Six Tax Credit Takeaways from Analyzing 6,000 Public Company Filings

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.

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

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.

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.

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

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."

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.

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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In December 2023, the IRS issued Notice 2024-9, which details how "applicable entities" can satisfy the Inflation Reduction Act's domestic content requirements when using elective pay (which is often called "direct pay"). In particular, projects beginning construction on or after January 1, 2024 may have the value of their tax credit reduced if domestic content requirements are not met.

The IRS refers to the time-based credit reductions as the "statutory elective payment phaseouts."

Applicable credits

The required use of domestic content under elective pay applies to the following credits:

• §45: Electricity produced from certain renewable sources
• §45Y: Clean electricity production credit (technology-neutral PTC)
• §48: Energy credit
• §48E: Clean electricity investment credit (technology-neutral ITC)

Details for each credit can be found in our overview of IRA tax credits.

Applicable entities

Applicable entities subject to the statutory elective payment phaseouts include:

• Organizations exempt from income tax
• Any state or political subdivision thereof
• The Tennessee Valley Authority
• An Indian tribal government
• Rural energy cooperatives
• Alaska Native corporations

Credit reduction

The percentage of credit available to an applicable entity making a direct pay election is determined by multiplying the credit value by an "applicable percentage." Applicable percentages are as follows:

• 100%: Project meets domestic content requirements and/or has a net output of less than one megawatt (alternating current)
• 90%: Project begins construction on or after January 1, 2024 and doesn't meet either of the "100%" requirements
• 85%: Project begins construction on or after January 1, 2025 and doesn't meet either of the "100%" requirements
• 0%: Project begins construction on or after January 1, 2026 and doesn't meet either of the "100%" requirements

Exceptions

The IRS provided two exceptions to the domestic content requirement. If either exception applies, the applicable percentage is 100%.

• ‍Increased cost exception: The inclusion of steel, iron, or manufactured products that are produced in the U.S. increases the project's overall costs of construction by more than 25%‍
• Non-availability exception: The relevant steel, iron, or manufactured products are not produced in the U.S. in sufficient and reasonably available quantities or of satisfactory quality

Attestation

Applicable entities can claim one of the above exceptions from the phaseout by attaching an attestation to the relevant tax form claiming the credit – form 8835 or form 3468.

The attestation must:

• Be signed by an individual with the power to bind the applicable entity in federal tax matters
• Be made under the penalties of perjury
• State that the entity has reviewed the requirements for each exception and has made a good faith determination that one or both apply

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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

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.

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.

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.

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.

Reunion is hiring

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

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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2023, the first full year of the Inflation Reduction Act, is officially behind us. As year-end approached, transactions closed in lockstep with the release of further IRS guidance and other market-enabling milestones.

With the turn of the calendar, we wanted to share our 2023 pricing observations and 2024 pricing predictions.

Overview of tax credit transfer pricing

Transferable tax credits are sold at a discount per $1.00 of credit, and the discount is the primary incentive for a buyer to enter into a tax credit transaction. A corporation, for example, buying credits for $0.90 would pay $90M in cash in exchange for $100M in tax credits. The company would realize $10M of savings, which is not treated as gross income and, therefore, not subject to taxes.

The net price the seller receives for the credit is typically the buyer’s purchase price less the cost of tax credit insurance and transaction fees (e.g., fees paid to a platform or facilitator such as Reunion).

Looking back on 2023 pricing

The market for transferable tax credits remains nascent, as transactions started in earnest following Treasury guidance on June 14, 2023. We have found that offers (and closed transactions) for 2023 tax-year credits are within fairly narrow pricing bands based on risk/complexity.

Across these pricing bands, projects with more scale have tended to drive smaller discounts.

§45 production tax credits (PTCs)

§45 PTCs are the simplest transaction to execute, as the credit is straightforward to validate. Buyers commonly review production reports and related documents to confirm that electricity was produced from an eligible project type and sold to an unrelated third party. Importantly, §45 PTCs do not carry recapture risk. 

Current-year PTCs have been trading in the $0.94 to $0.95 range. Buyers who have committed to paying for PTCs that will be generated in future tax years have received larger discounts.

For a deeper understanding of how pricing dynamics and forward commitments affect transaction structures, refer to our Section 45 PTC transfer case study, which explores a real-world transaction and deal specifics.

§48 investment tax credits (ITCs)

§48 ITCs carry more complexity. The buyer will need to validate the cost basis used to calculate the ITC as well as the tax year that the project was placed in service:

• Cost basis: If the cost basis has not been properly calculated, the credit can be subject to disallowance by the IRS
• Placed-in-service date: The project must be placed in service in the desired tax year; if a project is placed into service in a later-than-expected tax year, the tax credits can be carried back up to three years but the process is not straightforward

§48 ITCs are subject to recapture rules, which require that (1) the property remains a qualified energy facility for five years, and (2) there is no change in ownership for five years. If these conditions are not met, the IRS will recapture the unvested portion of the ITC (the ITC vests equally over a five-year period). 

2023 summary pricing

The discount is only one financial metric. Many buyers are also interested in timing of cash flows

While the discount is often the first question that we receive about tax credit pricing, it is not the only metric to evaluate the financial return of a tax credit transfer.

The timing of cash flows from a tax credit transfer is also important to buyers. Treasury’s June 2023 guidance clearly states that a “transferee taxpayer [i.e., a tax credit purchaser] may also take into account a specified credit portion that it has purchased, or intends to purchase, when calculating its estimated tax payments.”

Below are several examples of how timing of a tax credit purchase can impact returns (assuming buyers purchase credits for $0.90):

Finally, buyers commonly request to delay payments for a tax credit transfer to line up with their quarterly estimated tax payments. This is a key negotiation point, as sellers prefer to get paid as soon as possible after credits are generated.

Going forward, we expect delayed payment terms to result in a smaller headline discount for the buyer, since the seller will want to be compensated for their cost of capital.

In September 2023, we wrote a detailed discussion on buyer returns and also made a returns calculator available for download.

Looking forward to 2024 pricing

As we consider macro-level tax credit pricing in 2024, two major themes come to mind: increased credit supply and market bifurcation. The former is an emerging trend, while the latter extends from 2023.

Increased tax credit supply

Early analysts predicted that discounts would shrink as the market matures. We do not believe this is a foregone conclusion.

There is a significant increase in supply of clean energy tax credits for the 2024 tax year; Reunion’s digital platform already lists over $3 billion in tax credit opportunities for the 2024 tax year. This increased volume of tax credits looking for buyers will put downward pressure on pricing, at least until buyer demand grows commensurately.

In contrast, the supply of 2023 tax year credits was constrained, with a relatively small number of projects for buyers to invest in.

Continued market bifurcation

Heading into 2024, we believe that the market will bifurcate: certain credits will demand premium pricing while other credits (e.g., uninsured ITCs without an indemnity from a creditworthy guarantor) will need to offer a deep discount and/or novel ways to mitigate risk.

Common project types that will garner premium pricing include:

• §45 PTCs from solar and wind with an indemnity from a creditworthy guarantor or tax credit insurance. Certain §45X credits from advanced manufacturers will trade at a premium, if the size of the credit is significant and the seller provides a creditworthy guarantee or tax credit insurance
• §48 ITCs from sizable solar or battery projects (larger transaction sizes will demand a premium price), with an indemnity from a creditworthy guarantor or tax credit insurance
• §48 ITCs from solar or battery projects sold out of tax equity partnerships with experienced sponsors and tax equity investors

2024 summary market drivers

Overall, our view is that risk/complexity and scale will be the two main drivers of pricing. Projects that present buyers with lower risk and greater scale will, ultimately, enjoy higher pricing.

