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

Drawing on over $10B of verified transactions, our report takes a deep dive on the Section 48 investment tax credit, Section 45 production tax credit, and Section 45X advanced manufacturing production credit. We also examine emerging market trends and deal dynamics.

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Participants in the initial wave of tax credit transfer transactions filed their returns reflecting those deals on October 15, marking another milestone for the Inflation Reduction Act’s experiment in tax credit transfers. At least for some credit buyers, the tax system is inching closer to the inevitable: audits.

At least for some credit buyers, the tax system is inching closer to the inevitable: audits.

In the due diligence they performed before the transfers, participants began preparing for examinations. The diligence process for tax credit transfers will likely always be at least partly customized to the parties because different entities have different concerns, but a more standardized roadmap has emerged over the past year or so as advisers and tax credit buyers and sellers gained experience.

Doing Your Homework

The basic outlines of the diligence process were informed in part by the precursor to transfers — tax equity. But the IRA clearly conceived of a transfer as a far simpler transaction, and accordingly they require less diligence. Consensus among buyers and sellers about how much less has evolved over time. The natural processes of maturation and acceptance of common diligence practices have made negotiations over due diligence more streamlined, said David Burton of Norton Rose Fulbright US LLP. “Now there are typically only a handful of issues to negotiate,” he said, adding that some buyers still do more due diligence than they need to out of an abundance of caution.

The due diligence required for a transfer is focused on ensuring that the project can continue to operate economically in order to avoid a recapture event or a disallowance of credits, said Billy Lee of Reunion, an energy tax credit marketplace. Unlike in tax equity and secured financing deals, investor returns aren’t dependent on cash flows of the project in transfers, hence less diligence. The relative simplicity of transfers is a large part of their appeal. “Transferees want to buy credits and never think about them again — that’s an ideal outcome of a tax credit purchase,” Lee noted. However, there are several areas where the tax credit buyer is exposed to some operational risk: avoiding recapture and complying with the prevailing wage and apprenticeship requirements.

Some deals require the seller to provide an annual compliance certificate to the buyer, but avoiding recapture and complying with the labor requirements are largely the project developer’s purview. Recapture, a scary possibility for transferees because it has high consequence, is very unlikely to happen, Lee said. If it does, the developer must notify the buyer so they can reflect that on their tax return and seek indemnification or make an insurance claim. Typical transfer agreements require transferors to comply with the prevailing wage and apprenticeship rules for alterations and repairs.

Prospective credit buyers and sellers increasingly try to ensure that the information they need for due diligence is prepared and vetted as they go into negotiations, said Anand Chaturvedi of Dili. Chaturvedi’s company automates the data and file processing that has traditionally been done manually in the due diligence stage of transactions and provides diligence reports that are based on complete data, rather than sampling, to identify risks. Chaturvedi added that collecting and processing diligence information before negotiations not only makes them go more smoothly but also helps to ensure that the data is available for a later examination by the IRS. “Part of our involvement in these deals is to make all of the documentation as robust as possible for audit,” he said.

Market Maturation

Due diligence may never be fully uniform for all transactions, but as the number of completed deals climbs, the process has become more efficient. “There is now a better appreciation for the scope of diligence on both sides. Buyers understand that they don’t need everything, and sellers understand that they can’t get away with providing nothing, or even the bare minimum,” Lee said. As a result, there are fewer disagreements in investment tax credit transfer negotiations over the scope of due diligence because it’s generally accepted what buyers and sellers need to be confident about the transaction, he said. Debate is more likely regarding due diligence for newer credits that have fewer precedent transactions, such as the section 45X advanced manufacturing production credit.

A handful of areas remain where buyers and sellers don’t always see eye to eye. Buyers sometimes ask for an independent engineer’s report. Sellers tend to argue that those reports are unnecessary for transfers, because the purchase takes place after the credits have accrued, Burton explained. Some buyers also seek corporate enforceability opinions. In addition, tax opinions are not part of every deal. Burton said that over half of his firm’s transfer deals through mid-October had no tax opinion condition precedent. The market appears to consider a good indemnity agreement a sufficient precaution.

