The “Big, Beautiful Bill” and the implications for corporate taxpayers and the clean energy industry

Tradable tax credits are becoming a hot commodity in the renewable energy industry.

A new breed of climate tech startup is emerging to take advantage of provisions in the U.S.’s Inflation Reduction Act that for the first time allow clean-energy tax credits to be bought and sold. That trading will unlock tens of billions of dollars in previously inaccessible financing for solar, wind, and battery farms, in particular projects whose scale falls between an individual household and a huge installation.

Those projects, which often went unbuilt due to a lack of financing, could dramatically speed up progress toward the Biden administration’s goal to fully decarbonize the electricity grid by 2035. The provisions also present a new method for all kinds of companies to get a break on their taxes in a way that looks good on their sustainability marketing.

Tim’s view

Over the last 20 years, tax headaches have hampered the rollout of renewable energy in the U.S. at least as much as technology glitches, supply chain bottlenecks, or competition from fossil fuels. But the IRA changes the game by allowing project developers to sell their tax credits without the hassle and expense of a frequently used type of financing known as tax equity. That reform is one of the law’s biggest, if least heralded, victories.

The market for renewables tax-equity deals is about $15-20 billion annually. That number is unlikely to grow, especially with a recession looming. If project developers can sell their tax credits in a relatively painless way to any corporate taxpayer, it will at least double the amount of financing available, said Eric Rubinstein, chief investment officer at Leyline Renewable Capital, a North Carolina-based clean energy investment firm. That would keep tax financing on pace with projected demand.

Say you’re a company that develops midsize solar farms and has interest in a project from a rural farming town. You predict the tax credits the project will qualify for once built. Then you look for a buyer: any company from Google to a grocery store chain. You sell the credits at a discount — lawyers I spoke to said the ranges being negotiated for the first IRA-enabled credit sales are 85-95 cents per dollar. You get cash to do the project, the middleman takes a fee, and the buyer gets a discounted tax break and an opportunity to tell everyone they’re supporting clean energy that might not have been built otherwise.

That’s where the startups come in. Reunion Infrastructure and Basis Climate were both launched after the IRA passed, raising an undisclosed amount of venture capital seed funding this year. Both were founded by veterans of the renewable energy finance industry, with a similar business model: To act as a marketplace connecting sellers and buyers of tax credits. Both startups are developing insurance programs in case the project doesn’t actually get built, and lawyers said more government guidance is needed to ensure tax credit buyers don’t wind up on the hook or under audit if projects don’t materialize.

The upshot is that the pool of possible financiers grows from a handful of big banks to anyone with a corporate tax bill, and a lot more clean energy gets built.

Know More

Renewable energy projects in the U.S. can tap one of two tax credits. Prior to the IRA, many project development companies were unable to use these credits directly, either because they didn’t have enough taxable income to make full use of them, or because they needed cash upfront to actually get the project built. Instead, they typically sought a tax equity deal, in which a bank or other financier puts up cash, becoming a partial owner of the project, and allowing the financier to count the credits against its own taxes.

There are two problems with these deals. One, they’re notoriously tedious and require teams of accountants and lawyers — the term “brain damage” gets used a lot to describe them. Two, there’s simply not enough tax equity financing available to cover all the projects out there. Where there is, it tends to get eaten up by the biggest projects, like an offshore wind farm that costs hundreds of millions of dollars. Smaller projects — solar on the roof of a commercial warehouse or in a field next to a university — weren’t worth it. The investor-owned utilities that operate most of the nation’s coal-fired power plants have also been held back in switching to renewables in part because their regulatory structure prevents them from entering tax equity deals. The IRA’s transferability reforms should go a long way toward solving these problems.

Room for Disagreement

The market for tax credit trading is certain to grow quickly, Rubinstein said, drawing in the traditional big accounting firms that most companies are more accustomed to dealing with. “I’m skeptical that startups will be able to unseat the incumbents,” he said. And if the Internal Revenue Service does open the door for individuals to buy tax credits, as it is considering, the startups will also face competition from filing services like TurboTax.

The View From Texas

Transferability isn’t the only tax innovation in the IRA. The new law also extends tax breaks beyond wind and solar to a range of other technologies including batteries, nuclear, geothermal, and hydrogen. The first investment in utility-scale batteries made possible by IRA tax credits was announced this week, for a 200-megawatt pair of batteries in Mission, Texas.

Notable

• The IRA’s plethora of grants, loans, and tax breaks have turned the U.S. into the world’s most attractive investment destination for renewables, the Financial Times reported, with $90 billion in new investment announced since the law passed. The U.S. is on track for $114 billion per year in clean energy investment by 2031.

