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

On January 19, the IRS released key guidance for the §30C alternative fuel vehicle refueling property credit. The guidance included two appendices that identify eligible census tracts depending on a project's placed-in-service date. Alongside the guidance, the IRS issued a press release and an FAQ.

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Takeaways

1. The Inflation Reduction Act extended and meaningfully modified the §30C ITC 
2. 99% of U.S. territory is included in eligible census tracts
3. Eligible locations will vary depending on when a project is placed in service
4. DOE published a mapping tool that shows eligible areas with placed-in-service filter
5. Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor
6. Further guidance is coming

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TAKEAWAY 1

The Inflation Reduction Act extended and meaningfully modified the §30C ITC 

The §30C ITC existed prior to the Inflation Reduction Act (IRA), and the guidance reminds us of the ways in which the IRA modified the credit.

Added prevailing wage and apprenticeship requirements

‍The §30C is subject to the IRA's prevailing wage and apprenticeship (PWA) requirements. If a developer meets PWA requirements, the §30C credit value increases from 6% to 30% of eligible costs. Considering the economics, virtually all developers will meet PWA requirements.

Increased credit maximum

‍The IRA increased the maximum credit value that an eligible property can receive. For businesses, the cap is $100,000 per "item of property."

Modified eligibility scope

‍The IRA modified the scope of the §30C ITC "so that it no longer applies per location and instead applies per single item." Notably, although the guidance provides several definitions, it does not define what constitutes a "single item." We'll comment on this below.

Narrowed applicability to non-urban areas, low-income communities, and, with this guidance, U.S. territories

The IRA requires a §30C-eligible property to be placed in service in an eligible census tract – that is, any population census tract that is a low-income community, a non-urban area, or a U.S. territory.

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TAKEAWAY 2

99% of U.S. territory is included in eligible census tracts

According to the guidance, three broad areas are eligible for the credit:

• Non-urban areas: For purposes of the §30C credit, the IRS defines a non-urban area as "any population census tract in which at least 10 percent of the census blocks are not designated as urban areas.” Many market participants have been referring to non-urban areas as "rural areas."
• Low-Income communities: The IRA defined a qualifying census tract as one described in Section 45D(e), which defines a low-income community for purposes of the new markets tax credit (NMTC). The guidance, however, notes that NMTC data was recently updated and provides a transition rule under which developers can rely on designations using the older or more recent data.
• U.S. territories: The guidance allows refueling properties located in U.S. territories to qualify for the credit. However, the property must be owned by a U.S. citizen, U.S. corporation, or a U.S. territory corporation. (Inhabited U.S. territories are American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands.)

According to the Electrification Coalition, an industry group, the areas in which eligible property can be installed "will include approximately 99% of U.S. land territory and 62% of the population."

This is particularly good news for expanding electric vehicle adoption because, without the §30C tax credit, installing EV charging infrastructure can be prohibitively expensive in rural areas where there are fewer vehicles in the first place.

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TAKEAWAY 3

Eligibility of a census tract depends on when a project is placed in service

The guidance also provided two appendices that list qualified census tracts depending on when a project is placed in service (PIS):

• PIS after 12/31/22 and before 1/1/25: Appendix A or Appendix B
• PIS after 12/31/24 and before 1/1/30: Appendix B

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TAKEAWAY 4

DOE published a mapping tool to streamline siting analyses

To strengthen implementation efforts, Argonne National Laboratory within the Department of Energy (DOE)  published a §30C Tax Credit Eligibility Locator mapping tool and an FAQ.

To help developers select the appropriate census tract for their project's placed-in-service date, Argonne accompanied the map with a decision tree.

The mapping tool, however, is for informational purposes only and "may not be relied upon by taxpayers to substantiate a tax return position and will not be used by the IRS for examination purposes."

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TAKEAWAY 5

Ambiguity around definition of "single item" with respect to credit qualification remains a gating factor

The guidance did not fully clarify what equipment constitutes a "single item" with respect to credit qualification. As Canary Media notes, electric vehicle "charging sites also have a lot of 'shared equipment' such as power conduits, switchgear, transformers and enclosures," and there are "still questions of whether [the credit] will cover just the charger, or additional factors to installation like upgrading power infrastructure."

The definitional ambiguity presents financial challenges for developers who want to transfer their tax credits because they don't yet know what their credits will be worth.

