- A transferable tax credit market created by the 2022 Inflation Reduction Act is drawing more investment into solar and other clean energy technologies.
- The tax credits will be available until at least 2032, offering market participants “greater certainty and stability, facilitating long-term planning.”
A transferable tax credit market created by the 2022 Inflation Reduction Act is drawing more investment into solar and other clean energy technologies, from a wider range of investors.
The new rules allow clean energy project developers to sell tax credits directly to investors and are designed to attract greater private sector investment in clean energy infrastructure and manufacturing. Buyers benefit by offsetting their tax liabilities and supporting their sustainability targets.
Transferability makes development capital more accessible and cheaper for project developers. Previously, many developers did not have adequate tax burdens to use tax credits themselves and investors could only use tax equity arrangements that involve more complex accounting and administration.
Solar developers can access either investment tax credits (ITCs), which are allocated to project costs, or production tax credits (PTCs), which are based on the energy output. Manufacturers gain PTCs on components produced.
Tax credits can provide up to 60 per cent of project construction costs because bonus adders are available to meet wage and apprenticeship standards, minimum domestic content levels, and locating projects in communities with low incomes or those affected by fossil fuel divestment.
The tax credits will be available until at least 2032, offering market participants “greater certainty and stability, facilitating long-term planning,” Hans Royal, Senior Director of Renewable Energy & Carbon Advisory at Schneider Electric, a supplier of energy management and distribution solutions noted.
According to Crux, a financial services company that facilitates deals, the total value of US clean energy tax credit transfers is forecast to rise by 50 per cent this year to $25 billion. Solar will represent the largest share, accounting for around 40 per cent of deals this year.
Crux CEO and co-founder Alfred Johnson stated that higher transfers are expected in the coming years, and all classes of solar should benefit from favourable economics and capital access.
A rise in domestic solar manufacturing following the Inflation Act combined with falling interest rates could help this trend “accelerate through the end of the decade,” he said.
Recent solar tax credit transactions include a June $103 million PTC facilitation agreement between developer Recurrent Energy and Bank of America for its 160 MW North Fork Solar Project in Oklahoma.
Elsewhere, Orsted sold $680 million in PTCs and ITCs from 550 MW solar and 300 MW storage assets in Arizona and Texas to J.P. Morgan in May and US solar supplier First Solar sold up to $700 million of advanced manufacturing PTCs from its 2023 module production to financial tech firm Fiserv in December 2023.
Larger developers that have established relationships with big investors are the primary participants in the transfer market, but many smaller investors previously unfamiliar with the energy industry will also find these investments “lucrative,” Akshay Thyagarajan, Domestic Climate Policy Analyst at thinktank the Center for American Progress, told Reuters Events.
Transferability eliminates certain investment risks, such as project cash flow risk, increasing a small investor’s appetite for purchasing tax credits. Associated insurance costs are typically covered by the seller, the legal and administrative costs are lower than traditional tax equity deals, and there is simpler accounting and less ongoing management required.