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Dan Testa: Hello there, and thank you for joining us on Energy Evolution, podcasts about the energy transition, brought to you by S&P Global Commodity Insights. Every week, we aim to provide you with the most up-to-date information and analysis on the shift towards clean energy. I'm Dan Testa, Power Finance Editor, and I'm joined by my co-host, Taylor Kyukendall, who's a senior reporter, for today's episode. Hey, Taylor.

Taylor Kyukendall: Hey, Dan. Thank you very much for that introduction. Today, I'm bringing in an interview with Alfred Johnson. He's the CEO and Co-Founder of Crux. Alfred was also a Deputy Chief of Staff to Janet Yellen at the US Department of Treasury. Crux is a platform for developers, tax credit buyers, and financial institutions to transact and manage transferable tax credits.

Dan Testa: Okay, so it sounds like this all ties into the tax credits offered by the Inflation Reduction Act, and the emerging market that's forming as a result.

Taylor Kyukendall: That's exactly right, Dan. And some of our listeners, I remember we even talked to Alfred Johnson before when some of these transferable tax credits, that were under the Inflation Reduction Act, were first becoming to be understood by the industry. See, the IRAs opening up hundreds of billions of dollars of tax credits for companies that are trying to deploy renewable energy. Transferable credits allow the companies to sell those credits, and that gives them a means to quickly access capital that they otherwise might not have. In my recent chat with Alfred, we talk about the company's services, which are enabling an efficient market for tax credits that are associated with these big clean energy and decarbonization goals of the IRA. He also talks about the company's recent $18.2 million series A funding round. And share some insights from the company's inaugural market report on the state of clean energy tax credit transactions.

Dan Testa: What were some of the highlights out of that report?

Taylor Kyukendall: Dan, I'm glad you asked. See, they had some really interesting figures in here. For example, Crux found out that there was between $7 billion and $9 billion in volume of 2023 tax credit transactions. They found that the transferability of these tax credits has been leveling the playing field for smaller projects and new technologies that might not otherwise have as much use for the credits. See, approximately 80% of the transactions analyzed had a face value of $50 million or less. And, see, these are the sort of projects that generally have pretty limited access to traditional tax equity, at least according to Crux's report. Buyers, sellers, and intermediaries are also hinting that there's going to be a boom in this market in 2024, with Crux forecasting this already robust market, growing in both participation level and deal size.

Dan Testa: Okay, I'm glad we're staying on top of this. This is a really interesting topic. Let's dive into the conversation with Alfred Johnson, CEO and Co-Founder of Crux.

Taylor Kyukendall: Alfred, welcome back to Energy Evolution. Just as a reminder for our listeners who didn't catch our first episode where you were our guest, what exactly is it that Crux does?

Alfred Johnson: Taylor, it's great to be back on the podcast. I enjoyed our first conversation. So, first, as a reminder, the Inflation Reduction Act was passed in August of 2022. It's the largest climate bill that has ever been passed by any government ever. And is roughly two thirds tax credits. Now, the interesting thing about tax credits is that they are very, very useful if you pay a lot of taxes. They are less useful if you don't. And many renewables developers, the companies that are building energy infrastructure, don't have tax liabilities that are enough to be able to consume and make use of the tax credits that they are getting through this new law.

The law also provides credits for many different kinds of technologies than previously had them. And because the law was creating all of this supply of tax credits, hundreds of billions of dollars of it, on an annual basis, they also created, they being Congress, a mechanism by which those credits can be sold directly for cash. Which is a new mechanism of financing tax credits than has ever existed before. We formed Crux in early 2023 in order to build an efficient market for these credits. That energy transition depends on this source of capital, that tax finance source of capital, being as efficient as possible. And Crux's software that enables those transactions from a workflow data management and stakeholder management perspective. And we are also the network where buyers, sellers, and intermediaries are able to connect and transact. So we're building the mechanism of transaction in the market, where the players that are looking to transact in these credits are able to find each other.

Taylor Kyukendall: Excellent. I want to zero in just a little bit more on this, the value of these transferable tax credits. What you're talking about, is this just a thing where clean energy companies are saying, "Hey, this is a nice thing to have. And, hey, maybe we'll build a little bit more?" Or is it fair to say that what the Inflation Reduction Act did here is really transformative for the clean energy industry?