The Required Minimum Is Not Enough

The final transfer regulations (T.D. 9993) outline the required minimum documentation that an eligible taxpayer must provide to a transferee, and some sellers initially sought to provide transferees with only that minimum. Advisers quickly pointed out that “minimum” was not equivalent to “recommended.” The preamble to the final rules notes:

In providing for the required minimum documentation that an eligible taxpayer must provide to a transferee taxpayer, the intention was to require a baseline of information that is necessary for validating an eligible taxpayer’s claim of eligibility to an eligible credit, while not overburdening the eligible taxpayer with production requirements or altering the arm’s length arrangement between the parties.

But the preamble also explains that an objective of the rules was to allow “sufficient flexibility for market participants to determine if more information is necessary in a particular transaction,” and it suggests that agreements between taxpayers might go beyond the minimum requirements.

The final transfer regs also include in reg. section 1.6418-5(a)(4) a list of circumstances that may indicate reasonable cause for avoiding an excessive credit transfer tax. Those include review of the seller’s records regarding the determination of the eligible credit, reasonable reliance on third-party expert reports, reasonable reliance on representations from the seller, and review of audited financial statements. The list also helped to frame the standard scope of diligence.

Advisers quickly pointed out that ‘minimum’ was not equivalent to ‘recommended.’

Standard diligence for ITC transfers includes the cost segregation report, placed in service substantiation, appropriate insurance coverage, seller credit analysis, prevailing wage compliance, and basic parameters indicating that the project has the right and ability to operate. The validity of any bonus credits must also be covered. If there is a step-up transaction, an appraisal is needed, Lee said. “Our due diligence effort is comprehensive, but efficient — we try to hit all the points that are salient to make sure that credit buyers have everything they need to get comfortable and defend their position if there is a challenge down the line,” he said.

Looking Ahead to Audits

Planning ahead for an audit means anticipating the questions that the IRS will ask on information document requests and collecting that information in advance.

“Typically the purchasers want to do enough diligence that they feel comfortable that even if there is an audit, there’s a complete and substantive file they can point to,” Lee said. Buyers typically also agree with the seller stating that the seller can be involved and allowed to participate in an audit, Lee said. Similarly, if there’s indemnity, the seller is given the right to consent to any settlements, and where insurance policies exist the buyer also provides the insurer with audit participation and settlement consent rights. “An audit is going to be a collaborative exercise,” particularly because there is not typically a way to allow the buyer to transfer an audit to the seller,” Lee said.

One way to reduce the risks that worry buyers and insurers is for sellers to show that they have a strong program for ongoing compliance or reporting, Chaturvedi said. “For alterations and repairs, the project developer needs to continue to pay prevailing wages and also give confidence to their insurer or credit buyer that those compliance rules are being met,” he said.

Recording

Key topics

• 1:22 – "What's New" with Keith Martin of Norton Rose Fulbright
• 20:31 – Tax credit pricing
• 24:50 – Tax credit market size
• 25:30 – Emerging deal terms and dynamics
• 29:52 – Market participants
• 31:52 – Tax credit insurance
• 34:37 – Audience Q&A

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Special guest, Keith Martin of Norton Rose Fulbright

Keith Martin is a tax lawyer in the Washington office of Norton Rose Fulbright who has helped lead the project finance group at the firm for more than 25 years. The group did $211 billion in project financings and closed 448 significant transactions in the last four years. It closed 57 large tax credit sales in the last year involving more than $6 billion in tax credits. Keith worked for 258 companies last year on numerous transactions. He also lobbies the US Treasury and Congress on policy issues. The Chambers directory gives him its sole "star" ranking among US renewable energy lawyers.

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Download Reunion's tax credit pricing and market trends report

Can't attend the webinar? Download our Q3 report now.

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About Reunion

Reunion facilitates the purchase and sale of clean energy tax credits. So far in 2024, Reunion has worked with major corporations to acquire over $2.5 billion in tax credits from solar, wind, storage, advanced manufacturing, and other clean energy projects.

Our curated marketplace features billions of dollars of high quality tax credit opportunities, and our team of clean energy finance veterans supports buyers and sellers through each step of the transaction process, with a focus on commercial negotiation, due diligence, and risk mitigation.

