How Reunion is positioned to help connect corporate buyers with discounted tax credits to fund clean energy growth.
The Inflation Reduction Act of 2022 (IRA) was a sweeping bill with many implications for the energy transition–particularly the financing of new projects. In the IRA, Congress specifically sought to incentivize private sector investment into the energy transition. One of the most prominent ways they did this was through tax credits, to incentivize corporate taxpayers to redirect capital into the clean energy and sustainable technology industry.
A recent assessment of the IRA from Boston Consulting Group (BCG) and Breakthrough Energy puts a fine point on the value of tax credits in switching to low carbon energy, by demonstrating the impact of tax credits on levelized cost of energy (LCOE).
Per BCG’s analysis, tax credits from the IRA and other major energy-related legislation can drive between 20% and 60% reductions in LCOE across six technology types. But a low LCOE and actual steel-in-the-ground are not the same thing. To physically deploy these less expensive technologies, project developers will require many billions of dollars of project finance capital.
Bloomberg illustrates just how significant the demand for investment dollars may be over the next 25-30 years. This demand is a powerful function of government policies, decarbonization goals of Fortune 500 companies that increasingly extend down into global supply chains, and the aforementioned plummeting LCOE that allows low carbon energy technologies to displace incumbent coal, gas and oil-based power generation. That’s a very difficult demand-pull force to derail once it gets going.
So where will all this capital come from? In the U.S. the IRA’s tax credit regime significantly enhances project capital stacks with upwards of $500 billion of tax credits over the next 10-20 years, depending on various estimates and factors. Here’s one such estimate from Credit Suisse, which projects $576B in tax credits over a 10-year period.
The IRA also enhanced the value of tax credits on a project-by-project basis. For example, developers can now monetize up to 70% of a solar project’s costs with the addition of bonus credits. Project developers typically are not able to absorb the tax benefits from their projects, and traditionally would tap into a $15B-20B tax equity market to finance the tax credit portion of any given project. With the enhancements from the IRA, the renewable energy sector could require up to 3.5x market growth by 2030 and possibly ~5x growth by 2049 according to demand projections by Wood Mackenzie. And that doesn’t even include fuels, CCUS, hydrogen, manufacturing or any of the other tax credits created by the IRA. That's a lot of external tax appetite being put to work that did not previously participate in this market.
Monetizing tax credits for project development will be one of the primary barriers to clean energy deployment, particularly in the initial years following the IRA legislation as corporate tax groups are educated on the opportunity to redirect their tax payments into renewable energy tax credit investments.
Following the IRA, the question developers now face is how quickly and to what extent they'll be able to monetize these benefits as they execute on their development pipeline.
Tax credit-related capital has traditionally come from large banks such as JP Morgan Chase, Bank of America, Wells Fargo, and US Bank; a handful of banks account for the majority of tax equity investment capital in recent years.
The IRA legislation seeks to broaden this pool of capital to meet the anticipated demand represented above in the WoodMac chart. To do this, they created a transaction mechanism called Transferability which allows project developers to monetize their credits with a simple purchase-and-sale agreement, rather than the traditional equity partnership investment structure.
Here is a detailed description of transferability.
Transferability isn't intended to replace traditional tax equity; instead, it gives corporate tax and treasury teams an alternative pathway to:
The value proposition for corporate taxpayers is simple: redirect your tax payments into clean energy projects and receive a discount on your federal tax liability. The reality is a little more complicated – tax credit purchases do carry some risks and reporting requirements, so partnering with third parties on transactions can often streamline the process. But earning an estimated 8%-10% discount on federal tax with controllable risks will be an attractive proposition to corporate taxpayers who may have chosen not to pursue traditional tax equity investments.
If the IRA is successful in its goal to scale more established technologies while kickstarting newer technologies like hydrogen and CCUS, a deep market for transferable tax credits could develop by 2030 with wider pricing spreads and creative structures used to pull more capital in from corporate taxpayers.
In conclusion, while it’s early days in the post-IRA renewable energy project finance market, the outlook is bright for both sustainable technology growth broadly speaking and for transferable tax credits sales specifically.
Reunion Infrastructure is leading the market on transferability as a service by packaging market expertise with core services needed to execute rapid, de-risked, and repeatable transferable tax credit transactions. Through its marketplace platform, Reunion provides:
To learn more about Reunion, please contact Kevin Haley at kevin@reunioninfra.com.
Jordan Tamchin, Executive Vice President and leader of the Tax Insurance Practice at CAC Specialty, will join Reunion's transactions team for a 60-minute workshop covering recent market developments in tax credit insurance and a lively discussion about unique tax insurance solutions that have emerged in 2024.
Instructions for joining the webinar will be sent once you have registered. If you have any questions, please contact Maria Verbaite.
We will make a recording available for those who cannot attend the webinar live.