Alfred Johnson: It's absolutely transformative. We have had tax credits in America for a long time. We have used them for oil and gas for more than 100 years. We've used them for renewables for decades. They have been significantly expanded here. But the implication of tax credits is it effectively creates another source of capital into the project. And if you think of the different sources of capital for a project, that will be equity, debt, and tax equity. Tax equity has historically been a term that's been associated with a particular SOAR project finance structure with transferable tax credits. Now, you can sell your tax equity effectively to a third party investor, who is buying your credits and putting cash into the project and giving it to the company. And the implication of that is that forms another source of capital to build the project, to turn around and invest in new projects. And all of that is enormously valuable to the developers that are building the facilities that are going to enable the next phase of energy development here in the United States.

Taylor Kyukendall: Speaking of Crux specifically, can you just give me a sense of how many partners you're already working with? And maybe give our listeners an idea of the breadth and diversity of some of these projects, with maybe a couple of examples?

Alfred Johnson: This is such an interesting market, Taylor, because it is very unusual that a market of this size and significance forms as quickly as this one is. So it will be a multi hundred billion dollar market. We found, in a recent market transaction report that we did, that somewhere in the neighborhood of $7 billion to $9 billion worth of transactions happened in the last five months of 2023. And what that suggests is that there's going to be quite a lot of volume that comes to market pretty quickly. For Crux, in particular, we are working with hundreds of partners on the buy side of the market. So companies that are looking to purchase these credits, companies that are selling the credits, and intermediary partners, like tax advisors, banks, and other people that are connecting the various parties in the transactions. And we currently have $8.3 billion worth of credits available for sale on the platform in a market that is very rapidly accelerating.

Taylor Kyukendall: And so it sounds like lots of potential and there's a lot of activity going on. But just to maybe take some of those numbers and contextualize them just a little bit. Would you say that the interest in these credits and these projects has been robust, about the level that you've been expecting? Or were you maybe hoping to see more companies jump in and take advantage of these tax credits?

Alfred Johnson: The market accelerated more rapidly than people thought it would. So it was legal to transact beginning January 1st of 2023. But for practical purposes, people did not transact until the Treasury put out guidance on how the credits would function, and how transferability specifically would function, in the middle of June. We started to see deals close in August of 2023. And then the market accelerated pretty dramatically from there. The early market estimates were that we would see something in the neighborhood of $4 billion or $5 billion worth of credit transfers in 2023. We found, in this report, we were able to track $3.5 billion of transfers specifically associated to individual transactions. So we found that somewhere in the neighborhood of seven to nine is likely to actually transact.

And when you compare that to the traditional tax equity market, that market, in 2023, we estimated to be around $23 billion. That's in line with other private estimates. So the whole market for tax finance, tax monetization, has grown to something in the neighborhood of 30 billion from 20 in 2022. And a lot of that growth is coming from transferable credit. So we're seeing that particular mechanism of financing projects, and for the government to subsidize the development of different kinds of clean energy, we're seeing that to be a particularly powerful form that has accelerated more quickly than people thought.

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Taylor Kyukendall: Crux actually had a bit of exciting news, just late January, announced that you'd raised $18.2 million in series A funding. Can you tell us just a little bit about how that fundraising came about, the process, and getting it going? And then, also, the significance of that level of funding to Crux's mission, and what you plan to do with it?

Alfred Johnson: Totally. Well, Taylor, it's good to be back on this podcast. This is the first conversation like this I've had since we announced the new fundraise. As history on this, we announced the company in early 2023. We raised our first round of capital, lower carbon, led that, QED Investors, a handful of strategics. We did a second seed extension in the summer of last year. Brought in some really cool strategic partners, Orsted, LS Power, Hartree, Canopy Investors invested in that round. So raised about $9 million of total venture and strategic money over the course of '23.

But, again, this market has been accelerating faster than anybody thought. And there is a real need for software to be at the center of that market. And for buyers, sellers, and intermediaries to have the tools that they need and access to the liquidity that they need to transact. And given the conviction that we have in that, we went out on a very quick fundraising process in early December. Ended up having some solid interest for that. And were just thrilled to be partnering with David Haber and the Andreessen team. They are absolutely top-notch. David sits in the FinTech investment group at Andreessen, but we are also engaged with their American Dynamism group. Michelle Volz on that team is quite engaged with the company. And the resources that collectively Andreessen brings to the table are unmatched, frankly. So, now, we've raised about $27 million. We have the opportunity to go build the central platform in this very fast-growing market.