How Reunion helps

The Reunion team is available to meet with buyers looking to purchase 2023 or 2024 tax-year credits, and is also available to answer questions for those looking to learn more about the rapidly growing tax credit transfer market.

Please find us on LinkedIn or email us at info@reunioninfra.com.

Introduction

In episode 5 of 10 Questions with Reunion, our president, Billy Lee, sits down with David Kinzel of Marsh to discuss tax credit investor default insurance. Marsh designed this innovative and evolving insurance solution as a "credit enhancement" for buyers of transferable tax credits who are considering forward purchase commitments.

As David notes, tax credit investor default insurance has the potential to meaningfully "expand the universe of buyers well beyond what it is today and add more liquidity to the transferability market."

Listen on Spotify or Apple: 10 Questions with Reunion is available as a podcast on Spotify and Apple.

Guest: David Kinzel, Structured Credit & Political Risk Insurance Consultant, Marsh. David Kinzel is a Vice President in Marsh's Structured Credit and Political Risk group. Marsh is the largest insurance broker in the world.

Takeways

• Credit insurance expands the universe of potential buyers of transferable tax credits. By providing a credit enhancement to would-be transferable tax credit buyers, credit insurance allows more companies to buy tax credits on a forward basis. According to a Marsh analysis, over 1,400 companies could be eligible.
• Credit insurance is relatively new with respect to transferability. Insurers are beginning to explore credit insurance for transferable tax credit transactions, which should expand the scope of eligible deals.
• Underwriting is evolving but relatively straightforward. Underwriters will consider the financial strength of the buyer, the experience and reputation of the developer, the duration of the commitment, and the experience of advisors involved in the transaction.
• A credit insurance policy has three parties: the developer, the buyer, and the lender. The developer would be the insured, the buyer would be the insured counter-party, and the lender would be the "loss payee," or the party who would have rights to the policy proceeds in the event of a valid claim. The lender generally provides a bridge or construction loan to the developer.
• Many privately held companies would be insurable. Companies without publicly rated debt, including privately held companies, would be eligible for tax credit insurance.
• In the event of default on the forward contract, the insurer could become the purchaser of the credits. If the tax credit buyer doesn't perform on the forward commitment, the credits haven't been transferred. Therefore, the insurer could purchase the credits as part of their recovery.
• Coverage will usually cost less if an insurer has more recovery options. Insurers look for multiple pathways to being made whole, and the more pathways they have lowers the risk of the deal.
• ‍A good starting point for the cost of credit insurance is an annualized 1% of the commitment amount. Pricing would likely go down for higher credit qualities and shorter durations. Pricing would likely go up for more challenging credits and longer durations.

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Video Chapters

• 0:00 - Introductions
• 2:05 - Question 1: How can credit risk insurance be applied to tax credit transfer transactions?
• 4:43 - Questions 2 and 3: How deep is the tax credit investor default insurance market today? How deep could the market become?
• 6:00 - Question 4: What would underwriting and due diligence look like for investor default insurance?
• 8:21 - Questions 5 and 6: Could any tax credit buyer be insured? Why would a tax credit buyer need a credit enhancement?
• 11:01 - Question 7: How would a tax credit investor default insurance policy be structured?
• 12:26 - Question 8: How could an insurer "step into the shoes" – that is, become the purchaser of the credits – of a buyer in the event of an insurance claim?
• 14:27 - Question 9: Theoretically, will coverage cost less if insurers have more recovery options?
• 15:06 - Question 10: How much does this insurance cost today? How much do you think this insurance will cost over time?

Transcript

Introductions

Billy Lee: Hello, and thank you for joining our webinar series, 10 Questions with Reunion. My name is Billy Lee, and I'm the President and Co-Founder of Reunion, the leading marketplace for clean energy tax credits. We work with corporate finance teams to purchase tax credits from solar, wind, battery, and other clean energy projects.

Today, we are joined by David Kinzel, Vice President of Structured Credit and Political Risk at Marsh. I'm excited to speak with you, David, because risk management – that is, the comprehensive identification and proper allocation of risk – is core to the tax credit marketplace. Innovations around risk management are critical to growing this market.

Let's get into it. David, for starters, can you tell us who you are, what you do, and where this webinar finds you today?

David Kinzel: Thanks, Billy. I appreciate you having me here today. I am part of Marsh's Credit Specialties Division. For those who don't know, Marsh is the largest insurance broker in the world but has teams who are specialized in niches within the insurance world – mine being credit and political risks. I've been working in the world of credit risk for over 15 years and have a lot of experience in political risk (but that's an interesting topic for another day).

Billy Lee: David, where are you calling in from?

David Kinzel: I'm based out of Denver, Colorado.

Billy Lee: Excellent. Insurance in the context of tax credit transferability usually focuses on tax credit insurance, where an insurer is covering the risk that a tax credit is disallowed or recaptured by the IRS. With transferable tax credits, this insurance is important because, generally, buyers bear this risk, and sellers often do not have the balance sheet wherewithal to stand behind their indemnities.

Question 1: How can credit risk insurance be applied to tax credit transfer transactions?

Billy Lee: You and I had an interesting discussion the other day about how credit risk insurance could also be applied to tax credit transfer transactions, specifically in the context of forward commitments. Can you provide some detail here?

David Kinzel: Yes, we had an interesting dialog. And, to be clear, credit insurance is different from what our talented tax credit insurance team does. Our team is focused on more of a credit enhancement for the tax credit buyer.

We can take a step back to get a little bit more context. Credit insurance covers the default of a financial obligation. The market has been around for years but has been evolving over the past decade or so. Recently, we've been looking into more complex transactions beyond short-term trade receivables. We've been looking at insuring the default of a project finance loan and we've been looking at insuring offtake agreements. (Under a power purchase agreement, there's credit risk as well.) It's a creative and evolving segment of the insurance world.  

When we look at transferability, we're thinking of credit enhancement for the tax credit buyer who makes a forward purchase commitment. We're effectively insuring the financial commitment of the tax credit buyer. From our understanding and our discussions, it seems like lenders – whether it be bridge lenders or construction lenders – have a binary view of the credit risk of the tax credit buyer. They say, "If that tax credit buyer is investment grade, we can fund the project. If they're not, then you need to find a new tax credit buyer."

So, we see credit insurance as an opportunity to open up the universe of eligible tax credit buyers.

Billy Lee: When a developer is seeking a forward commitment to sell their tax credits to a buyer – that is, they are starting construction on a project that's going to take two years, they want a buyer to be there in two years to buy the credits, but they want to contract now – the creditworthiness of that buyer is important because, typically, a developer is entering into that contract to finance that bridge loan. When we have buyers who may not be as creditworthy, then your product could come in handy.

David Kinzel: That's exactly right. Perfectly said.

Question 2: How deep is the tax credit investor default insurance market today?

Billy Lee: How deep is this market? Maybe it's not deep today, but how deep do you think it can become?

David Kinzel: As you said, Billy, it's a new market. It's evolving as we go, so it's hard to give concrete numbers. But we, Marsh, are building out this market. There's a lot of insurer interest. A lot of insurers have expressed interest in diving into this market. And, once they understand more about insuring these risks, I think there's going to be a short-term and a long-term approach.

