We hosted a webinar on June 20 to discuss Treasury’s newly-released guidance on the transferable tax credits created by the Inflation Reduction Act (IRA). Our expert panel consisted of tax, legal, and energy experts including: John Marciano, Co-Head of the Global Energy Practice at Allen & Overy, Eric Heintz, Managing Director of Renewable Energy Finance at M&T Bank, and Bryen Alperin, Partner at Foss & Co.
Hundreds of people joined from every corner of the market: developers, tax credit buyers, advisors, banks, syndicators, and intermediaries. The organizations on the call collectively represent billions of transferable credit supply and demand and will be active participants in this new market.
The notice of proposed rulemaking issued last Wednesday, summarized here, provides for a 60-day comment period followed by a public hearing on August 23. While there are still some open questions that likely will be addressed after another round of industry commentary, his new multi-hundred billion dollar market is expected to ramp quickly.
You can watch the full recording of the webinar here – and we’ve compiled some of the most frequently asked questions about this growing market and recapped how the panelists responded.
Note this is Crux's general summary of the webinar event and does not reflect legal or tax advice, nor a summary from the panelists.
For the most part, guidance addressed the significant outstanding questions in expected ways, sharing sufficient clarity to jumpstart the market.
Another surprising component were limitations on tax credit transfers in inverted leases, a common structure used to raise tax equity for renewable energy projects. This may reduce the viability of inverted leases in tax equity structures going forward.
The statute language around risk staying with buyers was already fairly clear, however there are some remaining questions, primarily around its impact on liquidity of the market. Buyers are incentivized to do due diligence on potential deals, creating a significant role for advisors and insurance markets.
Specifications surrounding individuals participating based on passive income was expected, though additional details are expected following the 60-day comment period.
Some panelists were surprised by the significant portion of guidance focused on cash vs. non-cash payments for credits, with the ultimate conclusion that only cash can be used in these transactions.
Clarity was also given on logistics surrounding sale of credits from a partnership.
Panelists are already closing PTC and ITC deals with their clients and expect them to ramp up following guidance.
Panelists indicated that cash deals are closing before the portal is live, but deliveries of credit are essentially forward commitments. The ability to add a registration ID to a tax form, instead of introducing additional documentation, will streamline the administrative process, but in and of itself would not be a blocker. They expect deals to be signed and funded in advance of the portal being activated.
There are a number of ways that banks can participate. Banks that have been active tax equity investors can easily participate by buying credits to use or syndicate by structuring hybrid deals where credits are sold out of a tax equity partnership. Banks who have not been active tax investors to date will likely become significant purchasers of credits in the marketplace. Panelists expect banks to be very active facilitating credit sales through syndication, as they’re accustomed to performing diligence and advising both sellers and prospective purchases.
Both will continue to play a significant role in the industry, often even coexisting within the same deal. Tax equity won’t go anywhere, and will continue to be used for larger, fully or mostly contracted transactions. We’re seeing tax credit transfer deals happening in a few key areas: smaller solar deals, storage, non-investment-grade offtakers, PTC’s. We’re also seeing a lot of interest from medium-to-large deals in hybrid approaches (selling credits out from partnerships).
Guidance made it clear that intermediaries are allowed to play a role; the ability to transfer credits to partnerships will enable the syndication market. They expect many transfers will mirror the state tax credit market, where single deals were originally brokered. Panelists see continued role for the fund model. In the fund model, buyers commit to purchase a certain number of annual tax credits at a given price, offering more diversification and efficiency.
Current tax investors have become comfortable with accounting procedures tied to tax credits. However, there are many potential market participants who see accounting implications as an obstacle to moving forward. Guidance enables these participants to avoid equity accounting and utilize a simpler accounting approach. This is a key benefit of transferable tax credits, particularly for new and smaller buyers. The gain achieved by the purchase of the tax credit is not taxable.
With ITC, where there is more traditional recapture concern, diligence will be important. Thereafter, indemnification is expected to be a feature of all deals and insurance will also be an critical tool in some cases.
Insurance policies are already accessible to cover a variety of situations tied to transferable tax credits and will play a critical role in many transactions. Panelists anticipate that buyers will drive the formation of policies for these deals to align with the seller’s credit quality and ensure sufficient coverage. Insurance will focus on recapture, basis eligibility, appropriateness of FMV claims, and also sometimes reps & warranties.
Transferability helps smaller companies participate by bringing down transaction costs, which have traditionally made tax equity inaccessible to smaller deals. Ultimately there will be varying comfort levels with risk which echoes the importance of insurance and sponsor indemnification, and will lead to wider ranges in pricing.
Panelists are seeing a huge variety of deals (ITC and PTC; solar, wind and storage; large and small projects, as well as portfolios), both in terms of structure and size, indicating a significant appetite in the market.
The partnership is treated as the owner of the credits and has the ability to sell credits. Partnership agreements will need to address circumstances where individual partners want to sell credits.
Active tax equity investors are interested in expanding into transferable tax credit deals, and some already are. There is also a pool of corporations who had considered participating in the market in the past, but for whatever reason chose not to (or participated on the state level). They will likely be some of the first new buyers in this market given their familiarity.
One of the benefits of the IRA is the general awareness within nearly every major corporation in the country; they are already thinking about these tax credits and seeking additional education. We see corporates getting involved quickly.
Overall, panelists are seeing new buyers emerge across a wide range of archetypes, which will be necessary to scale this market rapidly.
In prior renewable energy tax credit policies, panelists have not seen issues surrounding payment following an audit. The only potential—albeit rare—issue they could see arising is when there is insufficient clarity about whether the correct facts were provided during underwriting. Transparency and documentation are important in the insurance process.
Buyers will want to have a clear sense of any representations that sellers are making to the insurance company, particularly if the seller is organizing the insurance. They’ll also want to understand what is covered by that insurance policy.
In other tax credit markets, surveys have shown a <1% recapture rate, and the vast majority of those were smaller projects that did not closely adhere to the rules. Panelists had not personally experienced a true recapture event in the renewables tax credit market. These transferable tax credit deals are also conservatively structured to mitigate this kind of risk. Panelists stressed that recapture events are rare and/or non-existent due to proper risk mitigation methods being used and urged listeners to continue to mitigate risks through diligence.
The buyer can be an individual, but is expected to be subject to passive/active restrictions. Some high net worth individuals and family offices that have participated in this market previously, may find transferable tax credit deals appealing if they can time the payout closer to their tax filing date. Overall, the guidance doesn’t enable the market to open widely to individuals.
The rapid growth of the market and the variety of players involved will require a number of solutions to make processes like compliance and diligence more efficient. Transactional marketplace software will create a more liquid market for sellers and streamline the syndication process for intermediaries while allowing participation from advisors.
The transferable tax credit market will scale and fragment in a way that tax equity did not, creating complexity that only new technology can manage.
Crux is that enabling layer, the ecosystem connecting everyone in managing transferable tax credits. We’re actively building alongside partners to ensure we develop the tools and solutions the industry needs.