CFO to sleep easier.”

Energy companies vetting corporate services providers should review each provider’s global footprint, along with its ability to provide information, advice and services related to corporate and indirect tax, HR, legal, banking, immigration and licensing.

A global platform

Platform consolidation is closely connected with vendor consolidation, and technology should be carefully considered when vetting providers. Organisations with complex legal entity structures can benefit significantly from a single cloud-based platform that allows them to track and manage entities in each country of operation. Some platforms even allow an organisation to create entities online, while also storing legal and other documents such as energy licenses, and providing a compliance calendar showing tax-filing and other obligations for each entity.

“Getting access to a single, secure entity management platform is increasingly important, not just for energy companies but for all multinational organisations,” says Lickess. “As tax and other regulatory obligations proliferate, it’s more difficult than ever to achieve global compliance, and using one platform can greatly reduce risks and administrative burdens. Working with a provider that not only has a robust platform, but also complementary global advisory services all contained within a single technology-enabled solution is ideal for mitigating risk and promoting efficiencies.”