When we say short-term, insurers are probably going to have more appetite for vanilla transactions. We're thinking ITCs because of the shorter duration of the risk that they would be taking on. We're thinking there could be anywhere up to $100 million per transaction. So, $100 million of tax credits or commitments could be insurable, which, from my understanding, should cover the majority of the transactions that are going on today or in the near future.

Question 3: How deep could the market become?

David Kinzel:  When we look to the longer term, there's going to be a lot more appetite for more complex transactions. PTCs could become eligible, given their longer term nature of credit risk.

Question 4: What would underwriting and due diligence look like for investor default insurance?

Billy Lee: What would the underwriting for a credit transaction of this type look like? What would the diligence be? I imagine it would be much different than your typical tax credit insurance.

David Kinzel: It's evolving. Initially, we think that underwriters are going to take a conservative and traditional view of the risk.They're going to dive into the credit risk of the tax credit buyer by looking at audited financials. How creditworthy are they to make this investment? Is there anything coming up that could impact their ability to make that investment when the time comes and the tax credits are available? Ultimately, that's going to be the first layer underwriters are going to look at. You have to pass that test.

Then, once they drill deeper, they're going to look at the developer. Does the developer have a good reputation? Are they reliable?

Underwriters are going to look at the duration of the forward commitment. A six-month commitment is going to be different from a 24-month commitment. So, duration – from the time the tax credit transfer agreement is signed to the time that the tax credits are transferred – will be part of the analysis.

Many people want to know, "Are insurers going to dig into the underlying contracts? Are they going to want to see all these contracts and get into the details?" The answer is no. However, they're going to want to see portions of the tax credit transfer agreement. It's important to clarify that they're insuring the default of a legally enforceable obligation. If, for some reason, there's a situation where one of the tax credit buyers says, "We found a way to back out of this commitment because of one of the clauses within the agreement," the insurers aren't looking to provide protection for a bad contract. It's important to just make that clarification and distinction.

It's also important to say the underwriters are probably going to look at what advisors are involved in these transactions. If there are advisors like you, Billy, who have a lot of experience in structuring these transactions and getting clean documents together, that's going to give them comfort as well.

Questions 5 and 6: Could any tax credit buyer be insured? Why would a tax credit buyer need a credit enhancement?

Billy Lee: You mentioned something interesting about insurers analyzing audited financials and credit. I guess the question is, could any tax credit buyer be considered an insured? And, if a potential buyer has to have some minimum level of credit, does that defeat the purpose of insurers? If you have credit already, why do you need a credit enhancement?

David Kinzel: Those are really good questions. Not every tax credit buyer would be considered insurable. But I don't believe that defeats the purpose of the insurance, and I'll explain why. In the short-term, we expect the insurer's appetite is going to be for more S&P BB risks. So, one notch below investment grade is probably where there's going to be the most appetite. This is also good for privately held companies – companies without publicly rated debt. That is something that the credit insurance market is comfortable with. Looking at financials and backing into an implied rating is something they're doing on a regular basis; that's not going to be a problem.

Where we get excited is we've done some analysis of S&P data and looked at the universe of all the rated entities in the United States. If you look at who is investment grade, there's approximately 1,200 investment grade issuers in the United States. That says the potential universe of companies that can invest in tax credits on a forward commitment is around 1,200 – a big number. But what could we do differently? If we go down the credit curve and say BB entities are eligible, maybe even B entities, that adds another estimated 1,400 entities.

On top of that, if we look at privately held entities that don't have public debt, or if we look at U.S. subsidiaries of a foreign parent where the parent may be investment grade but doesn't want to give a parental guarantee – there are many situations where this could come into play. We see credit insurance as an opportunity to expand the universe of potential buyers well beyond what it is today and add more liquidity into the market.

Billy Lee: Those are interesting numbers. Right off the bat, we're doubling the potential universe of buyers. That's great. We need more of that type of thinking and creativity.

Question 7: How would a tax credit investor default insurance policy be structured?

Billy Lee: How would a policy like this be structured, from a mechanical standpoint?

David Kinzel: I'll keep it simple. There will be three parties involved. First, you would have the developer, and they would be the insured on the policy. They're going to be who purchases the policy.

The second party would be the insured counter-party, or the tax credit buyer. That's the party that could trigger a claim by defaulting on the legally enforceable obligation that we talked about.

Third would be the lender. The lender would be what's called a "lost payee." They'd be named on the policy and, if there was a claim paid, they would have rights to the proceeds, giving them that comfort of why the policy is there in the first place. The claim could be triggered by a number of different things – for example, you could have a 12-month forward commitment and the tax credit buyer files insolvency on month six. A second scenario could be where the tax credits are transferred and there's some agreement to pay after the transfer event; if there are payment terms like that, that would trigger a claim as well. Really, any situation in which the tax credit buyer defaults on the contract that we're wrapping in insurance, that's where claims would be triggered, and that's how it would be structured from a general level.

Question 8: How could an insurer "step into the shoes" – that is, become the purchaser of the credits – of a buyer in the event of an insurance claim?

Billy Lee: We also spent some time talking about how an insurer could step into the shoes of a buyer in the event of a claim, which I think is really interesting. Could you explain this arrangement? Also, would an insurer need to have privity to the purchase and sale agreement? Would it become a three-way tax transfer agreement?

David Kinzel: It's interesting. We've talked a lot about the underwriting process and how it works based on credit quality. But another important factor that the insurance market takes into account is the potential for recoveries. Once an insurance company pays a claim, it's not like they sit there and say, "We made a bad decision. Let's move on to the next one." They are going to be going back and looking for recoveries in any way that they can to minimize their loss. That's part of their process, and there are three ways they can go through it. First, they would go after the tax credit buyer under their breach of that legally enforceable obligation to commit the capital.

If the insurer isn't successful there, they'd have the expectation that the developer would help them find a new buyer for the tax credits. The third step is the interesting thing that we talked about: there could be a situation where the insurer may say, "We paid a claim, but our recoveries could be in the form of a tax credit" – that is, finding a way to say the tax credits have not been transferred to the original tax credit buyer. Since there's not a buyer anymore because they defaulted on that contract, could the insurance company step in take those tax credits for themselves? This is something we're exploring and talking about, and it seems possible.

Question 9: Theoretically, will coverage cost less if insurers have more recovery options?

Billy Lee: Right. If you give insurers more backup options to ultimately recover, the more willing they will be to extend that coverage, and perhaps the coverage will cost less theoretically, correct?

David Kinzel: Exactly. That could impact the cost and how far down the credit curve we can go. There's a lot of implications as the market develops. If the insurers get good experience and get comfortable, it could really open up the universe of who would be eligible to be insured as a tax credit buyer.

Question 10: How much does this insurance cost today? How much do you think this insurance will cost over time?

Billy Lee: Great. The immediate follow-up question and my last question is the million dollar question: How much does this insurance cost today? Obviously, there's probably been very few data points, but how much do you think this coverage will cost over time? Will it go down as more of these policies are written?

David Kinzel: The market's developing. I think there is going to be quite a bit of variation based on the risk with all those underwriting factors that we talked about. But we know the market really well. We've been in this market for a long time. I think a good starting point is around an annualized 1% on the commitment amount that's going to be insured. And that could go down as we see better credit quality, more comfort from insurers. I would expect that to go down for the higher credit qualities and the shorter duration risk. Whereas if we look at going down the credit curve to more challenging credits and longer durations, then it could be above that 1% annualized threshold. But that's a good base estimate if people are looking to explore this at a high level.

Billy Lee: David, this has been a great conversation. I love connecting with thought leaders and innovators, particularly around risk management. Thank you for your time. Thank you for tuning into 10 Questions. We'll see you next time.

