The 2024 comprehensive guide to clean energy transferable tax credits

August 25, 2023

Table of contents

General questions:

  1. What are transferable tax credits (TTCs)?
  2. Which federal tax credits are transferable?
  3. Why did Congress create transferability provisions?
  4. When does transferability make sense versus tax equity?
  5. What role does Crux play in a TTC transaction? How is Crux distinct in the competitive marketplace?
  6. What is the transaction process and how does timing work?
  7. What documents are required to apply the tax credits?
  8. What are the structures that will emerge around transferability?
  9. What will the role of banks, advisors, and other intermediaries be?

Questions for tax credit buyers:

  1. Who can buy credits?
  2. What do credits typically cost? How do I calculate my return on the credits?
  3. What do transaction costs entail?
  4. What are the risks?
  5. What do the carry forward/carry back rules entail?
  6. When can credits be applied to your tax liabilities?

Questions for sellers:

  1. What are buyers looking for?
  2. What bonus tax credits are available and who qualifies?
  3. What is the typical pricing structure for TTCs before and after fees and costs?
  4. What are the risks associated with making TTCs available?
  5. What are transaction timelines for TTCs versus tax equity?
  6. When is a TTC generated and when do deals typically fund? Is bridge financing available?

What are transferable tax credits (TTCs)?

The 2022 Inflation Reduction Act (IRA) is the United States’ largest ever investment in clean energy. The clean energy sector has already been growing exponentially and the IRA is expected to catalyze $3 trillion of investment in the US over the next 10 years, according to Goldman Sachs

The IRA makes principal use of tax credits, which are more generous to developers than ever before and are extended for at least 10 years, providing stability and certainty to our industry. In addition, the IRA added eligible categories for new decarbonization technologies (such as stand-alone energy storage, hydrogen, and carbon capture) and advanced manufacturing. 

To allow the marketplace to realize the full value of the credits, the law introduces a new transferability mechanism that permits 11 federal clean energy tax credits to be sold for cash. The IRA also creates “direct pay” for tax exempt entities (like schools, tribes, and governments) and certain categories of credits on a limited basis. Though a limited form of transferability exists in a number of state tax credits, those credit programs are at least an order of magnitude smaller than the new IRA credit regime, and there are substantial differences in the structure of those markets. True transferability has never existed at the federal level until now.

Which federal tax credits are transferable?

The 11 energy tax credits that the IRA makes eligible for transferability are:

  1. Section 30C credit for alternative fuel refueling property
  2. Section 45 renewable energy production credit (PTC)
  3. Section 45Q carbon capture credit
  4. Section 45U zero-emission nuclear power production credit
  5. Section 45V clean hydrogen production credit
  6. Section 45X advanced manufacturing production credit
  7. Section 45Y clean electricity production credit
  8. Section 45Z clean fuel production credit
  9. Section 48 energy investment tax credit (ITC)
  10. Section 48C qualifying advanced energy project credit
  11. Section 48E clean electricity investment credit.

Why did Congress create transferability provisions?

Before the IRA, various forms of tax equity were the only external mechanism to monetize project tax attributes, with “tax investors” investing directly into partnerships with developers and receiving a special allocation of cash, tax credits, and depreciation in exchange for investment. 

In 2022, tax equity accounted for roughly $18 billion of financing for projects. Being a partner in a tax equity transaction is structurally complex and generally requires domain knowledge and monitoring and oversight capabilities. As a result, tax equity has principally been the domain of banks and insurance companies – and more than 80% of the market is composed of the 10 largest tax investors. 

Given the ability to monetize depreciation and step-up project basis, tax equity and partnership structures have been and will continue to be an important tool to finance renewables. 

However, the existing tax equity market will not be able to absorb the five-fold increase in the dollar value of tax attributes generated. Many new buyers will need to participate in this market. In 2022, US corporations paid $334 billion in taxes and the Congressional Budget Office forecasts that number to grow to $527 billion by 2031. For $83 billion (Credit Suisse’s independent estimate of the potential annual outlay of IRA credits) to be monetized to corporations, roughly 16% of all 2031 corporate tax liabilities would need to be allocated to tax credits.

When does transferability make sense versus tax equity?

Historically, renewable energy project developers were required to enter into joint-ventures and leasing arrangements with other private companies that had a sufficient tax liability in order to capture the full value of the major clean energy tax credits like the ITC and PTC. These arrangements are known as "tax equity" and are relatively complex financing structures. This has created a bottleneck on the deployment of renewable energy over the last several decades. Generally, only large financial institutions with project finance underwriting capabilities and a small cohort of non-financial companies have been repeat "tax equity" investors.

