The Takeaway: A Q&A With Howard Steinberg on Transferable Clean Energy Tax Credits

Can you share some background regarding the new market opportunity for clean energy tax credits?

The Inflation Reduction Act (IRA), signed into law in August 2022, includes $369 billion in energy-related spending, including new and enhanced incentives for clean energy. The IRA restores and enhances the production tax credit (PTC), now available for solar as well as wind and other qualified energy resources, and the investment tax credit (ITC). It adds an enhanced tax credit for solar and wind components manufactured in the U.S. and new credits for clean hydrogen, zero-emission nuclear energy, advanced manufacturing, standalone battery storage, and sustainable aviation fuel, among others.

Prior to the IRA, an investor was required to enter into complex tax structures such as partnership flips and sale-leasebacks to benefit from clean energy tax incentives. Effective January 1, 2023, the IRA permits a one-time transfer of clean energy credits by project developers to unrelated purchasers.

What are the benefits to credit purchasers and sellers?

A corporate purchaser in any industry with sufficient current taxable income and/or taxable income in the prior three years can potentially benefit from a purchase of the credits. The purchaser benefits from the discount, reflected in the purchase price of the tax credit when compared to the dollar-for-dollar reduction in cash tax liability. The purchaser also supports clean energy initiatives by directing capital into clean energy development projects through credit purchases.

For sellers, transferability unlocks new fundraising opportunities and liquidity for them, and they do not have to report the sales proceeds as taxable income. And, of course, purchasers and sellers both benefit from the reduced operational complexity associated with a traditional tax equity structure. 

In terms of payment timing, the Treasury’s draft guidance provides significant flexibility as to when a purchaser can purchase a credit and receive benefits from an estimated tax perspective. From the perspective of a credit purchaser, payment for credits would be made no earlier than the quarterly estimated payment due dates and can be made as late as the due date of the tax returns for the year to which the credit relates. This is balanced with the cash needs of the seller.

Credit sellers benefit from financing solutions that can include tax credit sale bridge financing, providing the seller with needed liquidity, pending receipt of payments from the purchaser or debt secured by direct pay proceeds (e.g., direct IRS credit as estimated tax payments available for certain types of credits).

How long does it take to purchase a credit? What is the process?

The purchase of a credit is a negotiated transaction between purchaser and seller that involves a transfer agreement, limited and focused due diligence of credit details provided by the seller, indemnities, and often tax insurance, and the typical transaction timeline is four to six weeks.

What is the current state of the market for clean energy tax credits?

Transaction activity commenced in mid-2023 when the U.S. Treasury published necessary draft guidance, and it accelerated into year-end 2023. Prospective purchasers across all industries who have not had any involvement with tax equity are now entering the market.

Significant activity is occurring around “hybrid structures”—the sale of tax credits out of tax equity structures. Such hybrid structures combine some of the benefits of traditional tax equity structures, such as depreciation deductions and a tax basis step-up, with the enhanced liquidity provided by tax credit sales.

This is quickly evolving into a multibillion-dollar annual market; the expectations are for clean energy credits to ultimately consume a meaningful portion of the corporate income tax base.

Generally, pricing ranges from around 85 to 95 cents on the dollar. However, numerous factors impact the pricing of credits, such as the creditworthiness of the seller and the purchaser’s risk tolerance, the size of the credit, and others, including the following:

• The type of credit (ITC vs. PTC) and the underlying technology (wind and solar are currently the most predictable from a pricing perspective).
• The availability of bonus tax credit adders, which may increase ITCs from a typical base credit of 30% (assuming prevailing wage and apprenticeship thresholds are met) to potentially as high as 70%. The most common bonus credits are those for domestic content and energy communities, each of which increases the credit by 10%.
• Whether the purchaser requires insurance (e.g., insurance with respect to basis step-ups, recapture risk, and bonus adders for ITCs).

So, what’s the Takeaway?

The clean energy tax credit transfer market has rapidly gained momentum following the passage of the Inflation Reduction Act. While the market only got started in 2023, it has evolved into a multibillion-dollar annual market, given the breadth of the opportunity and the substantial benefits for buyers and sellers.

For the tax credit purchaser, the cash tax benefit of purchasing a tax credit at a discount when compared to the dollar-for-dollar reduction in cash tax liability coupled with flexibility around payment timing for the purchased credit provides a compelling financial incentive. From the perspective of the seller, the tax credit transfer efficiently provides necessary capital to develop clean energy projects.

From the perspective of policymakers, according to a U.S. Department of the Treasury official, “increased access to energy credits is acting as a force multiplier so that more clean energy projects are built quickly and affordably.” Given the alignment of policy objectives with the benefits for both purchasers and sellers of clean energy tax credits, it is inevitable that this market will continue its rapid growth trajectory.