In early December, the IRS launched a webpage for its pre-filing registration tool. As of this post, the actual tool is "unavailable to the public."

However, developers who want a head-start can review the portal's user guide to get a clear sense of what to expect – including the IRS's recommended 120-day review timeline.

Reunion's key takeaways from the pre-registration portal user guide

• Takeaway 1: The IRS pre-registration portal is not yet open, but the user guide discloses the portal's data and documentation requirements
• Takeaway 2: The IRS does not issue a registration number until the review is complete, and the IRS recommends at least 120 days for review
• Takeaway 3: Projects must be placed in service before submitting a registration‍
• Takeaway 4: For every credit, the portal requires standardized information about the registrant‍
• Takeaway 5: The portal includes credit-specific requirements, including a "non-exhaustive" list of documents. (Navigate directly to a credit's requirements: §30C, §45, §45Q, §45U, §45V, §45X, §45Y, §45Z, §48, §48C, §48E)‍
• Takeaway 6: Developers will need a registration number for each facility/property‍
• Takeaway 7: A registration number does not mean a registrant qualifies for a credit of any specific amount

Takeaway 1

The IRS pre-registration portal is not yet open, but the user guide discloses the portal's data and documentation requirements

In early December, the IRS launched a webpage for its pre-filing registration tool. As of this post (December 18, 2023), however, the actual tool is "currently unavailable to the public."

Although the portal is not yet live, developers can get a preview of the tool's look, feel, and workflow through the Pre-Filing Registration Tool User Guide and Instructions.

The 69-page guide includes step-by-step instructions for registering each facility/property, including a bulk upload functionality – complete with a spreadsheet template – for the §30C, §45, and §48 credits. (The template is not yet available.)

Takeaway 2

The IRS does not issue a registration number until the review is complete, and the IRS recommends at least 120 days for review

The IRS does not issue registration numbers until the application has been reviewed and marked as "Returned - Closed." The registration field will go from "pending" to an alpha-numeric string.

The guide counsels registrants to submit their pre-filing registration at least 120 days prior to when they plan to file their tax return. 120 days "should allow time for IRS review, and for the taxpayer to respond if the IRS requires additional information before issuing the registration numbers."

Importantly, 120 days is the IRS's current recommendation, suggesting this timeline could vary. Developers should prudently assume 120 days is the minimum.

Takeaway 3

Projects must be placed in service before submitting a registration

The guide states, "Before a facility/property can be registered to make a transfer election...that property or facility must have been placed in service no later than the date the registration is submitted." However, nothing prevents a registrant from getting a head-start on a draft submission.

Takeaway 4

For every credit, the portal requires information about the registrant and allows for "additional information, if any"

All registrations must provide the following "general information" about the registrant:

• Tax period of the election
• EIN
• Name associated with EIN (as it appears on tax return)
• Parent of consolidated group?
• Registrant type (C corporation, sole proprietorship, etc.)
• Address
• Bank account information (account number, routing number)
• Type(s) of prior-year return(s) filed (Form 1120, Form 1040, etc.)

The portal also allows for "additional information, if any" as unformatted text. This field is optional but allows for the collection of "any additional information the registrant may wish to provide to identify a specific property or facility." In general, registrants should consider this field an opportunity to address any potential questions about their submission. Registrants should remove as much uncertainty in their application as possible.

Takeaway 5

The portal includes credit-specific requirements, including a "non-exhaustive" list of documentation

Depending on the type of credit a developer is registering, the portal will ask for specific data – the date construction began, for example – and a "non-exhaustive" list of supporting documentation.

According to the guide, "Supporting documents will usually be relatively short documents, such as permits, title documents, [and] sales documents (showing the name of the registrant, date of purchase, and identifying information such as serial numbers)." On several occasions, the user guide states, "Do not attach detailed project plans or contractual agreements."

The guide does not list requirements for credits that are pending:

• §45Y – Clean electricity production credit: Applies to facilities placed in service after 12/31/2024
• §45Z – Clean fuel production credit: Applies to transportation fuel produced after 12/31/2024
• §48E – Clean electricity investment credit: Applies to facilities placed in service after 12/31/2024

Scroll to a credit: §30C | §45 | §45Q | §45U | §45V | §45X | §45Y | §45Z | §48 | §48C | §48E

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Takeaway 6

Developers will need a registration number for each facility/property

Developers will need a separate registration number for each facility/property, depending "on how the credits must be computed and reported on the source credit form and Form 3800."

The source forms for each credit are as follows:

Transferable tax credit source form links

Here are links to available source credit forms for transferable tax credits. Some forms, like 7213, are in draft as of this post (December 11, 2023): 

• §30C (Alternative fuel refueling property credit) – Form 8911
• §45 (Renewable electricity production credit) – Form 8835
• §45Q (Carbon oxide sequestration credit) – Form 8933‍
• §45U (Zero emission nuclear power production credit) – Form 7213. As of December 2023, this form is draft
• §45V (Clean hydrogen production credit) – Form 7210. As of December 2023, this form is draft
• §45Z (Clean fuel production credit) – Form 8835. As of December 2023, this form is pending a future revision
• §45X (Advanced manufacturing production credit) – Form 7207
• §45Y (Clean electricity production credit) – Form 7211. As of December 2023, this form is pending
• §48 (Energy credit) – Form 3468
• §48C (Qualifying advanced energy project credit) – Form 3468‍
• §48E (Clean electricity investment credit) – Form 3468. As of December 2023, this credit will involve a future form revision

Takeaway 7

A registration number does not mean a registrant qualifies for a credit of any specific amount

The guide reminds registrants that the portal demonstrates an "intent to monetize" a credit. A registration number, in other words, "does not mean that the registrant has been determined to qualify for a credit of any specific amount."

To monetize a credit, a developer must meet other requirements to make a valid election, including:

• Reporting the credit on the applicable source credit form (see list above)
• Completing Form 3800
• Fully executed transfer election statement
• Attaching these forms to a timely-filed tax return

Questions

Interested in learning more?

To learn more about the pre-registration portal or the IRA tax credit market it supports, please contact Reunion.

At Reunion, we believe that setting a strong company culture from the start is a critical part of building a high-performing company. Our founding team worked together to define company values that influence our everyday work; from how we screen and hire new employees, to how we collaborate and develop our product offering.

Our mission has remained constant. Our team members are motivated by our mission to make a meaningful difference in the fight against climate change. We believe that our team is uniquely positioned to increase deployment of renewable energy through our deep experience in financing.

We have five core company values. Every quarter, we re-visit our company values and ask whether these values remain relevant to how we work. This always spurs insightful and honest reflections on where we are succeeding and where we can improve. Sometimes, it leads us to adjust our company values to better reflect what is truly important.

Our mission

Reunion’s mission is to accelerate investment into renewable energy projects by simplifying the project financing process.

Our values

Communicate empathetically and directly

• We communicate openly and directly, even in disagreement
• We are kind and assume our teammates, customers, and partners have the best intentions

How can we go faster?

• We make firm and fast decisions, particularly on decisions that can be reversed
• We ship fast and adjust course based on data and feedback

How can we do it better?