Welcome to 10 Questions with Reunion

At Reunion, we are fortunate to occupy a unique position in the clean energy financing market. Sitting at the confluence of buyers, sellers, and external advisors, we receive questions and observations from every corner of the industry. To share our vantage point, we are launching a video series, 10 Questions with Reunion, in which we will field questions, share emerging insights, and engage with a range of experts.

We hope you'll join us and ask questions of your own. Stay tuned to Reunion's LinkedIn page for further episodes and market analysis. If you have a question for our team, please send it to info@reunioninfra.com.

Episode 01 takeaways

• "Rumored" credit prices from $0.95 to $0.98 are not representative of the broader market. Transactions pricing in the mid- to high-90s are not representative of the broader transferability market. Deals with relatively high pricing reflect non-standard features, like extended payment terms.
• Plain vanilla 2023 spot ITCs with scale are pricing in the $0.90 to $0.92 range net to the developer. Potentially a hair higher or lower.
• ‍2023 spot PTCs are pricing around $0.93 to $0.94 net to the developer. Generally, PTCs present less risk than ITCs, so they trade at less of a discount than ITCs.
• Do not assume the conventional wisdom that credit prices will rise with time. Credit pricing is a function of supply and demand. We see a major increase in available credits in 2024 and beyond. The key question is whether credit demand increases at a similar rate.
• The further in advance a tax credit is purchased, the greater the discount. There is a real price for forward commitments. A 2024 credit purchased in 2023, for instance, will carry a greater discount than a 2023 spot credit.
• Medium- to large-size corporate buyers and sophisticated finance groups have been early market entrants. Among corporate buyers, many had considered tax equity but decided it was too complex. Now, with transferability, they're re-engaging.
• Traditional tax equity has been increasingly harder to access. Supply of traditional tax equity has remained constant, while demand for it has grown rapidly. New demand is originating both from new developers and also new credit types.
• Transferability will play a role in most tax equity deals going forward. Traditional tax equity is dominated by a few large banks, and they have a finite tax equity appetite. Layering transferability onto tax equity deals enables large banks to support more clients and more projects.
• The June transferability guidance suggested that the IRS would further scrutinize step-ups. Looking ahead, we could see a market-wide standard for step-ups around 15% to 20% emerge because of limits set by insurance companies. Already, some large banks have implemented similar caps in tax equity deals.
• Due diligence for transferability should be simpler and more standardized than due diligence for tax equity. Unlike tax equity, buying transferable tax credits is not making an equity investment, which minimizes the scope of due diligence.
• Applying tax credits to quarterly tax payments could result in effective IRRs in the teens or higher. The June guidance allows taxpayers to offset their quarterly tax estimated payments with tax credits that they intend to acquire. If a company is paying $0.92 or $0.93 for a tax credit, their effective IRR could be in the teens or higher.

Video chapters

• 0:00 - Introduction and overview of Reunion
• 0:55 - Question 1: There have been rumors of transactions at 95, 96, or even 98 cents on the dollar. Are these numbers real?
• 2:28 - Question 2: How should we think about pricing a Section 48 investment tax credit (ITC)?
• 4:20 - Question 3: How does pricing compare for a Section 45 production tax credit (PTC)?
• 6:46 - Question 4: How should we think about pricing on forward commitments?
• 8:01 - Question 5: What kind of buyers are approaching the transferability market?
• 9:02 - Question 6: Has it become harder for developers to access traditional tax equity?
• 10:50 - Question 7: How will transferability play a role in tax equity deals?
• 12:46 - Question 8: How are market participants thinking about the IRS potentially scrutinizing basis step-ups?
• 13:59 - Question 9: How will due diligence for transferability compare to due diligence for tax equity?
• 15:43 - Question 10: How do buyers think about the return on investment when buying a tax credit?

Transcript

Introductions

Andy Moon: Good afternoon. My name is Andy Moon. I'm Co-Founder and CEO of Reunion, a marketplace that facilitates the purchase and sale of clean energy tax credits from solar, wind, battery storage, and other projects. We currently have over $2 billion in near-term tax credits from leading clean energy developers on our platform. Reunion works closely with corporate finance teams to identify high-quality projects and ensure a low-risk transaction. Together with my colleagues, Billy Lee and Kevin Haley, we have over 40 years of experience financing clean energy projects. Today, we'll be answering ten of the most common questions we get about tax credit transfers. Let's dive in.

Question 1: There have been rumors of transactions at 95, 96, or even 98 cents on the dollar. Are these numbers real?

Andy Moon: There have been rumors of transactions at 95, 96, or even 98 cents. Some project developers say they are holding out for prices in that ballpark. Billy, are these numbers real?

Billy Lee: Thanks, Andy. To answer it quickly, no, we don't think these transactions are really representative and reflect other non-standard features like extended payment terms. For example, we heard of an outlier where a buyer is acquiring 2023 credits but is not required to pay for them until close to the tax filing date in late 2024. In another example, an institution is selling late-year credits along with an investment-grade corporate guarantee to provide additional wrap.