And then, another thing that excites us, is that these tax credits are an enormous catalyst to clean energy and decarbonization. They also fundamentally change the capital stack for renewables development and these projects. In that sense, we see an opportunity for Crux to continue to facilitate other forms of capital into projects. And we'll begin to experiment with and launch some of those products starting this year.

Taylor Kyukendall: Well, it sounds like already a lot of big and quick growth for Crux itself. I'm just wondering though, is there anything you're excited about, or any big future plans for growth, whether that's in 2024, or looking even further down the line?

Alfred Johnson: Well, we'll double our team this year, so we'll go from 15 people to about 30. I think the sophistication of this market is increasing by the day. The opportunity to increase the level of standardization within the market is really exciting. And in an early market like this, and this is not uncommon for other new asset classes that have formed, it takes a while for the parties that are around the table to agree on what the terms are of various agreements, how the process around closing a transaction work. And the more deals you do, and the better software gets at facilitating aspects of the transaction, the more efficient they can get. I'm really excited about that. Because if we do that well, and we'll do it well, that will lead to lots of additional dollars going into projects more efficiently than would have been possible before.

I'm also excited about some amount of additional guidance and clarity that is going to come out of the Treasury Department and IRS in the coming months. They've done a great job of getting guidance out rapidly in 2023. And we expect that they will continue to do a great job in 2024. And as guidance becomes more stable, as more transactions close, as technology is more efficient, as the market is more accessible, we're going to see more buyers come into it. We saw good signs of that in late '23. And I think, right now, a lot of corporations are coming to the view that this will be part of their tax management strategy and sustainability strategy, going forward. And they're starting to develop concrete plans for how they're really going to participate in this market over a longer period of time.

Taylor Kyukendall: Great. And then, lastly, I just want to ask really a broad question here, something I've been thinking about recently. Is the Inflation Reduction Act enough? Sure, the IRA is really big policy, but tackling climate change is also a really big goal. Are there any other policies from the US that you would like to see enacted that would maybe accelerate the transition to clean energy? Or is the IRA going to cut it on its own?

Alfred Johnson: I think that IRA is a great start. You look at the level of commitment that Congress placed through the IRA, and it's a really big number. The IRA was scored by the CBO at 370 billion. There are private sector estimates that it will be larger than that. And in any case, when you put that up against other investments that the country has made in key infrastructure, it is a huge number. And the level of investment that we're seeing the private sector make on the back of that, the number of announcements of new facilities in the last year alone has been extraordinary and, frankly, ahead of expectations.

Another piece of the IRA that I think people don't talk about enough is how it is also a piece of manufacturing and industrial policy legislation. It is very supportive of investment in battery facilities, in solar manufacturing facilities, in wind facilities. And the result of that is that it is going to bring a lot of manufacturing of components back here to the United States. And so I'm really excited about the benefit that will come from that. I think it is a grades down payment.

Obviously, Taylor, the challenge in front of us is so big. We're talking about the holistic reformation of our energy system and energy security. And that is going to take a lot of investment, both from the government and the private sector. And it does create downstream needs. For example, there's a lot of talk about the need for better transmission infrastructure and capabilities. And I think it's pretty clear that if we do the scale of development that is likely to happen because of the IRA, we're going to need other capabilities in the grid, and as a country, to be able to accommodate it.

Taylor Kyukendall: Excellent. Those are all great points. Alfred, thank you so much for joining us on Energy Evolution. We're glad to have you back a second time. And, hopefully, we'll be hearing from you again soon.

Alfred Johnson: Awesome. Good to be here, Taylor. Thanks.

Taylor Kyukendall: All right, listeners, thank you so much for listening to the latest episode of Energy Evolution. I want to give a special shout out to our incredible podcast team members. I am, once again, Taylor Kyukendall. But other people behind this podcast include Dan Testa, Camilla Naschert, Kamilia Morris, Christopher Coats, Karen Willenbrecht, and our wonderful agency partner, The 199. To stay up to date with our upcoming episodes, be sure to subscribe to Energy Evolution on your favorite platform. If you have any ideas for future themes or guests, we'd love to hear from you. All you have to do is shoot us an email at energyevolution@spglobal.com. And, look, if you liked what you heard today, do consider sharing the podcast with others, or leaving a review on your preferred podcast platform. We can't wait to bring you more fascinating discussions in the future. Until next time, take care, and stay tuned for more from Energy Evolution.