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Transferable tax credit pricing has increased in the latter half of 2024, particularly for large, "clean" ITCs

The increase in pricing reflects a seasonal supply-demand imbalance caused by the following:

• Corporate taxpayers have a firm and clear estimate of their 2024 tax liability, and many new tax credit buyers have stepped into the market. They are now scrambling to find credits to offset that liability
• The supply of 2024 credits, particularly large credit volumes, have dwindled given the amount of transaction activity throughout the year

We expect pricing for 2024 credits to remain inflated through the end of the year and into 2025. This intra year supply-demand imbalance was also observed in 2023.

While pricing has increased across all credit types, the most marked increase has been with large, straightforward ITC projects. For most of the year, these opportunities traded in the $0.92 to $0.93 range, but as of Q3 we are seeing buyers bid $0.94 or even $0.95. The spread between ITCs and production credits (§45 PTCs and §45X AMPCs) has narrowed considerably.

Sellers have started marketing high quality 2025 tax credit opportunities and are actively seeking buyer commitments. We believe that buyers that are willing to shop now for 2025 credits will be able to access a wide range of credit opportunities, with less competition.

We have also observed sellers running competitive RFP processes, and are receiving multiple bids – in some cases, upwards of ten qualified bids. Examples of projects that have received multiple bids with high valuations:

• $130M solar ITC from an investment grade seller, exempt from prevailing wage requirements
• $150M solar and storage ITC from a reputable seller with a very strong balance sheet. No step-up in cost basis and exempt from PWA requirements

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Corporate buyers should develop their 2025 tax credit acquisition strategy now to avoid the late-year credit frenzy

Reunion is seeing an increasing number of high quality sellers marketing their 2025 projects now and placing tight deadlines on accepting bids. Even though pricing may not be optimal due to a lower number of buyers ready to look at 2025 credits, these sellers want to put a tax credit purchase agreement in place so they can obtain a bridge loan against their tax credit commitments.

Buyers who are able to commit to 2025 credits now will get access to a wider selection of project opportunities, and potentially better pricing, as only a subset of buyers have enough visibility into 2025 tax liabilities to be able to commit early. They’ll also avoid “chasing credits” in the latter-half of 2025.

Buyers who are able to execute tax credit transfer agreements now have a significant advantage

For buyers with uncertainty around their tax liability, one option is to initially target a purchase volume that is significantly lower (e.g., 50%) than projected tax liability. The buyer can purchase additional tranches of credits later in 2025 as their tax position becomes more clear. (We previously discussed the strategy of topping up on credits.) Purchasing tranches of credits to “top up” also carry the benefit of less competition for smaller credits, resulting in potentially better pricing.

Buyers who are willing to go slightly out of pocket will also be in an advantageous position

A majority of corporate tax credit buyers do not want to go “out of pocket” to acquire clean energy tax credits, preferring to align tax credit purchases with their quarterly estimated tax payments. Typically, the internal approval process for a cost savings effort (e.g., paying a clean energy developer $95M in lieu of paying $100M to the IRS, at approximately the same time) is easier than requesting an out-of-pocket investment to buy credits that generate tax savings in the future. 

Buyers who are willing to go slightly “out of pocket” — for example, willingness to pay for an ITC in Q1, Q2, or even Q3 — will enjoy a less competition, and a larger discount to compensate for timing of payment. These out-of-pocket investments can present attractive economics to buyers, with IRRs over 20%. 

We can see this in a sample $100M ITC purchase from a project that will be placed in service in Q1 2024. Let’s assume a buyer and seller execute a tax credit transfer agreement in Q4 2024 (11/15/2024) for a utility-scale solar project that is expected to be placed in service in Q1 2024 (3/15/2024). If the buyer agrees to pay for the credits as soon as the project is placed in service, they could reasonably expect to pay $0.93, as they will essentially be “pre-paying” their taxes in Q1 and will get the benefit of the tax offset during their quarterly estimated tax payment dates.

Even though the buyer goes out of pocket in this scenario, the investment generates an attractive 20.3% IRR and $7.0M tax savings.

Consider smaller projects for better economics 

Buyers and sellers want as few counterparties as possible. If a buyer has a $160M tax credit appetite, they want to find one project as close to a $160M as possible.  

Focusing on a single, large transaction, however, can present challenging economics because as we noted, there are many large taxpayers that all want to find a large, straightforward transaction.