Kevin Haley: Exactly, Billy. I would say that payment terms are a good example of something that's both very important and, in this early market, a little bit under appreciated in terms of price drivers, especially in a high interest rate environment that we're all dealing with today. A seller obviously wants to get paid as quickly as possible once the project's been completed, but the buyer is incentivized to try to come to some agreement to extend those payments when possible. Over time, I think we'll have to see a normalization around payment terms. The later that the payment is delayed, buyers should expect that it'll come with a penalty on the discount and they'll end up paying a slightly smaller discount.

Question 2: How should we think about pricing a Section 48 investment tax credit (ITC)?

Andy Moon: There's a few different types of credits. Why don't we go one at a time. How should I think about pricing on a Section 48 investment tax credit?

Billy Lee: Sure. Let's assume a plain vanilla deal. What I mean by that is 2023 tax year, a well-capitalized sponsor with deep experience, no tax credit insurance required, no material fair market value (FMV) step-up, a project that has scale – say, $20 million of credits or higher – and proven technology such as solar or battery storage. For these credits, we are seeing pricing net to the developer in the 90 to the 92 cent range. Maybe a hair higher or maybe a hair lower.

Andy Moon: I'll add we are seeing a wider discount in a few different scenarios. One is project size. These early deals require a fixed amount of transaction cost and learning just to get the deal done. I think buyers do want a wider discount to motivate them to take on a small project. Second, there's technologies such as biogas that have a smaller pool of buyers compared to solar or battery storage. These deals do carry a slightly larger discount. I think, similarly, there's new technologies that have tax credits for the first time, such as hydrogen or CCS, and they have less buyer demand. I think we'll have to see where the pricing shakes out. One other point is that projects that have unusual risk or complexity do carry a larger discount. Some examples are very large step-ups in the cost basis, or if a project has large indebtedness, that will also impact buyer demand. One final item I'll mention is that if a tax credit buyer requires insurance on a project, that will result in some additional cost in the 2-3% range, which results in a lower final price to the project developer.

Question 3: How does pricing compare for a Section 45 production tax credit (PTC)?

Andy Moon: Kevin, how does pricing compare on a Section 45 production tax credit?

Kevin Haley: I think for the PTC, particularly for 2023 spot credits, there's less risk than an ITC, and we would expect the discount to be lower, and that's what we're observing in the market today. Risk is lower on the PTC because generally there's no recapture risk, and the PTC credit amount is determined by the amount of electricity generated, which is easy to verify, and then it's multiplied by a fixed price per kilowatt PTC credit amount. We're typically seeing PTCs coming off of wind projects in 2023, trade in the 93 to 94 cent range net to the developer, and we would expect solar PTCs to trade in that similar range. Now, the one area where I think there could be a wider discount on PTCs is for other technologies that have lower buyer demand, like you mentioned, Andy. We're starting to see some of the early 45X and 45Q credits. These do carry a small amount of recapture risk on the 45Q side, and that could translate into a slightly better price for the buyer.

Billy Lee: I would interject here. It may seem obvious to most people, but the price of any commodity, including tax credits, is directly related to supply and demand. And there's a conventional wisdom that's been reiterated many times in a number of articles that pricing for tax credits will increase as the buyers become more active. But it's important to note that this assumes a static supply of credits, which will almost certainly not be true. Remember that there is a development cycle for these projects. Most 2023 credits are from projects that were originally developed pre-IRA, so they weren't assuming transferability. The IRA, by all measures, has supercharged clean energy development, and the vast majority of these credits will start to be generated in 2024 and beyond. We have a unique vantage point in the marketplace, and it is very plausible at this point in time that the supply of credits will continue to outstrip demand, which will almost certainly impact pricing on a macro level. The million dollar question is whether the tax credit buyer demand increases at the same rate as a supply of tax credits.

Question 4: How should we think about pricing on forward commitments?

Andy Moon: Developers are looking for forward commitments. In other words, they want a buyer to commit to buying credits now, even though the project may not be placed in service until 2024 or 2025. The reason, of course, is they want to be able to take that commitment, go to a bank, and get a bridge loan. Billy, can you talk more about pricing in this scenario?

Billy Lee: Sure. There's a real cost to the buyer for agreeing to commit early. Even though the money doesn't change hands until the credit is generated, it's a legally binding obligation. That has a cost. Right now, the supply of buyers willing to commit in advance is limited. Currently, most buyers are still very focused on 2023 spot tax credits. In order to get a bridge loan against a commitment, the buyer must be creditworthy. We expect this requirement to relax over time. We believe that lenders will start underwriting and lending against tax credits without a buyer commitment, but that's in the future – not really right now. So, in general, there will be a further discount on 2024 credits and even a larger discount on 2025 credits. The further in advance a commitment gets, the larger the discount.