Jordan Tamchin is Executive Vice President and leader of the Tax Insurance Practice at CAC Specialty, where he specializes in delivering innovative and unique insurance solutions for the most complex tax risks across a variety of tax credit and tax equity deals.
Andy Moon and Billy Lee are the co-founders of Reunion and work closely with Fortune 500 corporations and clean energy companies to buy and sell clean energy tax credits.
Andy and Billy have led hundreds of clean energy financings since 2006, including some of the first solar transactions with institutions such as US Bank, JP Morgan, Wells Fargo, Bank of America, D.E. Shaw, and others.
We want our office hours to be interactive, so please bring any questions you have, whether related to current market conditions, pricing, or commercial terms.
You're welcome to ask questions beforehand.
Reunion recently surpassed $1.5B in clean energy tax credit sales in 2024. Our transactions have spanned solar, wind, battery storage, fuel cells, biomass, and advanced manufacturing components.
Our team works directly with dozens of Fortune 500 tax credit buyers and leading clean energy companies, and we have observed several emerging trends in 2024.
An increasing number of deals are competitive bidding situations. Buyers should have a clear sense from relevant stakeholders — e.g., CFO, legal, board of directors — on what deal terms are acceptable and what specific approvals are required prior to starting the negotiation process, as delays can be the difference between winning and losing a deal.
We have seen several companies proactively establish investment thresholds that allow them to move quickly for the right credit.
There has been increased interest in tax credit purchases from major corporations that pay $500M to $1B or more in annual taxes, resulting in more competition for large credit opportunities.
These opportunities tend to trade at a premium — upwards of $0.01 to $0.02, depending on the credit type.
Many buyers were reluctant to pay for ITCs early in the year because doing so required them to “pre-pay” their taxes. Buyers, consequently, willing to purchase ITCs in Q1 or Q2 were rewarded with deeper discounts.
Now that we are in Q3 and payments for ITCs will not occur until later in the year, buyer interest has increased.
Buyers, particularly ones that have bid and lost on tax credit opportunities, want to make sure that they lock in credits in time to offset Q3 and/or Q4 estimated tax payments.
ITCs are still expected to trade at a wider discount compared to production credits. Although sellers often ask for mid-$0.90s pricing for ITCs, buyers typically push back since lower-risk PTCs or AMPCs would be available at similar pricing.
Initially, tax credit buyers demanded tax credit insurance to cover 100% or more of the tax credit value. We are seeing more flexibility in structures, whereby insurance may not cover the full tax credit amount due to presence of other risk mitigants such as portfolio diversification, creditworthy seller indemnities or parent guaranties.
Over the past few months, virtually every transaction we’ve executed has included a capped fee reimbursement for the buyer. The size of the reimbursement is largely dependent on the deal size.
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Reunion recently announced our collaboration with Summit Ridge to sell $40M in tax credits to fund community solar projects.
Phil Schapiro, VP of Project Finance at Summit Ridge Energy, will join Reunion's transactions team on Tuesday, August 20th for a 60-minute workshop covering recent market developments and a discussion about their experience working through a tax credit transaction.
Instructions for joining the webinar will be sent once you have registered. If you have any questions, please contact Maria Verbaite.
We will make a recording available for those who cannot attend the webinar live.
The workshop will include three 15-minute modules, with about five minutes of Q&A per module.
Phil Schapiro is VP of Project Finance at Summit Ridge Energy, where he leads fundraising efforts across the capital stack including debt, equity, and monetization of tax credits.
Andy Moon and Billy Lee are the co-founders of Reunion and work closely with Fortune 500 corporations and clean energy companies to buy and sell clean energy tax credits.
Andy and Billy have led hundreds of clean energy financings since 2006, including some of the first solar transactions with institutions such as US Bank, JP Morgan, Wells Fargo, Bank of America, D.E. Shaw, and others.
We want our office hours to be interactive, so please bring any questions you have, whether related to current market conditions, pricing, or commercial terms.
You're welcome to ask questions beforehand.
On April 25, the Treasury and IRS published final regulations for the Inflation Reduction Act’s tax credit transfer mechanism. The IRS also published a press release and updated their transferability FAQs.
The final regulations carried few surprises – other than, perhaps, arriving earlier than some market participants predicted – and preserved the status quo set by the June 2023 guidance.
At Reunion, we welcomed this "non-event" and the clarity it provided, and wanted to highlight several key consistencies.
Despite “many comments” calling for a change, widely held C corporations will remain the primary buyers of transferable tax credits. While this decision will likely decrease overall liquidity in the tax credit market, it will also limit the potential for fraud and abuse.
Passive activity rules generally limit individuals, trusts, estates, and closely held C corporations to applying transferable tax credits to passive income – not active income. The final regulations did not adjust this stance. (However, a potential exception exists for certain closely held C corporations, which allows them to offset active income with tax credits.)