• We run experiments that we can measure and are open to changing our minds when presented with data
• We keep an “enterprise-level” bar for excellence

Everybody is a leader and an owner

• Anybody can own an initiative and make it a reality
• If we commit to a project, we aim to follow through to finish

Continuous growth

• We strive to keep learning and improving, both as a company and as individuals
• Feedback is a gift; we embrace opportunities to grow

Come join us

Defining and refining our company values has helped us clarify who we want to be as a company. We have developed a high-performance culture, and we have surprised ourselves at times with our pace of execution despite having a small (but mighty) team. I should also emphasize that, although it’s not an official company value, we also have fun! 🙂

We believe that hiring and motivating the best people will be core to achieving our climate mission. If our mission and values resonate with you, we are always looking for talented people to join us – check out our open roles.

Key features of the IRA's 11 transferable tax credits

The Inflation Reduction Act (IRA) created 11 transferable tax credits to promote investment into clean energy. This article summarizes key features of each transferable credit including technology, duration, period of availability, and rates. Depending on the credit, we included three rates:

• Base: Rate assuming prevailing wage and apprenticeship requirements are not met.
• Full: Rate assuming prevailing wage and apprenticeship requirements are met. The full rate is five times higher than the base rate.
• Bonus: Additional rates assuming bonus credits – energy community, domestic content, low-income community – are met.

Jump to a credit

To jump directly to a credit, click a link below:

• §45 PTC – Electricity produced from certain renewable sources
• §45Y PTC – Clean electricity production credit (technology-neutral PTC)
• §48 ITC – Energy credit
• §48E ITC – Clean electricity investment credit (technology-neutral ITC)
• §30C ITC – Alternative fuel vehicle refueling property credit
• §45U PTC – Zero-emission nuclear power production credit
• §45Q PTC – Credit for carbon oxide sequestration
• §45Z PTC – Clean fuel production tax credit
• §45V PTC – Clean hydrogen production tax credit
• §48C ITC – Advanced energy project credit
• §45X PTC – Advanced manufacturing production credit

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§45Y PTC - Clean electricity production credit

Funding mechanism: Production tax credit

Technology grouping: Electricity

IRA Section: 13701

New or existing: New

Eligibility: Technology-neutral tax credit for production of clean electricity. The §45Y PTC is for facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero

U.S. Code: 26 U.S. Code §45Y

Duration: 10 years from the date the project is placed in service

Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.

The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.

Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2035 and meets PWA requirements will generate §45Y PTCs worth $13.75 per MWh when it is placed in service.

Stackability and limitations: Cannot be stacked with §48E or §45Q

Inflation adjustment: Subject to an annual inflation adjustment

Elective pay (direct pay): Only available to tax-exempt entities

Recapture: Not applicable

Rates

• Base rate: $5.50 per MWh (as increased by annual inflation adjustment factor from 2023)
• Full rate: $27.50 per MWh (as increased by annual inflation adjustment factor from 2023)
• Energy Community: 10%
• Domestic Content: 10%

Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan

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§48E ITC - Clean electricity investment credit (technology-neutral ITC)

Funding mechanism: Investment tax credit

Technology grouping: Electricity

IRA Section: 13702

New or existing: New

Eligibility: Technology-neutral tax credit for investment in facilities generating electricity for which the greenhouse gas emissions rate is not greater than zero

U.S. Code: 26 U.S. Code §48E

Period of availability: Projects placed in service beginning in 2025 are eligible for the credit.

The credit is subject to a four-year phase-out (100%, 75%, 50%, 0%) for projects that begin construction in the first calendar year after the ”applicable year,” which is the later of (1) 2032 or (2) the calendar year in which the IRS determines that the annual greenhouse gas emissions from the production of electricity in the U.S. are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the U.S. in 2022.

Below is an example phase-out schedule, assuming the "applicable year" is 2032. An eligible project that begins construction in 2034 and meets PWA requirements will generate a §48E ITC worth 22.5% of the project’s qualified investment when it is placed in service

Stackability and limitations:

• Cannot be stacked with §48, §45, §45Y, §48C, §45Q
• Subject to recapture per §50

Inflation adjustment: None

Elective pay (direct pay): Only available to tax-exempt entities

Recapture: Subject to five-year recapture period beginning on placed-in-service date. Recapture amount decreases by 20% per year

Rates

• Base rate: 6%
• Full rate: 30%
• Energy Community: 10%
• Domestic Content: 10%
• Low-Income: 10% if located in low-income community or on Indian land. 20% if part of qualified low-income residential building project or qualified low-income economic benefit project. Limited to projects less than 5 MW

Guidance: Further guidance pending. The credit is included in the IRS 2023-2024 Priority Guidance Plan

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Introduction

In Episode 3, our CEO, Andy Moon, gleans expert insights and unique market observations from Hilary Lefko, a partner at Norton Rose Fulbright. According to Hilary, "It's amazing how much the market has grown since the regulations came out in June."

Listen on Spotify or Apple: 10 Questions with Reunion is now available as a podcast on Spotify and Apple.

Takeaways

Transferability market activity has experienced incredible growth since regulations came out in June

• First movers were traditional tax equity investors purchasing credits. Now, we are seeing tax credit transfers across various sizes and technologies
• Every traditional tax equity deal that Hilary is working on has a transferability component

The bridge lending market is rapidly developing. Transfer deals with committed buyers are seeing advance rates similar to traditional tax equity bridge loans in the mid-90s

• If there's no tax credit purchasers signed up, we're seeing much lower advance rates – 75% and below

Technology and tax year is driving pricing, with higher pricing for 2023 tax year and established technologies

• 2023 tax credits are being priced much higher than later years
• Wind, solar, and storage are trading a little bit higher than technologies like biogas, where people are less familiar with the risks. PTCs are trading a little bit higher than ITCs

Key negotiation points include audit rights and scope of diligence

• Negotiations around audit are ending up similar to where tax equity is. Generally, each party controls an audit at their own level, meaning an audit of the tax credit buyer will be controlled by the buyer. If the seller has an indemnity obligation, they'll likely have notice, participation, and maybe consent over an audit that's going to result in an actual indemnity obligation
• Surprisingly, some developers are trying to limit the amount of due diligence buyers can do. They tends to be smaller developers who have insurance in place and don’t see the need for additional diligence; this will likely result in a lower price for the seller
• Limit of liability is also a negotiation point (e.g., is indemnity sized at the full tax credit amount, or the discounted amount that the buyer paid). Market is gravitating towards the purchase price of the credits plus some amount such as 20%. Important to remember that it’s rare to have a wholesale disallowance of credits

Basis step-ups continue to be important to developers, and structures are emerging to enable step-ups

• “Cash equity” structures with third party investors are emerging to help developers take advantage of step-ups. The third party investor must take true risk on their investment in order for the transaction to be respected by the IRS; however, this structure is markedly simpler than tax equity
• Not seeing many step-ups above the 20% range; traditional tax equity is capping the basis step-ups at 15% to maybe 20%. Some newer entrants with less sophisticated tax counsel are trying to go higher, though insurance will play an important role (and insurance markets may or may not be willing to insure larger step-ups)

Structures are also emerging to mitigate risk to buyers from recapture

• An internal partnership can be structured to own a project company, with one partner pledging their interest to the lender to mimic the collateral structure in back-leveraged tax equity. This can mitigate recapture risk for the buyer

Credit adders have varying levels of maturity. Energy community is the most common

• Energy community deals are appearing frequently. Projects that qualify on statistical area or on a closed coal fire and generating plant or closed mine are straightforward. Brownfield sites, which are more challenging to diligence, are beginning to emerge
• LMI bonus should appear soon. The application portal for the LMI bonus credit, which is allocated by the IRS, opened in late October
• For now, use of the domestic content bonus is limited. The market is waiting on further guidance and manufacturers are reluctant to disclose costs. Hilary has seen domestic content on two solar deals