Question 5: What kind of buyers are approaching the transferability market?

Andy Moon: Kevin, you've been spending a lot of time with buyers. What buyers are you seeing come to the table?

Kevin Haley: Thanks, Andy. It's been really interesting so far, especially because it's such an early market. We only just got Treasury guidance in June. I would say that our early buyers are typically the medium- to large-sized corporation that pays federal income tax. Our earliest adopters have really been coming out of the more sophisticated finance groups, many of whom have previously looked at tax equity investments into wind or solar. Some of them pursued those; others decided tax equity wasn't for them, and now they're coming back for transferability. But I think this is rapidly changing. We have deals in flight right now with a variety of large corporates in manufacturing, specialty finance, retail, insurance, and healthcare. It's really a diverse range across different sectors.

Andy Moon: I think Treasury guidance on June 14th really gave a lot of confidence to tax directors on how the transfer program would work.

Question 6: Has it become harder for developers to access traditional tax equity?

Andy Moon: Switching gears to tax equity, Billy, you've had a hand in many of the earliest tax equity transactions and have watched the market grow over the last 15-plus years. We keep hearing that the tax equity market has changed a lot in the last six months, and it's actually really hard to get tax equity than it was before. Is this true?

Billy Lee: Yes. This is near universal feedback that we're hearing from developers. Again, it's just reflective of supply and demand. There is a lot more demand for tax equity than there is supply. We're hearing of experienced developers with unique and long-standing tax equity experience saying they're struggling to get tax equity on 100-, 200-megawatt contracted utility-scale projects that previously would have been easy to get a tax equity deal. Tax equity has never been a layup, but the market dynamics really have changed. For example, we've already talked to a large bank that said that their tax equity appetite for 2024 has already been committed.

Kevin Haley: Billy, you touched on this earlier with supply and demand dynamics. There's a lot of new first-time credits coming online – 45Q, 45X, 45Z. There's a nuclear PTC. These are all competing for those same tax equity dollars. The demand for credits has increased significantly since the IRA, but the supply of tax equity capital has not really moved much further north of the $20 billion-a-year historical market size that we've seen in the past, and we don't expect that to change dramatically in the near future.

Question 7: How will transferability play a role in tax equity deals?

Andy Moon: That's a great point. And due to this shortage in tax equity, it's now becoming clear that transferability is going to play a role in many tax equity deals moving forward. Can you describe how this will work?

Billy Lee: Sure. I'll even go so far as to say that we think that transferability will start to play a role in the majority of tax equity deals. And this is based on conversations with many of the banks that are involved in tax equity. For example, a bank's ability to invest is limited by not only their total corporate tax liability, but also the amount that they've allocated internally to renewable energy transactions. One option is for the bank to sell some of the credits from a tax equity investment to a third party, which then frees up more space to serve more clients and more projects. In some ways, we think that there will be more corporate buyers who will be particularly interested in buying credits from a tax equity partnership for two main reasons. One, the tax credit buyers can rely on a bank's significant and detailed underwriting and due diligence. Secondly, and really interestingly, if there's a disallowance or reduction in the value of the tax credits, the IRS will first go after the retained credits before they go after transferred credits. So long as the tax equity partner keeps some credits, that's built-in risk mitigation because it provides a first loss mechanism to a tax credit buyer. That said, everything comes with a price and, in an efficient and perfect market, we would expect credits that are sold out of tax equity partnerships to carry a smaller discount than ones that are sold from a standalone tax credit transfer deal.

Question 8: How are market participants thinking about the IRS potentially scrutinizing basis step-ups?

Andy Moon: Switching gears to step-ups, we've heard some chatter that the IRS may start scrutinizing step-ups and that 50% to 100% basis step-ups are a thing of the past. Billy, what do you think about this?

Billy Lee: One surprise back in the guidance was that lease pass-through structures are not going to be allowed to transfer credits. This was the one structure that explicitly allowed for stepping basis up to fair market value. We read this as a potential sign that there will be more scrutiny from the IRS on step-ups. Large banks like JPMorgan and Bank of America have started limiting step-ups to 15% to 20% as an institutional rule. If we start to see more challenges from the IRS on large step-ups, we think the insurance market may go a similar route. And this could create a market standard that establishes what a maximum step-up percentage should be. So in general, overall, yes, we do think there's increased risk both for transfers as well as traditional tax equity deals that have large basis step-ups. The developers should just be aware of this when planning their projects.

Question 9: How will due diligence for transferability compare to due diligence for tax equity?

Andy Moon: Question for you, Kevin. Is the due diligence process in a transfer deal going to be as cumbersome and difficult as tax equity? What does it look like?