The IRS did not change its stance on depreciation. As the FAQ states, “Only a taxpayer that has an ownership interest in the project may claim tax depreciation. Transferability does not allow depreciation benefits to be transferred.”
The IRA created three bonus, or adder, credits, which can increase the value of a clean energy project’s tax credits:
The Treasury’s June guidance stated that bonus credits cannot be sold separately from a project’s other credits. A developer cannot, in other words, sell its base credits to one company and its bonus credits – perhaps at a different price per credit – to another company.
Instead, all credits must be sold as “vertical slices” and be pari passu to one another. In practice, if a single project has multiple buyers for its credits, all buyers have the same risk exposure.
April’s regulations did not change the Treasury’s position.
Tax credit buyers can still "take into account a specified credit portion that it has purchased, or intends to purchase, to calculate its estimated tax payments." Of course, buyers remain liable for any underpayments.
The regulations clarified that the "intends to purchase" language "illustrates that all the requirements of proposed §1.6418-2(b) do not have to be met for a transferee taxpayer to take the expected eligible credit into account in its estimated tax calculations."
An advanced manufacturer’s decision to use transferability or direct pay to monetize their §45X tax credits need not be binary. If a manufacturer has multiple facilities, they can make the transferability-or-direct-pay decision at the facility level. If a manufacturer only has one facility, however, their decision is binary.
The same optionality holds true for the §45V PTC for clean hydrogen and §45Q PTC carbon capture, although the timing of the election varies by credit:
Importantly, because the §45X election is made during the taxable year in which an eligible component is produced, production facilities that predated the IRS may be eligible for the credit.
Although “upfront payments for PTCs determined in future taxable years are standard in tax equity transactions,” the final regulations stated that transferred PTCs must be paid for in cash one year at a time. This holds true for ten- and 12-year PTCs.
Permitting advanced payments would “raise several complex legal and administrative issues, such as whether an excessive credit transfer has occurred or if the eligible taxpayer has gross income if prepaid eligible credits were not transferred in a later tax year."
On an encouraging note, the final regulations specifically state that “there is no prohibition on either a transferee taxpayer” – that is, a tax credit buyer – “or another third-party loaning funds to an eligible taxpayer, including loans secured by an eligible credit purchase and sale agreement.”
The final regulations, unsurprisingly, left unaltered the assumed role of tax credit intermediaries (like Reunion) in the transferability market. Intermediaries can serve as brokers and facilitators in tax credit transfers, helping to match and advise buyers and sellers.
Intermediaries cannot, however, serve as dealers, effectively taking ownership of a tax credit with the intent of transferring/selling it again.
The final regulations acknowledge calls for an increase to the amount of required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer to make a valid transfer.
Nonetheless, the Treasury and IRS left the required minimum unchanged. Perhaps as a nod to the validity of increasing the required minimum, the final regulations remind market participants that, “...while the required minimum documentation requirements are the same for all taxpayers, any particular agreement between an eligible taxpayer and transferee taxpayer may go beyond the required minimum documentation based on the arrangement of the parties. The proposed regulations allowed sufficient flexibility for market participants to determine if more information is necessary in a particular transaction, while balancing the burden of producing the required minimum documentation required to make a transfer election.”
The final regulations also remind market participants that "§6418(g)(2)(B) specifically places a due diligence responsibility on the transferee taxpayer."
The IRS opened the tax credit pre-registration portal in December to significant fanfare. But, as with any brand-new IT system, there have been calls for improvement.
While the IRS would not commit to set application review times, it left the door open to "continue to review the efficiency of the registration portal, including functionality responses from the public, to determine whether changes should be implemented or whether additional guidance or publications should be issued."
In Norton Rose Fulbright’s annual Cost of Capital call, the panelists aptly brought attention to the Congressional Review Act, which “is a tool Congress can use to overturn certain federal agency actions.”
With respect to the Inflation Reduction Act, an incoming Congress (backed by a Trump administration) could use the CRA to unwind IRA regulations that were issued within 60 legislative days of the previous Congress.
Although the exact date for the beginning of the 60-day window remains to be seen, it’s potentially in late May or early June. This gives the Treasury and IRS a little over 20 business days to issue a backlog of IRA-related guidance and regulations.
The IRS 2023-2024 Priority Guidance Plan details what guidance the IRS is prioritizing through the end of the plan year, which is June 30, 2024.
Please contact Reunion's transactions team to understand how these final regulations could impact your organization's plans to purchase clean energy tax credits.
Jordan Tamchin, Executive Vice President and leader of the Tax Insurance Practice at CAC Specialty, joins our Q3 buyer office hours on Thursday, September 5th at 2:00pm ET.
This due diligence checklist and documentation guide gives tax credit buyers, sellers, and their respective advisors a set of shared expectations on the required analysis and documentation for §48 investment tax credits.
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