Simply moving from a single transaction of $100M to three transactions of $30M can meaningfully improve deal economics without necessarily adding undue risk or complexity. Through Q3 2024, for example, smaller 45X AMPCs deals priced approximately a cent below larger 45X AMPCs deals.

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Set expectations with internal stakeholders on pricing dynamics for 2024 credits

Companies looking to pursue sizable 2024 ITC opportunities should expect credits to trade at a premium. Buyers should set expectations to bid $0.94, $0.95, or even slightly higher to win the most coveted opportunities. 

Additional 2024 credit opportunities will arise as the year draws to a close, and we also predict that additional opportunities will arise shortly after January 1. What we observed last year is that a number of tax credit sellers were not sure if their ITCs would be placed in service in the current year or the subsequent year, so they waited until they had certainty on the tax credit year (i.e., after January 1) to market their credits. That said, we predict that a large number of tax credit buyers will continue to compete over these 2024 credits, particularly for larger opportunities.

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Companies should start evaluating 2025 clean energy tax credit investments now

Corporations who are comfortable with their 2025 tax liability and are willing to go a bit out of pocket should begin shifting their attention to 2025. Q4 2024 is a good time to lock in some of the most attractive 2025 deals, particularly for larger ITC, PTC, and AMPC opportunities.

Our transactions team would be happy to assemble indicative cashflow scenarios. Contact us today.

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San Francisco, Sept. 24, 2024 /PRNewswire/ — Reunion, a leading clean energy finance company, today announced that it has facilitated the purchase and sale of over $1.6 billion in clean energy tax credits through Q3 2024.

Drawing on decades of clean energy financing experience, Reunion has transacted across a range of transferable tax credits – §48 ITCs, §45 PTCs, §45X AMPCs, and §30C alternative fuel infrastructure credits – and technologies. "Our team has facilitated dozens of tax credit transfers involving established clean energy technologies, like solar, wind, and battery storage, as well as emerging technologies, like biogas, fuel cells, and EV charging," said Reunion's president, Billy Lee. "Advanced manufacturing and critical minerals, however, have been the largest areas of growth for us. We've executed §45X transactions from $10M to well over $500M."

Reunion recently published a study that estimates the size of the transferable tax credit market, and quantified the total credit market by monetization strategy (transfer, direct pay, retention and transfer). We estimate that over $45B in clean energy tax credits will be generated in 2024. Of this total, Reunion estimates that approximately $21B to $24B will be transferred – a significant increase from the $5B to $7B in transfers Reunion estimated in 2023.

"At the end of 2023, many buyers were hesitant to be 'first to market.' A year later, however, the vast majority of corporate finance and tax leaders are aware of clean energy tax credits, and we are seeing significant demand for high quality opportunities," said Reunion's CEO, Andy Moon. "We are thrilled to see corporations across many industries invest in transferable tax credits."

The influx of new buyers and sellers has created a fast-moving market. When working with Reunion, typical transaction timelines have fallen from over 90 days in Q4 2023, to less than 45 days in Q3 2024.

About Reunion

Reunion facilitates the purchase and sale of clean energy tax credits, and has worked with major corporations to purchase over $1.6 billion in tax credits from solar, wind, storage, advanced manufacturing, and other clean energy projects. Our curated marketplace features billions of dollars in high quality tax credit opportunities, and our team of clean energy finance veterans supports buyers and sellers through each step of the transaction process, with a focus on commercial negotiation, due diligence and risk mitigation.

To learn more, visit www.reunioninfra.com and download our comprehensive handbook on clean energy tax credit transfers.

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Recording

Overview

Jordan Tamchin, Executive Vice President and leader of the Tax Insurance Practice at CAC Specialty, joined Reunion's transactions team for a 60-minute conversation covering recent market developments in tax credit insurance and a lively discussion about unique tax insurance solutions that have emerged in 2024.

Topics

• Tax credit insurance at a glance: Typical covered tax positions and exclusions
• Market snapshot: Depth of insurance market, pricing considerations, underwriting standards
• Emerging issues and trends: Coverage of step ups, PWA underwriting, bonus credit adder coverage, buy side vs sell side policies, typical limits of liability, audit experience
• Audience Q&A

Speakers

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.