Kevin Haley: I think it's a really interesting question, and we certainly hope that transferability will eliminate some of the complexity and some of the hurdles that tax equity investors had to go through on diligence really for two main reasons. One is that a tax equity deal is just that. It's an equity investment into a project. And with that equity stake, a tax credit investor needs to go to a deep level of diligence to ensure the project will perform as planned. The second reason is that tax equity also involves the structuring of a legal partnership between the seller or the project developer behind the credits and, of course, the tax equity investor themselves. These partnerships are oftentimes quite expensive to set up, running into the million dollar or higher range. They come along with substantial legal and accounting complexities. When we've pitched tax equity to corporations over the years, that's oftentimes been a roadblock to their ability to participate. So, yes, Andy, I would say we want to do our best to not fully replicate the diligence exercise behind tax equity when we think about transfer deals.

Andy Moon: I will add that it is important to note that, especially in the early days, transfer deals do have complexity, and this is where Reunion steps in and actively shepherds deals forward. Our team has to help buyers navigate the project identification and due diligence process, and we really ensure that contracts are properly set up and risk mitigation is in place, such as tax credit insurance.

Question 10: How do buyers think about the return on investment when buying a tax credit?

Andy Moon: Final question for today. How do buyers think about the return on investment when buying a tax credit?

Kevin Haley: I think it's been interesting so far. We've seen a number of motivations and metrics that tend to be case-specific to each buyer. One example, we have some large buyers that really are volume-driven. In the early transactions, they're targeting larger projects, even if they are seeing the slightly narrower discount on those deals. But we have other buyers that are very much yield-focused. For them, they want to take on projects that are maybe a little bit more complex. If that will get them a discount of 10%, maybe a little bit higher, that's a trade that they're willing to make.

Billy Lee: Other investors just really care about time value of money. One important point in the June guidance is that taxpayers can offset their quarterly tax estimated payments with tax credits that they acquire or intend to acquire. That's an important three words there. So even if they are paying 92 or 93 cents for a dollar of tax credit, the effective IRR could be in the teens or potentially much higher, to the extent that they're reducing their estimated tax credits during the year and actually acquiring the tax credits late in the year or even in the following year.

Andy Moon: Thanks, Billy. There you have it, ten questions with the Reunion team. Thank you so much for listening today. We're excited about the level of interest in transferable tax credits and will be posting regular analysis on our LinkedIn page.

Questions of your own?

If you have questions you'd like us to answer, please send us an email at info@reunioninfra.com. We have some great interviews lined up and will look forward to seeing you on the next video episode. Thank you.

Introduction

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

We invite you to view the recording and download the panel's presentation.

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.

Reunion launches clean energy tax credit marketplace, which now has over $2 billion in tax credits available for sale

In July, we announced Reunion’s digital marketplace, with over $1 billion in near-term tax credits from clean energy projects such as wind, solar, battery storage, and biogas. Since then, the supply of tax credits on our platform has grown to over $2 billion!

Watch our marketplace announcement to learn more.

If you are a corporate buyer looking to purchase tax credits, please sign up to get access to the platform and take a look at our project portfolio. In addition to the largest inventory of marketable tax credits, we provide transactional support with deal structuring, insurance, and due diligence. Early tax credit transfer transactions are novel and complex, and we are here to answer your questions.

For project developers, please contact us to add your projects to our marketplace. All projects are listed in a way that protects the confidentiality of the sponsor, the project, and project counterparties. There is no obligation or exclusivity to listing a project. A seller portal will be released shortly that will allow you to easily add, edit, or remove projects from the marketplace.

Follow us on LinkedIn to stay up to date on our latest insights

Our founding team has a combined 40+ years of experience in clean energy finance, and we are sharing real-time market observations via our website and our LinkedIn page. Recent highlights:

• Billy Lee, Co-Founder and President, notes that tax equity is becoming relatively more scarce, and predicts transferability will become a component of most tax equity deals going forward (link)
• Kevin Haley, Head of Tax Credit Capital, wrote a popular article on how transferable tax credits help corporations navigate Corporate Alternative Minimum Tax (link)
• Our founding story: while Reunion launched in 2023, we have laid the groundwork for this company over many years (link)

Recent appearances at industry events

Billy Lee appeared on the Norton Rose podcast with Bank of America, JP Morgan, and others; it was covered in the June Project Finance newswire, and a transcript was published here.

Andy Moon, Co-Founder and CEO, appeared on a panel discussion with Perkins Coie and Novogradac to do a deep dive into Treasury's guidance on tax credit transfers.

‍Andy Moon appeared on a panel with JP Morgan, Marathon Capital, and others in June at the Norton Rose Energy Finance conference; please keep an eye out for the August Project Finance newswire for a transcript.