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Chapters

• 0:00 - Introductions
• 0:59 - Question 1: What sort of transferable tax credit deals are you seeing? What have been the smallest and largest transactions you’ve worked on?
• 2:14 - Question 2: What interesting structures are emerging with transferability?
• 3:12 - Question 3: What terms are you seeing on bridge loans?
• 4:17 - Question 4: How does tax credit pricing differ between standalone deals and hybrid tax equity deals?
• 5:28 - Question 5: When negotiating tax credit transfer agreements between buyers and sellers, what negotiating point has surprised you the most?
• 6:30 - Question 6: What type of sellers have the leverage to limit a buyer’s diligence?
• 7:24 - Question 7: What specific limits are sellers putting on due diligence?
• 9:34 - Question 8: What are you seeing with respect to audit rights during transfer negotiations?
• 10:44 - Question 9: What is the 50th percentile in terms of negotiating audit rates?
• 11:33 - Question 10: Are you seeing structures emerge for developers to take advantage of a basis step-up?
• 13:20 - Question 11: What level of ownership is required to make buyers comfortable that it's a true third-party owner?
• 14:58 - Question 12: Are you still seeing tax credit transfers with step-ups above 20% to 30%?
• 15:38 - Question 13: Are you seeing any structures emerge to mitigate risks to the buyers?
• 16:50 - Question 14: What types of limits of liability are you seeing in tax credit transfer agreements?
• 19:06 - Question 15: Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?
• 21:09 - Question 16: Are you seeing deals with the energy community and domestic content bonuses?
• 22:39 - Question 17: What types of deals are using domestic content?
• 23:31 - Question 18: Are you seeing deals with the LMI bonus?
• 24:33 - Question 19: Are you seeing deals outside of solar, wind, and battery storage? Are you getting calls from people ready to transact on newer technologies?
• 26:28 - Question 20: Will a flood of new credits from different technologies drive pricing down over time?

Transcript

Introductions

Andy Moon: Welcome to another episode of 10 Questions with Reunion. My name is Andy Moon, and I'm the co-founder and CEO of Reunion, the leading marketplace for clean energy tax credits. We work closely with corporate finance teams to purchase high-quality tax credits from solar, wind, and other clean energy projects.

Today's guest is Hilary Lefko, who needs no introduction to practitioners of renewable energy finance. Hilary is a partner at Norton Rose Fulbright in Washington, DC and has significant transactional experience with Section 45 production tax credits, Section 48 investment tax credits, and is now spending a lot of time advising clients on tax credit transfers via the Inflation Reduction Act.

Hilary, great to have you here today.

Hilary Lefko: Nice to be here. Thanks for having me.

Question 1: What sort of transferable tax credit deals are you seeing? What have been the smallest and largest transactions you’ve worked on?

Andy Moon: Specific to Section 6418 tax credit transfers, what deals are you seeing? What's the smallest transaction you've worked on and what's the largest?

Hilary Lefko: We're seeing all kinds of transactions. What I think is interesting relates to Congress's whole reason behind transferability: to open financing to much smaller projects than would traditionally be financed by tax equity. The first projects we saw were projects that would be financed by tax equity, and it was tax equity investors buying the credit.

But now the market is exploding. We're seeing small projects getting financed. We're seeing portfolios getting financed. We're seeing portfolios of wind and solar. We're seeing solar plus storage, small commercial and industrial solar (C&I), biogas, very large wind farms, and solar. We're even seeing nuclear and renewable natural gas (RNG).

It's incredible how much the market has grown since the regulations came out in June.

Question 2: What interesting structures are emerging with transferability?

Andy Moon: What are you seeing in terms of other interesting structures that are coming to light with transferability?

Hilary Lefko: The first deals we saw were existing wind tax equity, selling off some credits from the last few years of the PTC period. Then, we started to see portfolio deals with people bundling up existing wind farms and selling the tax credits from them.

Then, we started to see the market move into greenfield projects. We're seeing new builds for solar, new builds for wind, storage, biogas. I think everything is bespoke right now. We're seeing the plain vanilla standalone deal, but I would say every traditional tax equity deal I'm doing right now has a transferability component to it.

Transferability has become such an important part of the market. It's a feature of every transaction I'm working on right now.

Question 3: What terms are you seeing on bridge loans?

Andy Moon: You mentioned working on bridge loans against commitments of tax credit transfers. What terms are you seeing on bridge loans?

Hilary Lefko: We've seen lenders that traditionally offered tax equity bridge loans step into the transferability bridge market. I'm seeing relatively similar terms and similar advance rates: if there's a purchaser that's already signed a tax credit transfer agreement, [we're] seeing advance rates in the low to mid 90s. If there's no tax credit purchasers signed up, we're seeing much lower advance rates – 75 and below.

For the most part, the lenders that have been doing tax equity bridges have been willing to jump into the transfer bridge market.

It was, however, a steep learning curve for them. They had to get used to the fact that money was coming in later than it does with tax equity, that payment structures look different, that there are different risks, and that different structures may be necessary. But we're seeing the debt market pick up.

Question 4: How does tax credit pricing differ between standalone deals and hybrid tax equity deals?

Andy Moon: As tax equity partnerships sell credits out of the partnership, how does pricing differ on those deals versus a standalone deal? Is it a smaller discount?

Hilary Lefko: It depends. The trends I'm seeing are 2023 credits are trading much higher than 2025 or 2026 credits. 2024 credits are a little bit higher than those future credits as well.

I don't know that the structure is driving the pricing so much as the timing of the credits. I also think the technology [is a factor] – wind, solar, and storage are going to trade a little bit higher than technologies like biogas, where people are not familiar with the risks. I think wind is trading a little bit higher, too. PTC is trading a little bit higher than ITC.

It'll be interesting to see once we get into the beginning of next year when 2023 tax liability has firmed up for many companies. I think we're going to see prices go up.

Question 5: When negotiating tax credit transfer agreements between buyers and sellers, what negotiating point has surprised you the most?

Andy Moon: That's very interesting. As you're negotiating tax credit transfer agreements between buyer and seller, what's come up in negotiations that surprised you the most?

Hilary Lefko: The thing that surprised me the most was a lot of sellers are trying to limit the amount of due diligence that buyers can do. Sellers are saying, "You're either getting a guarantee or you're getting a tax credit insurance policy, and you need to take our word for it – we're giving you representation."

The initial entrants into the market were traditional tax equity investors, and they were looking to do the same level of diligence that they would do on a tax equity transaction to confirm qualification for the credit.

Some of the newer entrants – corporates who haven't done tax equity before – are relying more on counsel, doing a little bit less diligence, but still wanting to kick the tires and make sure that the project qualifies. They're looking for tax credits, not an insurance payout.

Question 6: What type of sellers have the leverage to limit a buyer’s diligence?

Andy Moon: What type of sellers have the leverage to say there's limits on what due diligence you can do? Is that mainly the tax equity partnerships or the large banks who are putting those limits in place?

Hilary Lefko: I see it more from the smaller developers that want to sell their tax credits and think that they bought this insurance policy and that's going to make everything okay.

I think it has an impact on pricing. If you're not getting to kick the tires as much, you're not going to pay as much. There's a supply and demand aspect to it: if what you're offering doesn't have the same protections as what some other developer is offering, a buyer is not going to pay as much.

I think the market's going to take care of those sellers who don't want diligence being done, and they're going to get less for their tax credits than the sellers who are allowing buyers to do full diligence.

