"Powering Progress" Panel: Insights from Andy Moon, Reunion CEO with Edison Energy
Andy Moon, Co-Founder and CEO of Reunion, joined Shannon Holzer, Joey Lange, and Matt Donath of Edison Energy for an hour-long panel, "Powering Progress: An Overview of Policy Trends Shaping the North American Renewable Energy Landscape," on August 22, 2023.
Andy Moon, Co-Founder and CEO of Reunion, joined Shannon Holzer, Joey Lange, and Matt Donath of Edison Energy for an hour-long panel, "Powering Progress: An Overview of Policy Trends Shaping the North American Renewable Energy Landscape," on August 22, 2023. The panel provided a transferability overview, market update, and several policy insights, and concluded with audience Q&A.
Video recording and slides
Transcript of Andy's presentation
Overview of Reunion
Andy Moon: I'll start with a very brief introduction on Reunion. We're a marketplace that facilitates the purchase and sale of tax credits from clean energy projects. We currently have over $2 billion in near-term credits from leading clean energy developers available on our platform. We work closely with corporate finance teams to identify high quality projects and ensure a low-risk transaction. Our company was formed in the wake of the IRA, but our team has spent over 40 years in clean energy finance. We have a lot of experience both in tax equity as well as private finance.
Transferable tax credits will transform the way clean energy projects are financed
Andy Moon: When the Inflation Reduction Act passed, we saw a large opportunity in the transferability clause because financing has always been a major challenge for clean energy product developers. Transferability provides a much simpler and more streamlined structure, and tax credits from many technologies can now be transferred. In addition to solar, wind, and battery storage; now biogas, nuclear, manufacturing, and hydrogen projects can be transferred. There's a whole slew of tax credits that are available to be transferred. Historically, tax credit monetization has been dominated by tax equity, which is controlled by a handful of large banks. So, a major goal of transferability is to broaden the pool of investors that are investing in the energy transition. Any corporation that pays US federal tax can now be an investor in clean energy projects.
Corporations are paying attention to clean energy tax credits, given the volume of tax credits and the length of the program
Andy Moon: There's a lot of momentum that we're feeling right now from CFOs and tax teams from companies because the opportunity is large. The chart is from CohnReznick, which shows that the demand for tax credit monetization will reach $70, $80, or $90 billion annually in just a few years.
Andy Moon: And tax credit supply is hovering around the $20 billion range. There's just really a lot of demand for additional investors to come support clean energy projects. The other item is that, as many people here know, ITCs and other incentive programs have been extended piecemeal on a three- or five-year basis. And the Inflation Reduction Act is a long-term program. At the earliest, it will go to 2034. But many observers believe that because tax credits are uncapped until certain emission targets are reached, this program could last 20 or 30 plus years.
Treasury guidance from June 2023 provided certainty to transact
Andy Moon: As Shannon mentioned – just to highlight how new this market is – Treasury released guidance on June 14th, and that is really unlocked a lot of interest from corporate buyers. I think there was always the fear that potentially guidance would come with some unwelcomes surprises, but that certainly was not the case. Transferability, the mechanism, was explained quite clearly over a 108 pages. I think the biggest win is just having a clear sense of the mechanism by which how tax credits can be transferred. There were also some important economic clarifications to the positive side. So one is that tax credits that are purchased can be used to offset quarterly estimated tax payments, which greatly improves the return profile of the investment. And Treasury also clarified that if you buy a tax credit at a discount, so say you buy one dollar tax credit for 92 cents, that eight-cent discount is not taxable. We can go over any questions about the mechanisms in the Q&A, but just in brief – the way it works is the seller of the credit will be required to pre-register their project on an IRS platform and get a pre-registration number. Both the buyer and the seller need to attach a transfer election form when they file their tax reasons.