The transferability feature for various clean energy tax credits included in the IRA makes it possible for a larger universe of corporate taxpayers to take advantage of the credits since they will not be reliant on entering into complicated tax equity structures to see a benefit. Transferability is a simpler structure and should entice a much bigger pool of corporate taxpayers to participate in clean energy project financing. 

With more buyers, a larger pool of project developers should be able to benefit both from the ability to monetize their tax credits and the simpler process for doing so. Tax credit monetization plays a significant role in capitalizing clean energy projects, so more capital access should be a catalyst for many project developers, especially those who may not have established relationships with tax equity providers. 

Finally, while the IRA streamlined the process for project developers to monetize their tax credits, this transaction is still complex and it will continue to be important for buyers and sellers to engage their advisers throughout the process. Syndicators, tax advisors, and other intermediaries are going to continue to play a critical role in connecting buyers and sellers, structuring transactions, and conducting due diligence on TTC investments.

What role does Crux play in a TTC transaction? How is Crux distinct in the competitive marketplace?

At Crux, we're laser-focused on creating the ecosystem that will enable all industry participants to scale their businesses and maximize opportunities in this emerging market:

  1. Clean energy developers of all sizes can maximize the value of their tax credits, tapping into a network of existing and new tax credit buyers and streamlining transactions through contract templates and workflow software.
  2. Tax credit buyers can manage their tax liability and achieve their sustainability goals, discovering credits in our network, managing risk through diligence tools and insurance options, and reducing administrative overhead.
  3. Banks, syndicators, and advisors can scale their tax syndication efficiently and profitably, tapping into this new industry by connecting developers and tax credit buyers through a white labeled portal, using purpose-built workflows to manage transactions, and unlocking blended tax equity and transferability structures and other innovative offerings.

Our network and tools will help all parties streamline the transaction process, access a large and liquid market, and reduce risk through our tools and advisory partners – facilitating more and cheaper transactions that achieve internal goals and accelerate the energy transition.

We also know that these transactions are and will remain complex and bespoke for some time. Crux enables better coordination between credit buyers and sellers as well as their advisers, lawyers, and other partners.

What is the transaction process and how does timing work?

According to the IRS, eligible entities that wish to pursue a TTC transaction may take the following steps (noting that not all steps need to occur in the order listed below):

  • Pursue an eligible project. Identify and pursue a project that generates one of the eligible credits. 
  • Complete electronic pre-filing registration with the IRS. This will include providing information about the taxpayer, the intended eligible credits, and the eligible credit project. Upon completing this process, the IRS will provide a registration number for each eligible credit property. Complete pre-filing in sufficient time to have a valid registration number at the time you file your tax return. More information about this pre-filing registration process will be available by late 2023. 
  • Satisfy all requirements necessary to earn the eligible credit for the tax year. For example, a solar energy project would need to be placed in service prior to earning an eligible credit. Arrange to transfer an eligible tax credit to an unrelated party in exchange for only cash. Provide the transferee (i.e., buyer) with the registration number and all other information necessary to claim the transferred eligible credit. Complete a transfer election statement with the transferee.
  • File a tax return. File a tax return for the taxable year in which the eligible tax credit is determined indicating the eligible credit has been transferred to a third party and include the transfer election statement and other information as required by guidance. The tax return must include the registration number for the relevant eligible credit property and must be filed no later than the due date (including extensions) for such tax return.
  • If applicable, renew pre-filing registrations and file returns for each subsequent year that a transfer election is made to transfer an eligible credit related to the eligible credit property.

What documents are required to apply the tax credits?

Sellers and buyers complete a transfer election statement, including the registration number, which is attached to the seller and buyers’ tax returns. Importantly, according to Treasury guidance, “not all steps need to occur in the order displayed,” and “a transferee taxpayer may take into account a credit that it has purchased, or intends to purchase, when calculating its estimated tax payments.” This process principally affects filing and is not preventing deals from being signed and funded.

What are the structures that will emerge around transferability?

As developers and buyers evaluate the tradeoffs between tax equity and transferable tax credits, many are focused on two key value drivers: (1) achieving a ‘step-up’ in value from construction costs to fair market value to reflect the development premium; and (2) monetizing tax losses from depreciation. Tax equity inherently solves for both of these drivers. For transferable tax credits, there are a number of options developers and sponsors are considering.