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TAKEAWAY 6

Proposed regulations still to come from the IRS and Treasury

Fortunately, the guidance states that further guidance is forthcoming. Reunion believes this additional guidance will likely address the definition of a "single item," given the gating nature of its ambiguity.

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Reprinted from the Novogradac Journal of Tax Credits

January 2024 – Volume XV – Issue I

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Corporate income tax revenue was $425B in 2022, suggesting that if IRA tax credits reach $100B annually, monetizing these credits will require over 20% of annual corporate federal income tax to redirect into clean energy projects. Attracting new sources of tax-related capital into the market remains one of the major hurdles facing the renewable energy sector.  

Congress attempted to lower the barriers to entry for attracting tax credit capital by introducing transferability – a transaction mechanism that allows for the purchase and sale of credits, rather than the more complex tax equity partnership structure.

So far, this solution appears to be attractive to corporate taxpayers. In 2023, the range of buyers interested in IRA tax credits has grown beyond the traditional appetite from banks, insurance companies, and some specialized financial services firms.

IRA credits bring significant optionality to tax credit buyers

There are many different types of tax credits from which to choose.  For example, there are two credit types – Internal Revenue Code (IRC) Section 48 investment tax credits (ITC) or IRC Section 45 production tax credits (PTC) – and 11 sub-credits spanning electricity generating technology, low carbon fuels, carbon capture and sequestration, and advanced manufacturing.

There is also a range of pricing discounts available that reflect the risk profile of a specific project. Buyers now have far more optionality around the attributes of the credits they are buying, and the transaction process itself. 

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Buyers can also choose from two different tax credit structures – a single-year ITC or a ten-year stream of PTCs. Single-year ITCs apply to the tax year in which the project was placed in service. This gives tax teams the ability to buy credits year-by-year to offset fluctuating or unpredictable tax liabilities. PTCs are generated alongside the physical output of the project (e.g., electricity, sequestered carbon, manufacturing components, etc.). This allows tax credit buyers to contract for either a spot purchase – i.e., the credits from a single period of output (usually one year) – or a forward commitment to a stream of credits. For taxpayers with a predictable amount of tax over a multiyear period, committing to a forward PTC, or “strip,” purchase can improve the economics of the transaction versus a single-year purchase.

In the current market, spot PTC purchases offer the smallest discount to face value, since they carry less risk compared to ITCs which have a recapture provision, whereas PTCs do not. Single-year ITCs typically offer the median discount and PTC strips offer the largest discount. 

Optionality also comes in the form of purchase timing. There are two considerations here – first, most transferable credits are not paid for until a project is placed in service. This approach gives buyers the ability to require key conditions precedent to be met before funding and greatly reduces construction risk to the buyer while isolating the buyer’s exposure to pure tax credit-related risks. Second, buyers can still contract for credits prior to payment. Treasury guidance released in June 2023 formally allowed taxpayers to apply their “intent to purchase” credits to quarterly estimated payment, creating an opportunity to save on quarterly payments prior to laying out cash for a tax credit purchase.

Structuring purchases or payments around quarterly estimated payment days can deliver the best internal rate of return and cash management value. Contracting early in the year can often help buyers secure the best economics, even for credits that aren’t generated until later in the year. Ultimately, buyers should consider the timing of credit purchases as an additional benefit of transferability and plan accordingly for their own tax position.

Transferable IRA credits carry discrete, manageable risks

For early investors in IRA tax credits, risk mitigation should be the primary focus of a transaction process. In general, IRA credits carry the same risks as investing in pre-IRA wind or solar PTCs or ITCs. When investors buy these credits using transferability, however, they eliminate the structure risk associated with tax equity partnerships. This results in cleaner transactions, where buyers need to primarily focus on de-risking the credit itself, rather than the operating profile of the underlying asset.

For a transferable tax credit purchase, buyers must focus on two core risks:

• Qualification: Was the tax credit properly claimed?
• Recapture: Applicable only to Section 48 ITCs and Section 45Q PTCs (not applicable to other PTCs)

A Section 48 ITC is calculated on the cost basis of the energy property placed in service during the tax year. The IRS may challenge the cost basis of the energy property, and if this amount is ultimately reduced, the amount of ITCs from the project will be reduced as well, resulting in an excessive credit transfer tax to the transferee. Buyers will want to review detailed documentation that records the project’s cost basis, verified by a reputable third party accounting or legal firm. In addition, prevailing wage and apprenticeship requirements and any bonus credit adders will need to be verified.