Looking forward to the rest of the year

The Treasury Department released Proposed Regulations for tax credit transfers on June 14, and the clean energy industry breathed a collective sigh of relief. Uncertainty around the timing and the contents of Treasury guidance has been a hindrance to moving tax credit deals forward. Treasury clearly laid out the mechanism for tax credit transfers, and confirmed several important economic points (e.g., tax credits purchased at a discount will not be subject to tax on the discounted amount; tax credits can be used to offset estimated quarterly tax payments).

Reunion has been pleased with the uptick in activity from both buyers and sellers since June 14. Please let us know if we can help your organization purchase or sell a tax credit, or if we can collaborate on furthering the market for clean energy tax credits.

Have a great rest of the summer!

Canary Media thanks KORE Power for its support of our special coverage of the Inflation Reduction Act’s first year.

The Inflation Reduction Act has unleashed what could be a trillion-dollar flood of tax credits for U.S. clean energy and decarbonization investments over the next decade.

To capture as much of the value of these tax credits as possible — and, in turn, build as much new clean energy as possible — project developers need to partner with companies and financial institutions in what’s called a tax-equity market. Thanks to three decades of tax-credit-focused clean energy policy, this is a well-established ecosystem; it’s become the financial engine that makes solar, wind and battery subsidies work in the U.S.

But here’s the problem: The volume of tax credits introduced by the climate law is unlike anything these tax-equity marketplaces have ever dealt with — and without serious changes, these new credits would almost certainly overwhelm this key market.

A provision of the climate law known as ​“transferability” aims to solve this. The rules for how it works are as complicated as major new federal tax-credit policies tend to be, but the concept is relatively simple. For decades, financiers have had to become co-owners of the clean energy projects they invest in in order to claim the associated tax credits. In contrast, the new deal structure introduced in the Inflation Reduction Act allows investors to buy those credits on an open market, drastically lowering barriers to entry and potentially unleashing a torrent of new project funding worth billions.

“This will truly transform the way clean energy projects are financed,” said Andy Moon, CEO and co-founder of Reunion Infrastructure, one of a number of startups that have launched to facilitate and support the emerging market for tax-credit transfers. ​“It’s hard to overstate. This will be a huge deal.”

Many clean energy projects aren’t financially feasible without the help of tax credits, but the amount of money a project developer can receive from those credits is limited by the size of its tax bill — and most developers don’t pay nearly enough in taxes to make use of those credits. Today’s tax-equity markets help solve this: Clean-energy project developers partner with big banks and financial institutions with massive tax bills that are looking to reduce how much they owe to the federal government. In turn, these deep-pocketed partners return some of that value to the project developers in the form of cash payments.

That allows project developers to maximize the value of the credits and build far more clean energy projects much faster than would be possible if developers relied on their own tax liability alone.

At its peak prior to the new law, the U.S. tax-credit investment market processed about $20 billion in clean-energy projects per year. Under the Inflation Reduction Act, that annual figure is expected to be at least two to three times larger, according to multiple analyses. And with the supply of clean energy tax credits uncapped by the federal government and restricted only by the volume of creditworthy projects, the eventual demand could grow even further.

To incentivize project developers to build out clean energy as quickly as the climate crisis demands, the tax-equity market also needs to rapidly expand its capacity. That’s where transferability will play a vital role — and big banks, new startups, renewable energy developers and armies of lawyers and consultants are all rushing to put it into practice.

One of these advisory firms, Reunion Infrastructure, is benefiting mightily from the flood of interest in tax-credit transfers. In July, the startup announced it had amassed more than $1 billion in credits from ​“high-quality solar, wind, battery storage, and biogas projects” that are ready to be snapped up by corporate buyers. By mid-August, the total had doubled to $2 billion, according to CEO Andy Moon.

The pace of deals is likely to pick up even further in the wake of the U.S. Treasury Department issuing guidance in June on transferability and another option for streamlining tax-credit transactions, known as direct pay.

“There have been deals literally waiting on the sidelines to be implemented once the structure was in place,” said Allison Nyholm, vice president of government affairs at the American Council on Renewable Energy, a trade group representing clean energy companies and customers. An ACOREsurvey of clean-energy developers and investors in June indicated that more than 80 percent of them intended to use transferability or direct pay in their investments over the next three years.

This week, Bank of America unveiled details of the first tax-credit transfer deal to be made public, an agreement to buy $580 million in wind energy tax credits from a $1.5 billion wind farm being built by clean power developer Invenergy. ​“We’re creating a market where you can have more players around the table all participating in the clean-energy transition,” Karen Fang, Bank of America’s global head of sustainable finance, told TheWall Street Journal.

But Patrick Worrall, vice president of the asset marketplace at clean energy marketplace provider LevelTen Energy, warned that ​“the only way that the IRA can fulfill its promise is if there are many more parties who jump into the tax investment game.” That’s because the relatively small pool of large financial institutions that now do tax-equity deals don’t have the investment appetite or capacity to finance nearly as many projects as the Inflation Reduction Act’s expanded tax credits can support.