For many developers, the ease and speed they can execute transferable transactions will outweigh the potential loss of step-up and associated tax attributes, as well as inability to immediately monetize depreciation. Many developers are able to monetize some level of tax attributes internally or via their sponsors or affiliated entities.  In other hybrid structures, developers are sizing tax equity to a certain return or allocation — allowing them to monetize the depreciation and achieve an appropriate step-up — and planning to use transferability for the balance.

Some are using other structures to attempt to achieve a step-up, including selling the project into a partnership with a third-party. There are a range of opinions as to what types of partnership structures are sufficient to achieve this valuation step-up. Anecdotally, some have suggested that a 20% ownership stake from an unrelated third party is likely sufficient to get insured; while banks may look for something closer to 35%. It is likely we’ll see a wide variety of structures, depending on the unique needs of various developers.  

What will the role of banks, advisors, and other intermediaries be?

Advisers will play an important role providing diligence, insurance, and indemnification for buyers of TTCs. While these roles are similar to those performed in tax equity deals, the TTC market is expected to streamline transactions, leading to:

  • Accelerated (and less expensive) pre-signing diligence: a credit buyer’s critical review will focus on likelihood the project will achieve on-time commercial operation (in particular, as it pertains to the target tax year), validation of the proposed fair market value, and review of cost segregation report. Stakeholders will look at appraisals, cost segregation reports, and legal/tax opinions (although perhaps not in smaller transactions). Buyers will also want to ensure that the typical series of project documents are in place (EPC, interconnection agreement, etc).  This is a subset of similar items that tax equity investors require today. This will also be combined with evaluating the credit support and creditworthiness of the developer. 
  • Provision of full seller indemnities: perhaps counterintuitively, indemnities may be an area where transferable tax credit buyers focus more than tax equity investors, as they do not have the downside protection of being part owners in the project. 
  • Continued role for insurance: we expect insurance to play a large role in early transactions, especially in transactions involving smaller or non investment grade developers. In addition to Property & Casualty insurance, tax insurance policies are actively being bound on transferable credit transactions, with a focus on insuring against recapture and disallowances of eligible basis. In many transactions, parties are agreeing to just insure the soft costs of the project - whatever is above and beyond the invested CapEx. However, some buyers are seeking to insure the entire credit value. While binding insurance typically has minimum fees of ~$150-$250k per policy, developers are increasingly looking to procure larger programs, covering portfolios of projects that share similar characteristics. Cost has come down in the market even from earlier this year, and is currently anticipated to be between ~2.0-2.5% of the insured limit for most transactions >$10M. Technology may support more efficient underwriting by insurers.

Pertaining to prospective buyers of tax credits:

Who can buy credits?

Any "eligible taxpayer" (under the IRS definition) can take advantage of transferability, meaning that tax-exempt organizations are generally ineligible. Corporations and even individuals are able to buy tax credits. 

While the buyer can be an individual, they will be subject to passive/active restrictions — meaning that the face value of the TTC can only be used to offset tax liabilities from passive, non-investment income. Some high net worth individuals and family offices that have participated in the tax equity market previously, may find transferable tax credit deals appealing if they can time the payout closer to their tax filing date. Overall, however, we do not expect the TTC market to open widely to individuals. 

What do credits typically cost? How do I calculate my return on the credits? 

Credits typically are for sale for a discount to the face value of the credits, indicated as cents on the dollar (i.e. a $0.93 TTC price indicates a 7% discount to the face value of the tax credit).

Internal rates of return on TTC transactions are particularly high, and corporations are doing their best to time credit purchases as close as possible to their quarterly estimated payments. Most taxpayers set aside cash to make tax payments including quarterly estimated payments. Those funds would not normally be able to generate a return; companies cannot choose between paying taxes and building factories. With tax credit transferability, reserved cash suddenly has the capacity to generate a real cash return, making TTCs a uniquely attractive investment.

What do transaction costs entail?

Transaction costs can include fees for advisers and syndicators, and for conducting due diligence. We find that the seller of the credit typically covers these fees up to a negotiated cap.

What are the risks?

With transferability, the risk of the IRS not respecting the tax equity partnership as valid is eliminated because no partnership exists. There may still be a need to demonstrate the true third-party nature of the transactions. Project cash flow risk is much less of a concern so long as the project remains operational and solvent, given there is no participation on the part of the tax credit buyers in the project cashflows. 