To qualify for a Section 45 PTC, a project needs to generate electricity from a qualified energy resource during the ten-year period beginning on the date the facility was placed in service. Because the PTC is tied to production, the primary risk associated with PTCs is accurate production accounting. This risk is considered easily manageable because production is quantifiable and readily verified.

Recapture on a Section 48 ITC requires that (1) the property remains a qualified energy facility for five years, and (2) there is no change in ownership of the property for five years. In practice, there are three key risks that can be investigated with respect to recapture:

• Proper site control: ensure that the energy project will not be forced from the property by a current or new landlord, triggering a recapture
• Adequate property and casualty insurance: ensure that there is sufficient coverage such that the energy property will be rebuilt in the event of a casualty event
• Mitigate risk of recapture due to debt foreclosure: ensure that lender has agreed to forbearance agreement, or debt is structured in a way that does not trigger recapture in the event of a default

In addition, the seller will need to contractually assure the buyer that there will not be a change in ownership during the five-year recapture period, which the indemnity agreement will help ensure. 

To protect against these risks, buyers will negotiate indemnifications from the seller, and may seek tax credit insurance as a backstop to protect the value of the credits. Working with experienced transaction partners familiar with renewable energy tax credits can ensure that risks have been properly diligenced and risk mitigation is in place in the event of a challenge from the IRS.

Common points of negotiation in tax credit transfer agreement

Unlike a tax equity investment where control rights are an inherent part of the negotiated partnership structure between a project developer and tax credit investor, transferable tax credits sold via a purchase-and-sale agreement don’t carry the same level of ongoing rights for a buyer. This means that buyers should identify the key points of negotiation they will want to include in a tax credit transfer agreement (TCTA). 

Some common points of negotiation beyond price include:

• Timing of payments
• Audit participation rights
• Scope of buyer indemnification 
• Tax credit insurance and who bears the associated costs
• Representations and warranties, and pre-close/post-close conditions precedent 

Several of these are closely related to risk management and warrant additional explanation – namely, the scope of buyer indemnification and tax credit insurance. 

Buyers will typically secure a broad indemnity that shifts most risks (and their associated costs) from the buyer to the seller. In a tax credit transfer transaction relating to a Section 48 ITC, the primary risks to which a buyer is subject are qualification and recapture. The price of the credit can vary depending on the strength of this indemnity – if a creditworthy guarantor or very large balance sheet (in comparison to the size of the credit) is providing the indemnity, tax credit insurance may not be required. 

For instances where a buyer does want tax credit insurance, this cost is typically paid by the seller or the price of the credit is adjusted accordingly when the buyer is procuring insurance directly. Tax credit insurance can be a double-trigger policy that backstops the seller indemnity. So, if the seller fails to perform on the contractual obligations around a recapture or disallowance event, for example, the insurance policy steps in to make the buyer whole. Tax credit insurance is usually quite comprehensive and costs several pennies per dollar of credit. 

Conclusion: discrete, manageable risks

The IRA created an attractive tax credit regime for corporate taxpayers to participate in the energy transition while managing their own federal tax liability over an extended period. While these credits are not certificated in the same manner as some state tax credits, they do bear the benefit of being transferable – vastly lowering the barrier to participation when compared with legacy tax equity investments. 

The risks to these credits are not zero, but they are discrete and manageable through due diligence, seller indemnification, and products like tax credit insurance. Buyers can generally find ways to substantially de-risk these credits while still preserving sufficient value.

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Q1 2024 Newsletter

January 22, 2024

Welcome to the new year and our Q1 2024 newsletter.

The transferable tax credit market is accelerating quickly, and so is Reunion. We have several updates we'd love to share you — from a first-of-its-kind tax credit transfer, to news of our marketplace crossing $4 billion in tax credit opportunities.

Tax credit transfers will drive a significant increase in clean energy deployment in 2024, and we look forward to keeping you up to date!

Andy Moon, CEO

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An innovative tax credit transfer for commercial rooftop solar

Reunion celebrated the new year by facilitating an innovative tax credit transfer from a portfolio of commercial rooftop solar installations. The transaction represents the promise of transferability: enabling clean energy projects that have historically struggled to attract financing.

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Major updates to our transferable tax credit handbook

We recently unveiled version 2.0 of our 100-page transferable tax credit handbook, after receiving fantastic feedback from the market on our initial release.