Transferability makes such expansion possible — but it doesn’t guarantee it. ​“There’s nothing there if these parties don’t start coming to the market and making these investments,” Worrall said. ​“This was all set up by the federal government to enable these corporations to enable this transition.”

From tax equity to transferability: A sea change in how clean energy is financed

Why can’t today’s tax-equity markets handle the coming wave of clean energy tax credits initiated by the Inflation Reduction Act? Simply put, the traditional way of doing things is just too complicated and expensive to meet the scale and scope of investments coming, Moon said.

Moon and his co-founder at Reunion Infrastructure, Billy Lee, both come from the tax-equity investment world, starting together at solar development pioneer SunEdison and then working separately at large banks and private equity firms. ​“We’ve pitched tax equity [deals] to corporates for 15 years — and they very rarely do it,” Moon said. ​“It’s very complex.”

At the core of that complexity is the long-standing rule that allowed only the project owner to claim tax credits associated with the project. The government structured the rules that way to ensure that the benefits of the tax credits would go to an entity with a vested interest in ensuring the project was actually built and operated properly.

But it also complicated the process of using tax credits to build clean energy projects. Project developers and deep-pocketed tax-equity investors used complex transaction structures, such as partnership flips and sale-leasebacks, to make the investor the owner of the project for as long as it would take for them to be eligible to claim the tax credit. After that, they would ​“flip” ownership back to the developer for the remainder of the project’s lifespan.

These labyrinthine partnerships can take millions of dollars in legal and administrative costs to put together, and because of their inherent complexity, there is little opportunity to streamline or standardize based on past efforts and make future deals simpler or cheaper, Moon said. They also force investors into the position of owning a clean energy project for years at a time, exposing them to risks that very few companies are willing to take on.

That’s why the pool of tax-equity investors is as small as it is, LevelTen’s Worrall said. ​“Over 50 percent of it is JPMorgan and Bank of America,” with about 40 other institutions rounding out the market, he said. And because these deals are so complex and risky, these investors have little appetite or capacity to expand how much new business they can take on — ​“they’re investing regularly, and they’re full.”

These conditions have led to a ​“huge supply-demand imbalance for tax equity,” Moon said. ​“Projects that could previously get tax equity are in the last six months struggling — there just isn’t enough. And if you don’t get tax equity, you can’t build a project.”

Another problem with the status quo is that tax-equity investors tend to only target deals of $100 million and up. That has forced developers of smaller-scale projects like community solar to sell to project aggregators that bundle numerous smaller projects together into high-dollar portfolios valuable enough to attract the interest of banks.

The IRA’s new transferability option upends this landscape entirely, Moon said. ​“Now there’s an option for those developers to build the projects and sell the credits themselves.”

Would-be buyers of tax credits also have a much simpler road ahead under the new transferability option, Worrall said. ​“There’s no longer a partnership investment with a ton of due diligence upfront and a ton of maintenance over the lifetime of the investment. You’re talking about a simple transfer: corporate tax credits for cash.” These deals also have much simpler accounting requirements, he added.

Some projects making use of the new tax-transfer deal structure have already started to be put together. Moon said that participants in his company’s marketplace include developers of smaller-scale projects that would struggle to get the attention of traditional tax-equity investors.

Crux Climate is another recently launched startup that provides software and services to manage this new breed of tax-credit transfer transactions. CEO Alfred Johnson said Crux has ​“gotten past the term-sheet stage,” which precedes the writing of a binding contract, on its first deal with a smaller clean-energy project developer and an unnamed corporate tax-credit buyer that’s new to the tax-equity market.

While tax-credit transferability opens the door to smaller developers and inexperienced corporate investors, it could also be an option for those already active in the existing tax-equity markets, Moon added. ​“Large and very experienced developers are talking about how this will be part of the portfolio. All the banks and tax-equity investors are looking at how to integrate transferability,” with financiers including Bank of Americareporting deals in progress.

That’s a good thing, because the growth needed to expand the pool of investment capital flowing into clean energy projects that must be built at an unprecedented pace and scale to combat climate change is immense, Johnson said.

“We need to move from a world where there are 40 or 50 credible” financial institutions investing in the market and processing about $20billion in traditional tax-equity deals per year, to one capable of processing about “$85 billion in credits per year” by 2031, as per a Credit Suisse forecast of the market spurred by the Inflation Reduction Act, Johnson said. That $85 billion figure would be roughly equivalent to 20 percent of all corporate taxes paid in the U.S. last year, representing an unprecedented level of commitment from corporate America to a form of investment that barely exists today.