Question 7: What specific limits are sellers putting on due diligence?

Andy Moon: What specific limits are they putting on the diligence? Are they saying you can't dig into the cost segregation analysis, or are there specific areas that they want to curb diligence in?

Hilary Lefko: They’re saying, "Here's a cost segregation report, [and] you have an insurance policy. You have to trust us that we started construction. You have to trust us that the project is up and running. We've told you it's in service. You don't need to look at an independent engineer (IE) report."

"Why do you care if it's on a superfund site?" "If it is, then we get an energy community bonus." “But you can't look at environmental reports."

It's really limiting all those third-party deliverables the tax equity is used to viewing. We're seeing sophisticated tax counsel saying, "Well, you still have issues of tax ownership. We want to look at your O&M agreement, your off takes, [and] any revenue contracts to make sure that ownership of the project isn't shifting to someone else." And sellers are coming back and saying, "You don't need to look at an O&M agreement. It's an ITC. Why do you care if the project operates?" You do care during the recapture period, so there are considerations as well.

In the ITC context, we’ve seen sellers try and say, "Well, you can look at it up to placed-in-service, but you don't need to be concerned after that. We got you a recapture policy." That's just not been acceptable to a lot of buyers.

Andy Moon: That's been our experience, too. We've counseled buyers that it's important to do a comprehensive due diligence process and understand what you're buying.

There is some art, however, in making sure that this doesn't become another tax equity transaction where there is belt-and-suspenders diligence on every item. But proper diligence is important.

Hilary Lefko: Absolutely. I'm seeing some sellers try and limit the ability to get a tax opinion or what that tax opinion can cover. But, generally, more sophisticated buyers are looking for an opinion or a memo of counsel confirming that the project qualifies for tax credits in the full amount.

Question 8: What are you seeing with respect to audit rights during transfer negotiations?

Andy Moon: One other interesting point that you made is that audit rights and control of audit was one of the biggest negotiation points on the tax credit transfer agreement. Can you say more about what you're seeing there?

Hilary Lefko: Audit rights has become a big sticking point on a lot of these deals. The issue being that the regulations make clear that the audit can and will occur at the buyer.

Generally, these tend to be relatively buyer-friendly agreements, in which the seller has a lot of indemnities to the buyer. When the seller has an indemnity, they're going to want some level of control or participation in an audit. But you have corporates that aren't used to doing tax equity, and the thought of someone meddling in their audit is foreign to them.

Further, tax equity investors are buying these credits through their bank entities, and they can't have somebody else participating in an audit at the bank entity level.

So, [we've seen] a lot of negotiation on what kinds of rights sellers get where they do have an indemnity, where the buyer is clearly being protective of their audit process and should be.

Question 9: What is the 50^th percentile in terms of negotiating audit rates?

Andy Moon: Where would you say the 50th percentile is netting out in terms of audit rights?

Hilary Lefko: I think similar to where tax equity is. If the seller has an indemnity obligation, they have notice and participation rights [in the audit]. Ultimately, though, the buyer is going to control any audit at the buyer level. With respect to seller audits, we've seen a little bit more give – some sellers are willing to give buyers a bit more participation rights.

Generally, where the market is settled is you control an audit at your own level. If there are indemnity rights, we'll let you be involved, we'll let you have notice, participation, and maybe consent over an audit that's going to result in an actual indemnity obligation.

Question 10: Are you seeing structures emerge for developers to take advantage of a basis step-up?

Andy Moon: Flipping over to other structures that you've seen, we've heard a lot of talk of structures within transfers to enable a basis step up in the case of an investment tax credit - for example, an affiliate sale of a project company to a joint venture (JV). Have you seen this happening in practice?

Hilary Lefko: In terms of the step-up partnerships, I think this is going to be the key to unlocking the market. I think that everyone doing ITC deals is looking for a way to do a step-up partnership to get more value from the tax credit.

Initially, people were referring to these as accommodation parties, but I think to me it's more of a cash equity transaction. It's not tax equity. The investor is putting money in and getting a return on cash back. They're looking for credit card-like returns.

Initially, people were looking at these step-up partnerships as if they needed to look like tax equity and needed to satisfy the revenue procedure. “We need to have a pre-tax profit.”

To me, it's different. This is more like a cash equity transaction, where you have someone putting cash in and wanting a cash return.

Yes, a large portion of that return is coming early in the partnership because the partnership is selling tax credits. However, I think there needs to be some variability, and investors need to have some skin in the partnership game, some entrepreneurial risk – upside and downside. They're getting some of their return from the actual operations of the partnership – not just selling tax credits.

There was handwringing over making these interests look like tax equity when they're not tax equity. They're more like cash equity, which no one ever had these concerns about structuring cash equity.

Question 11: What level of ownership is required to make buyers comfortable that it's a true third-party owner?

Andy Moon: Do you have any sense of what level of ownership is required to make buyers comfortable that it's a true third-party owner?

Hilary Lefko: I think in terms of what percentage do these cash equity accommodation parties, whatever we're calling them, need to have. I think initially people said 20% because that's what we think of as a meaningful stake in the partnership. I think we'll start there. No one wants to be the guinea pig. I think the first deals are going to get done at 20% or higher.

The issue is if you're stepping up the basis of a tax credit, there needs to be a robust appraisal supporting that fair market value. The partner interest to me is a little bit more of a red herring.

While they do need to be respected as a partner – and I'm not writing that off or being flippant about not making sure that they're a true partner in the partnership – I think we're losing sight of the bigger issue, which is, can we support the step up? Is the step up too much? Is there an appraisal behind it?

I'm not saying that we don't need to make sure the partner is a real partner; I'm absolutely saying that. I think we're losing sight of the bigger issue, and that's we still need to be able to support the step up.

Andy Moon: For sure. We have two separate issues. One is to ensure that the IRS respects the partnership as a true third-party transaction. And the second is the level of step up. The latter is an ongoing question. The IRS didn't provide clear guidance or a clear line on what's acceptable in terms of step-up level. I think that'll be very interesting to see.

Question 12: Are you still seeing tax credit transfers with step-ups above 20% to 30%?

Andy Moon: Are you still seeing tax credit transfers with step-ups above 20% to 30%?

Hilary Lefko: Not really. We're seeing the traditional tax equity want to cap it at 15%, maybe 20%. Newer entrants into the market, if they're not represented by sophisticated tax counsel, can be convinced to go higher.

Some of the insurance markets are more conservative than others. Some will insure step-ups over 20%, while others will not. A lot of people view that step-up over 20% like an insurance arbitrage – we're going to get our tax credits, or we're going to get our insurance.

Question 13: Are you seeing any structures emerge to mitigate risks to the buyers?

Andy Moon: Are you seeing any structures emerge to mitigate the risk to the buyers? For example, if you have a partnership own a project company, that can help mitigate the risk of recapture if there's an upstream change in control.

Hilary Lefko: Absolutely. In the ITC space, we're seeing a lot of internal partnerships. These are not being done for step-ups. Rather, they're being done to mitigate recapture risk.

It almost creates a synthetic tax equity partnership where you have your class A interest that's getting tax benefits, and your class B interest that's getting more cash. The synthetic class B member can pledge that interest to the lender to mimic the collateral structure in traditional tax equity that they would have with back leverage.

I think if you can get that in place, lenders are getting comfortable. With deals that are already placed in service, though, where they didn't have the foresight to put something like that in place, lenders are saying, "Too bad, we have asset-level security. We're not going to forbear during the recapture period unless we have access to that sponsor-level interest as collateral."