Our latest edition includes an overview of the IRA's 11 transferable tax credits as well as comments on the latest Treasury guidance.

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Read our 2023-2024 pricing review and outlook

In January, our team published our inaugural pricing review and outlook, based on our transactional experience and hundreds of conversations with tax credit buyers and sellers. In the article, we share pricing observations from 2023 and predictions for 2024.

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Our marketplace now features over $4B in tax credits

Our marketplace has grown rapidly since our launch in June 2023. We now have over $4B of tax credits available across solar, wind, battery storage, advanced manufacturing, and other clean energy technologies.

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Reunion is hiring

Our team continues to grow! We have several open positions available and would love your help finding great folks.

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Stay tuned on LinkedIn

You can catch our latest insights and news on LinkedIn. We hope you’ll follow us and join the conversation.

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Tax Credit Insurance Helps Power Up Credit Transfers

Reprinted with permission from Tax Notes - Volume 182 | January 1, 2024

By Marie Sapirie

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The market for tax insurance has evolved alongside the market for credit transfers. At the opening of the new year, it’s likely on the cusp of a further expansion as more transfers are completed, with even more expected in the coming months.

Tax insurance has a long history and applications across many different types of transactions, but a new avenue for growth opened when the Inflation Reduction Act made transfers of renewable energy tax credits possible. Because tax insurance covers known risks, insurers want opinions or well-supported memoranda from outside counsel that offer a strong level of confidence about the credit, said Mark McTigue of Marsh. That generally means a “more likely than not” or should-level opinion or advice.

Even before the IRA, interest in tax insurance had steadily grown over the last 10 years, said Keith Martin of Norton Rose Fulbright US LLP. As more tax credit sales are completed, the demand for insurance will likely grow even more. Martin said that his firm had closed 11 sales of tax credits and has another 20 in documentation.

"The market for tax insurance has evolved alongside the market for credit transfers."

Investment tax credit buyers have so far almost universally required comprehensive risk mitigation, said Billy Lee of Reunion, an energy tax credit marketplace. “They either require a highly creditworthy seller (or guarantor) or tax credit insurance so there is a strong balance sheet that will make them whole for any reduction or loss of credits,” he said.

Credit buyers seeking a high degree of reassurance, particularly on recapture risk, are flocking to tax credit insurance. “If you’re buying a $100 million ITC and there is a possibility that in year 3 there is recapture because of a casualty that knocks the project permanently out of service, that’s a big tax bill,” said Lauren Collins of Vinson & Elkins LLP. Even sellers may prefer to get insurance instead of having to indemnify the buyer, she said.

But prospective credit sellers with smaller credit amounts may have difficulty offering, or be unable to offer, guarantees to buyers. And they might find it challenging to acquire insurance, too, although finding solutions to make the transfers of credits worth less than approximately $5 million is a focus for both tax credit marketplaces and insurers.

New buyers

Historically, insurance provided tax equity investors with reassurance that the credits were good and provided a backstop when a developer lacked a strong balance sheet, said Antony Joyce of Marsh. The transfer market is similar.

There are two types of tax credit buyers in the market, Martin said. The traditional tax equity investors were more likely to be satisfied with the types of indemnities they’re used to having in tax equity financing transactions, but are now starting to shift to all-events indemnities as they see less-sophisticated buyers get them. The other set of buyers expect to be compensated if anything goes wrong with the credit, and they’re less familiar with the risks they’re taking. The latter group is more likely to be a corporation not previously involved in tax equity or renewable energy that wants to buy credits to offset tax liability or as a revenue item. Such buyers tend to want a full scope of coverage, including basis risk, ITC rate computation risk, prevailing wage and apprenticeship risk, and risks connected to the bonus credits for domestic content and energy communities, Joyce said. They’re seeking protection that the credit and the transfer are good, he said.

Joyce said that traditional tax equity investors typically seek insurance for the riskier piece of the credits, rather than attempting to insure 100 percent or more of the credit, as some of the new post-IRA buyers do. “From an insurer’s perspective, the risk that’s being underwritten has the traditional riskier component and has insurance covering components of the credit that were not traditionally thought of as being riskier,” he said. That’s a new phenomenon brought about by the transfer market, and it affects the pricing, Joyce added.

In addition to the two types of buyers, there are also two types of transfers, Joyce said. Many transfers don’t include the step-up in basis typical of tax equity transactions, but a pool of transactions does include it. In those deals is a completed tax equity transaction that includes an embedded step-up in basis in the ITC, and the partnership is selling the credits. For all buyers and transactions, acquiring insurance is currently a bespoke process. “Every project and risk is different,” McTigue said.