Hurdles to clear to make a market: Recapture and insurance

A lot of industry watchers say the new tax-credit transfer deal structure will make things simpler, but it won’t exactly make them easy. That’s why companies like Reunion Infrastructure, Crux Climate and others have sprung into being.

The first challenge is ​“finding the big corporations and making them comfortable with it,” said Ben Ullman, founder and CEO of transferability marketplace startup Common Forge. That leaves it up to companies like his to ​“find a way to standardize this for corporations” so it’s as simple and painless as possible for the tax departments of the companies being courted as buyers of clean energy tax credits, he said.

One way to make the new tax-credit transfer deals more appealing to skittish corporate buyers is by reducing their risk exposure as much as possible, according to Ullman. ​“The key to that is the buyer protections” that dealmakers must structure to protect companies from the risks they take on when they purchase large amounts of tax credits, he said. ​“No corporation looking to buy a tax credit is going to start on a big deal process” without a clear understanding of the risks and how to protect themselves against them.

Right now, the biggest risk lies in what’s called ​“recapture,” Ullman said, referring to the Internal Revenue Service’s right to reclaim the tax credits from failed, sold or otherwise ineligible clean energy projects. Many clean-energy tax credits, including those for solar power projects, are pegged to the value of investment into a project in the year it begins operating. These credits can then be used to offset a buyer’s tax liability in the following year.

But what if that project ends up going bankrupt and shutting down, or is destroyed by extreme weather, or is sold to another party, or otherwise fails to meet the rules that allowed it to claim the tax credit in the first place? If that worst-case scenario occurs, the IRS can claw back the value of those tax credits.

When the project owner is the same entity using the tax credits to offset their tax bill, that’s a fairly straightforward process. But any third party looking to buy those tax credits and retain their value over time will need to find a way to protect themselves.

That’s what makes the risk of ​“recapture a headache” for would-be corporate tax-credit buyers, Ullman said. ​“The company has to defend itself to the IRS and to pay the IRS — and they could either pay out of pocket when that happens or buy an insurance product and pay that premium over time.” That’s why Common Forge and other players in this market are building insurance into their standard transaction structures, he said.

The good news is that there are already established ways to mitigate this risk. ​“Recapture insurance and qualification insurance is a mature market — all the big carriers and brokers carry that insurance,” Moon said. ​“We’re working closely with them.”

In fact, Ullman noted, ​“Insurers are all quite excited by the market opportunity.” And because insurance rates tend to decline when there’s a bigger pool of stuff to insure, that’s another argument in favor of encouraging standardization across deal terms in the burgeoning tax-credit transfer market, he added.

Building markets that work at scale — and that sellers and buyers can trust

Crux CEO Johnson believes that another key to successful standardization will be the availability of reliable technology to connect clean-energy developers selling credits with potential buyers. His company is focusing on providing its software to the big banks and financial institutions that are already the key players in the traditional tax-equity market, he said.

Clean-energy developers need software ​“to easily list…their credits for sale” to the widest audience possible and ​“to distribute the credits at the highest net price” they can hope to secure, Johnson said. Buyers need to be able to ​“find projects that meet their desired characteristics” and access project data they need to do their due diligence, and they need this information both before making a decision to buy and afterward, in case ​“the IRS comes knocking.” And companies like Crux are needed ​“in the middle” to ​“distribute these credits and make markets,” he said.

Ullman warned that this new market is not going to develop overnight. ​“The first thing — the existential thing — is getting buyer interest,” he said. ​“You have to do a bunch of transactions this year, show that buyers can engage with minimal overhead time internally, show a bunch of savings, and show it didn’t blow up at the end.”

Eventually, a healthy market will be able to sort tax credits from project developers with weaker or stronger underlying financial underpinnings and price them accordingly, Johnson said. It will also be broad-based enough to ride out disruptions that dogged the traditional tax-equity investment markets during the recessions of 2008–2009 and 2020–2021, when big tax-equity investors were making less money and thus had smaller tax bills, and had largely stopped looking for tax credits as a result.

A vibrant tax-credit transfer market could also create a new way for climate-conscious companies to invest in decarbonization, Worrall noted. For clean energy to grow at the rate needed to reach the Biden administration’s carbon-cutting commitments under the Paris Agreement, ​“these corporate taxpayers need to step up to support this federal policy,” he said.

Headquartered in Coeur d’Alene, Idaho with clients on every continent, KOREPower provides functional solutions to meet the growing demand for green economic expansion and a decarbonized future. As a fully integrated provider of battery cells and clean energy technology and solutions, KORE drives the energy transition through direct access to superior tech, clean energy manufacturing, and unmatched support for clean energy jobs and resilient, sustainable communities worldwide. KORE Power’s robust portfolio provides the commercial, industrial, utility and defense markets with next-generation battery cells, advanced energy storage systems that scale to grid+, intuitive asset management, and EV power and charging infrastructure support.