However, there are some key risks that buyers and sellers will have to navigate, particularly in the case of ITCs:

  • Recapture: recapture will continue to be an issue that needs to be navigated. Generally, developers will have to continue indemnifying buyers for this risk as they have done historically and insurance will play a key role. Even with insurance, project viability will continue to be of importance to buyers. Credit buyers won’t participate in project cash flows, but still will need to be confident the project will remain in service through the five-year recapture period. 
  • Developer creditworthiness and control: as with tax equity, the developer will be responsible for maintaining and operating the system throughout the recapture period in addition to supporting whatever indemnities they give to the buyer. A developer declaring bankruptcy and abandoning a project could trigger recapture. A benefit of transferability is that, after the recapture period, the transaction with the tax credit buyer is fully resolved.
  • Eligible basis and fair market value: one of the more important risks is ensuring that the stated level of basis is eligible for tax credits. Credit sellers are historically accustomed to “stepping-up” the value of a development project through a sale to a tax equity partnership in advance of monetizing the credit to validate the value through third-party investment. While this practice is commonplace, the valuation of such items requires careful monitoring and evaluation. Developers generally share the engineering, procurement, and construction (EPC) agreement, as well as an appraisal and cost segregation report as part of diligence.

Many of these risks related to recapture are typically covered by insurance. The seller of the tax credit will commonly cover insurance costs, though buyers can also choose to purchase uninsured credits at a steeper discount. 

What do the carry forward/carry back rules entail?

The IRA entitles the tax credit buyer to carry the TTC forward for 22 years and back for three years, meaning that the buyer has up to 22 years of future tax filings to utilize the full value of the credit, and can also carry the tax credit back and apply it to previous years, as far as three years in the past.

The carryback is not as simple as applying the credit to the previous year’s return, however. Unused tax credits must first be applied to the earliest tax year in the carryback period, which is three years before the current tax year. Any unused tax savings can then be allocated to the tax year two years previous to the current year, and then finally to the last year’s tax return (illustrated in the figure below). Companies will have filed tax returns in these periods, so applying tax credits to previous years necessarily requires refiling taxes for as many as three previous tax years, and thus may be a prohibitively complex process. 

When can credits be applied to your tax liabilities?

According to draft guidance from the IRS issued in June, “A contractual commitment to purchase eligible credits in advance of the date a specified credit portion is transferred satisfies the paid in cash requirement, so long as all cash payments are made…within the period beginning on the first day of the eligible taxpayer’s taxable year during which a specified credit portion is determined and ending on the due date for completing a transfer election statement” (emphasis added). 

In the rapidly developing TTC market – like the tax equity market – one of the biggest challenges is the timing gap. Developers want to pull forward as much certainty and commitment as possible; buyers want to outlay cash as close to quarterly estimated payments as possible. Certainty around advanced commitments ensures that both objectives can be met, by allowing buyers to pre-commit to fund in the future and letting developers take those commitments to lenders and others to finance short-term needs.

Pertaining to prospective sellers of tax credits:

What are buyers looking for?

In general, buyers seek to align purchases of transferable tax credits with their quarterly estimated tax payments. Buyers also assume certain risks when purchasing TTCs, and as such are likely to pay more for credits that are perceived as being lower risk.

While the market for TTCs is only beginning to take shape, we see TTC pricing organizing into tranches with pricing estimates reflecting relative risks.

What bonus tax credits are available and who qualifies?

The IRA provides valuable bonus tax credits (also known as “adders”) for projects that meet certain criteria. The prevailing wage and apprenticeship (PWA) bonus tax credit is available to projects to demonstrate that they met certain pay thresholds and apprenticeship requirements throughout construction and in the five years after the project enters service. Projects that meet this requirement are able to take a 5x multiple on the base 6% ITC rate — boosting credits to 30% of the project’s cost. Projects that started construction by January 29, 2023 were grandfathered into the 30% ITC rate and do not have to demonstrate that they meet the PWA standards.  Projects reflecting PWA adders are generally the standard baseline.  

Another valuable tax credit bonus is available to projects that meet domestic content requirements. In proposed guidance, the IRS has indicated that companies must demonstrate that projects meet domestic content standards for steel or iron constituent parts and for manufactured goods. If a project meets these standards, they can claim an additional 10 percentage point bonus tax credit — boosting their ITC value to 40% of the project’s base cost from 30% (for projects that meet PWA requirements).