Question 14: What types of limits of liability are you seeing?

Andy Moon: And flipping back to the tax credit transfer agreement, what limits of liability are you seeing? Are buyers asking for liability coverage in excess of the credit amount?

Hilary Lefko: I literally had two calls about this today! One with a lender, and one with a purchaser about what's "market" on sizing of indemnities for tax credit transfer deals.

If you're a purchaser, you're going to argue that market is the face value of the tax credits, and it should be uncapped. If you're the seller, you're going to say, "No, why should I pay you the face value of the tax credits? I should only be out for my purchase price."

We're seeing the "true" market settle somewhere between those two positions. We're seeing purchasers get comfortable if their indemnity amount is sized to the actual value of the tax credits – that is, the dollar amount of the tax credits. Then, they're willing to accept some limit on liability, such as purchase price plus 20%.

It's rare to have a wholesale disallowance of tax credits. Usually, you're looking at the basis step up or you have a piece of property that you claimed ITC on that you shouldn't have in the cost segregation. It's rare for the IRS to say you shouldn't have gotten the ITC at all.

For that reason, we're seeing purchasers accept some cap as long as they're getting the indemnity and the amount of the credit.

It also goes to the size of your insurance policy. We didn't talk about this, but all these deals I'm seeing are done with either insurance or a strong, creditworthy parent guarantee. To a seller that has insurance, if their tax credit insurance policy is sized to the face value of the tax credits, then they're fine with their indemnity looking like that because their agreement is going to say the buyer must go against the insurance policy before they can seek recourse against the seller.

Question 15: Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?

Andy Moon: That's fascinating. Are you seeing buyers get comfortable with sellers not providing a guarantee when there's insurance?

Hilary Lefko: I've seen several deals done with insurance only with a very limited parent guarantee. If you have insurance, what you're really looking at is retention (the uncovered amount) and whether contest costs count towards the retention.

You can quantify what's not covered by the policy and see how comfortable you can get with or without a guarantee. But I've seen deals done insurance only, with the seller pushing back on a guarantee or pushing back on a creditworthy parent giving a guarantee.

Andy Moon: That's fascinating. It's great to talk to you, Hilary, because you see so many deals in the market. It's interesting to see what each party is willing to accept because, at the end of the day, it's a negotiation.

Hilary Lefko: I would say "no guarantee" is the exception rather than the rule, and it certainly is going to impact pricing.

All these levers are levers that you can pull economically, and if you're willing to go without a guarantee, perhaps you can get a better deal on pricing. If you're insisting on a guarantee, then maybe the seller won't be is willing to work with you on pricing and some other factors.

The scope of the indemnity – whether it's just breaches (bad act-type things) or if it's more comprehensive (any loss disallowance recapture) – factors into the deal’s economic terms. All these deals are bespoke, and everyone's negotiating what they want out of them.

Andy Moon: Right. We've seen some buyers express that they want the indemnity from the seller to prevent moral hazard – that is, to make sure that the seller doesn't do anything that might trigger a recapture. Nobody wants to deal with having to get claims from an insurance policy.

Hilary Lefko: That's consistent with what we've seen as well.

Question 16: Are you seeing deals with the energy community and domestic content bonuses?

Andy Moon: Let's flip to bonus credits because there's still outstanding guidance on domestic content. What are you seeing in energy community, domestic content, and LMI?

Hilary Lefko: For the energy community bonus, I'm not seeing any issues with purchasing credits from projects that qualify on statistical area or on a closed coal fire and generating plant or closed mine.

It's been a bit more difficult to get a brownfield financed, and I think the reason for that is the determination must be made by an environmental lawyer. Environmental lawyers are not tax lawyers and are not used to writing opinions.

It's been hard to get the level of support and the documentation that tax credit investors expect when you're talking about a brownfield. I'm not saying it can't be done. There probably have been a few, but it's been difficult to get brownfield financed.

The other two, however, are easy to diligence: you look at the address and see if it's on the appendix. You must make sure the test year works in terms of whether it's placed in service, or every year during the credit period for PTC, or if you fit into the beginning-of-construction safe harbor. But I think that's probably the more difficult qualification piece than the underlying qualification itself.

Question 17: What types of deals are using domestic content?

Andy Moon: Are the deals you're seeing on domestic content win re-powers, or are they traditional solar installations?

Hilary Lefko: I have not seen a lot of domestic content financed. I know of two deals, and they have insurance. For the most part, sellers are finding that, right now, the market is not willing to finance domestic content. The reason for that being that it's just impossible to get manufacturers to disclose their direct and labor costs.

Everyone's putting this wait-and-see approach on domestic content. If we get better guidance or if we get manufacturers to disclose costs, then we're going to include the domestic content bonus. The projects that I know included the domestic content bonus in sizing were solar.

Question 18: Are you seeing deals with the LMI bonus?

Andy Moon: Fascinating. What are you seeing on LMI credits?

Hilary Lefko: The LMI portal opened last week, and everyone's scrambling to get their applications in. (Although you don't have to scramble because it's not first in, first out if you meet the [30-day] deadline. All applications [submitted within the first 30 days] get considered at the same time, based on the weighting criteria.)

If [the developer] get an allocation and other conditions are met, then we'll finance the credit.

People were hesitant until the portal opened and were worried that it wouldn't open – that we wouldn't, initially, have awards.

The DOE and the Treasury have been doing a road show of webinars, so everyone's gotten more comfortable with how you apply and how you qualify. We've been seeing more LMI elements added to these deals.

Question 19: Are you seeing deals outside of solar, wind, and battery storage? Are you getting calls from people ready to transact on newer technologies?

Andy Moon: Looking forward, we know there's a lot of demand for solar, wind, and battery storage tax credits. What are you seeing in terms of other technologies? Are buyers willing to purchase credits from other technologies?

Hilary Lefko: I am, although I am seeing lower pricing for other technologies. We are seeing a lot of sellers going to market with other tax credits. I think the next biggest category would be biogas and renewable natural gas (RNG). I think there's going to be a lot of those. There are a few projects that came online in 2023, and I think we'll see more 2024.

Anytime a potential seller comes to me with those types of credits and says, "I can get 96 cents of credit," I say, "Well, you're not selling 2023 wind [credits]. You probably can't [get that pricing]. You need to redo your economic projections assuming a much lower price per credit and make sure that this is still economically viable for you. Anything above that is going to be crazy.”

We've heard of some 45U nuclear credits coming out – maybe some other nuclear facilities selling technology-neutral credits. It'll be interesting to see what those trade at.

I think there's a lot of considerations with public perception around nuclear and whether investors will be willing to buy those credits and be associated with those technologies. It'll be interesting to see what the market will bear. It may be a great way for companies to get a bargain on tax credits.

As we start to see newer technologies flood the market with lower pricing, it'll be interesting to see if those impact the other end of the market – that is, the credits with which people are [familiar] and the technologies that investors are comfortable financing.

Andy Moon: I think that's right. There's a lot of expectation among developers that pricing will go up – that there will be a smaller discount as the market matures.

Question 20: Will a flood of new credits from different technologies drive pricing down over time?

Andy Moon: If there's a flood of new credits from many different technologies all competing for the same tax credit buyer dollars, will that provide downward pressure on pricing over time?

Hilary Lefko: I think it's going to be interesting to track.

Andy Moon: Thanks for coming on the show today, Hilary. It's been great to have you. Great to see you, as always.

Hilary Lefko: Yes, this was great. Great chatting.