Risks in transfers

Recapture is one of the chief risks that buyers of ITCs seek to have insured. “It’s low probability, but high consequence,” Lee said. Recapture insurance also provides a sort of backstop for property and casualty insurance, which most projects already have to cover the investment, he said. There are recapture scenarios that insurance typically won’t cover, however, including if the seller intentionally sells the project or converts it into a facility that no longer qualifies for the ITC.

"Recapture is one of the chief risks that buyers of ITCs seek to have insured."

A primary use of tax credit insurance is when the project’s financing includes debt, Lee said. If the project is performing worse than expected and the borrower defaults, the bank could foreclose, which would cause a recapture if the bank has the first priority lien on the equipment. “Some insurers will require the lender to enter a forbearance agreement to agree not to foreclose in the five-year recapture period,” Lee noted. He said that insurance brokers should push more of the markets to cover recapture from foreclosures without such agreements. “Doing that would remove a big hassle factor and create a lot of value for sponsors because that lender negotiation can be very difficult and time-consuming,” Lee said.

Tax insurance has typically been used in the traditional tax equity market for situations when the project developer relies on the physical work test to show when construction began, Martin said. That date used to be important to lock in tax credit rates during the period tax when credits were phasing out, and it remains important today for the application of the prevailing wage and apprenticeship rules and the energy community bonus credit.

Another risk that buyers think about is the possibility that the IRS disallows a portion of the credit that is claimed by a seller and sold to a buyer. Those situations — such as a sale of a $10 million credit that the IRS values at only $9 million — can be caused by numerous factors, including challenges to the appropriate amount of developer margin or the inclusion of ITC-ineligible costs, such as fences and roads. Disallowance is more likely than recapture but is generally less consequential, and still remains an important concern for buyers, Lee said.

The domestic content bonus credit is another area in which credit buyers seek the reassurance of insurance, in part because there is still considerable uncertainty in the application of the rules. In light of that uncertainty, a will-level tax opinion is hard for outside counsel to give, Collins said. The alternative is for taxpayers to get a should-level opinion and tax insurance, she said. Martin said that as the domestic content bonus credit gains traction, insurance to cover that risk will likely become more prevalent. But so far, there has only been one deal in which the market was willing to price domestic content into the financing, he said.

Insurance has been used in the traditional tax equity market in repowering wind projects. When a wind project is repowered with an expectation that it will generate another 10 years of credits, the tax equity market has been careful, Martin said, noting that some tax equity investors have required two appraisals to show that the 80/20 test was passed.

Tax credit insurance could also be a creative mechanism for covering registration and reporting risk for transfers, Collins said. Because that risk is all or nothing, foot faults like failing to timely obtain the registration number could have disastrous consequences, she noted. Similarly, if a seller fails to appropriately report the sale, the buyer could lose the money they paid for the credit without some type of risk mitigation.

Smaller credits

Although tax credit insurance is widely available, it comes at a price, and for smaller credits, the cost can be too high. Insurers’ minimum premiums may mean that insurance isn’t available. It can also be cumbersome, because insurers do extensive due diligence before writing a policy, and scale and simplicity are important factors in their decision to underwrite a contract. Consequently, projects that offer credits under about $5 million or have significant complexities can be hard to insure, and therefore hard to find buyers for, Lee said. But smaller projects may sometime soon be packaged into portfolios and sold collectively, and that bundling may open up insurance options for those credits, he said. The availability of insurance should make it easier for projects such as commercial and industrial solar and newer technologies to receive more bids from buyers, but for now, there are a lot of “orphan credits” because most buyers want full risk mitigation, Lee said, adding, “It’s a definite market inefficiency and an area we’re really focused on because the whole point of transferability is to make it easier for projects to get their credits monetized.”

"Although tax credit insurance is widely available, it comes at a price, and for smaller credits, the cost can be too high."

McTigue said that acquiring insurance on $2 million in credits, for example, is trickier because of the typical minimum premiums and the limits the insurance market is willing to entertain. “As much as it’s grown, it’s a fairly under-resourced space,” he said, but added that pooling credits by wrapping in other projects can be a creative way to overcome existing obstacles. “We say $5 million is the minimum limit on insurance, but there is some flexibility there,” McTigue said.