Purchasing credits is a simple process that drives tangible benefits
Andy Moon: I'll quickly go through a simple example for how a tax credit transfer will work. So if a corporation has, say, $50 million in tax liabilities, they could purchase tax credits from a clean energy developer or through a platform such as Reunion at a discount. And this discount is typically in the 7% to 10% range, but it really depends on a number of factors. So, assume that they pay $45 million in cash, they would then be able to offset $50 million of their federal tax liabilities. And given that the tax credit can now be used to offset quarterly tax payments, this is a big boon for IRR-driven investors, because that means that the effective IRR will be quite compelling.
Buyers face several manageable risks, which can be mitigated through due diligence, seller indemnity, and insurance
Andy Moon: I'll talk a little bit about the risks to be aware of when investing in a tax credit. In general, buyers do need to conduct due diligence on these projects to mitigate the risk that a tax credit is challenged by the IRS. That said, the diligence checklist is much narrower than a tax equity investment because you are just buying a tax credit. You are not making a true equity investment into the project. There are specific categories of diligence that need to be checked. In some instances, you are ensuring the project was actually constructed and connected to the grid, ensuring that the cost basis of the project is properly calculated in the case of an investment tax credit, and really ensuring that some of the bonus credit adders have properly been incorporated.
Beyond due diligence, sellers generally sign a broad indemnity, promising that if the tax credit is recaptured or reduced for any reason, the buyer will be made whole. However, if the buyer needs assurance that if the IRS successfully challenges the tax credit and the seller does not make good on their indemnity, tax credit and insurance is also available to ensure that the buyer doesn't realize a loss. In the future, we also think that diversification of projects will also be an important mitigator of risk.
Observations on current and future market
Andy Moon: Everybody wants to know about price, so I'll give some general observations on what we're seeing in the market. In 2023, which we're already at the end of August, I'd say buyers are very focused on a narrow set of projects. They tend to look for projects that are from very experienced developers that have financial strength behind them. They look for projects, generally with scale, that have proven technologies such as solar, wind and battery storage. And these are generally trading in a fairly narrow band. We're seeing these 2023 credits trade in the $0.90 to $0.92 range to the developer after all expenses.
Now, of course, there are a number of factors that can further impact the price for 2023 projects. One is product size. So, if the project size is small – say, a $5 to $10 million transaction – we're seeing buyers want a larger discount for those small projects just because this is a new asset class and there's a lot of diligence and new education that's required to do a project. So a lower price is required to motivate buyers to the table. Technology – I think there's a smaller pool of buyers for newer technologies. So, even biogas carries a bit of a larger discount, and it remains to be seen where pricing will settle for new technologies such as hydrogen or carbon capture. And then project risk is another piece. Projects that have items like large step-up in cost basis or that have large debt attached to the project can also carry a larger discount.
Production tax credits that are traded spot. 2023 spot credits trade at a narrower discount because there is not the risk of recapture or reduction in credits because those credits are typically sold after they're generated. For 2024 and beyond, conventional wisdom has been that prices on credits will eventually narrow and the discount will narrow over time. However, we are seeing that there's going to be massive influx of credits in 2024 and beyond. We have many projects such as nuclear, solar, and wind, and all these other credit categories that will be competing for the same tax credit buyers. I think the impact on price in 2024 and beyond really does remain to be seen.
We're seeing a lot of developers that have projects that will be constructed in late 2024 or in 2025 who are looking for a commitment from a buyer today to buy the credits when the project is completed. These forward commitments do generally carry a larger discount. The reason why a developer wants the forward commitment is because they want to be able to take that piece of paper to a bank and get a bridge loan against a forward commitment to buy credits in the future. So, that's another example of where buyers can achieve a larger discount and a higher return is by committing to a forward commitment in advance.
Reunion's digital platform has $2B+ in near-term tax credits from leading clean energy developers
Andy Moon: As I mentioned, Reunion launched our digital platform last month. We already have over $2 billion in near-term credits available for transaction with leading clean energy developers. We work very closely with tax credit buyers to really ensure a low risk and streamlined transaction process. If this sounds of interest, we love to talk and answer questions. We do realize that this is new for many people. And so a lot of our job today is really to answer questions and really make sure that buyers and sellers both understand exactly how the process works and feel comfortable with these transactions.