Projects developed in communities or census tracts designated as energy communities can claim an additional 10 percentage point increase in credit value. The IRA defines energy communities as:

  • A “brownfield site,” according to the definition in the Comprehensive Environmental Response, Compensation, and Liability (CERCLA). 
  • A “metropolitan statistical area” or “non-metropolitan statistical area” that has (or had at any time after 2009) 0.17% or greater direct employment or 25% or greater local tax revenues related to the extraction, processing, transport, or storage of coal, oil, or natural gas; and has an unemployment rate at or above the national average unemployment rate for the previous year
  • A census tract (or directly adjoining census tract) in which a coal mine has closed after 1999; or in which a coal-fired electric generating unit has been retired after 2009

Finally, projects developed in low income communities or in communities designated as historic energy communities may access additional bonuses. The low income communities bonus tax credit is available to solar and wind projects under 5MWac that are installed in low-income communities or on Indian land. Projects meeting this criteria can access a 10 percentage point bonus above their baseline ITC or PTC rate. Alternatively, a 20 percentage point credit increase is available to eligible solar and wind facilities that are part of a qualified low-income residential building or a qualified low-income economic benefit project.

What is the typical pricing structure for TTCs before and after fees and costs?

Sellers typically cover transaction fees up to a negotiated cap. In addition to these fixed costs, the gross purchase price for TTCs would include costs associated with insurance and with transaction fees. Insurance costs can be 1.75-3.5% of the face value of the credit (depending on deal size and risk), and deal fees range from 0.5%-3%. 

If a project sponsor sells a credit for $0.90 gross (a 10% discount to the face value of the credit), obtains insurance for 1.75% the face value of the credit, and pays a fee to an intermediary or broker for 1.25% the credit value, the seller will realize net proceeds of $0.87. If the buyer of the credit incurs $50,000 in additional advisory fees related to conducting due diligence of the transaction, and the seller has agreed to cover these fees up to that amount, then these costs, too, would be subtracted from the TTC sale to estimate the seller’s proceeds. 

What are the risks associated with making TTCs available?

A developer has little to lose by exploring the TTC market. TTC deals can be relatively fast and simple to navigate and, as yet, we do not see pricing for TTCs that is unattractive relative to tax equity deal pricing. 

To pursue a TTC deal, sellers will need to consider who their advisers and partners are and need to be prepared to obtain insurance or other indemnities to address the risks that are borne by the buyer in a TTC transaction. Crux is an enabling ecosystem for TTC deals, and our team can assist in helping sellers new to the market in identifying potential buyers, partners, and advisers. 

What are transaction timelines for TTCs versus tax equity?

TTC transactions are only just beginning to occur, with the first major deal, between Invenergy and Bank of America, announced in August 2023 (WSJ). As we discuss in our July 2023 State of the Market report, we anticipate that deal timelines for TTC deals will eventually compress to perhaps a couple of months. By contrast, tax equity deals can take between 6-18 months to complete.

Additionally, tax equity deals are relatively inflexible, negotiated agreements between a developer and an investor who is the recipient of the tax credits. Delays related to when a project is placed in service can create headaches for all parties involved, since a developer cannot easily pivot to another party that is better able to use the tax credits and impact complex partnership economic allocations. 

When is a TTC generated and when do deals typically fund? Is bridge financing available?

For investment tax credits, the TTC is generated when the facility is complete and placed in service. Importantly, projects that intend to claim the ITC but have regular, multi-year construction timelines may claim partial credits for qualified production expenditures (QPEs). These QPE credits are not eligible to be sold or transferred; only the ITC generated in the year the project is placed in service may be transferred.

Production tax credits (PTCs) are generated after a project enters service and begins producing energy. PTCs are generated for each unit of production (like a megawatt-hour of electricity or a kilogram of hydrogen) for a long period of time — ten years under the IRA. Developers can sell forward a stream of future PTCs (or a “strip”), either as a TTC deal or as a tax equity transaction. Typically, a developer will sell a conservative estimate of their future PTCs in a forward transaction in order to minimize the risk that the facility will not generate enough energy in a year to meet the required supply of PTCs. Excess PTCs generated in each year can also be sold as “spot” PTCs, which must again be transferred and used in the tax year in which they are generated. 

Because TTCs must be used to offset taxes in the year in which the credits are generated, buyers of credits are incentivized to execute transactions as close as possible to the end of their tax year (when they have the greatest certainty around their tax liabilities). For developers, it may be necessary to procure bridge financing to access cash before the tax credits are generated/sellable. So far, our team has observed that lenders are entering the market to provide this capital, and that the market for TTCs already appears reliable enough to lend around. 

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