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Biden's tax credit 'transferability' pours billions into renewables, storage

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US renewables and battery storage developers are looking to boost installations with tax credit sales.
Source: adamkaz/iStock/Getty Images Plus via Getty Images.

A multibillion-dollar market for clean energy tax credits has materialized in a matter of months, sparked by a provision of President Joe Biden's marquee climate law that allows project developers and manufacturers to directly sell their credits for cash.

By enabling the "transferability" of tax breaks, the Inflation Reduction Act (IRA) greatly eased the process for clean energy businesses to monetize those incentives. These include 11 types of tax credits, the US Treasury Department and Internal Revenue Service confirmed April 25 in final guidance. Developers previously had to rely on more restrictive, complicated and expensive tax equity deals that attracted a relatively small number of investors, typically large financial institutions.

"The Inflation Reduction Act, with this component in particular, has really freed up a lot of capital to be deployed faster," said Frank Burkhartsmeyer, CFO of battery storage developer GridStor LLC. That capital velocity is accelerating the energy storage industry's ability to deliver cost-competitive zero-emission capacity, "which is desperately needed in many areas, as the renewables have been built out ahead of the capacity market," he added.

Backed by Goldman Sachs Asset Management LP, the Portland, Ore.-based upstart in March announced its first tax credit sale, to JPMorgan Chase & Co., to support its 60-MW/160-MWh Goleta Battery Storage Project in Santa Barbara County, Calif. The transaction, the terms of which were not disclosed, is part of a broader clean power banking blitz that is yielding record solar photovoltaic (PV) and battery storage installations in the US and pushing overall additions of carbon-free sources of electricity to new heights.

The IRA has supercharged the battery storage business, offering a new investment tax incentive for stand-alone installations like Goleta and giving companies a cash sale alternative to traditional tax equity financing structures that require complex partnerships with big banks and other financial heavyweights that have significant tax liabilities.

Under the new and streamlined mechanism, energy storage and renewables developers are still working with financial giants like JPMorgan Chase, Bank of America Corp. and U.S. Bancorp. But their ability to now sell tax credits for cash has opened up a broader pool of corporate taxpayers to support a larger spectrum of projects, according to market participants and analysts.

"We couldn't possibly meet with all the financial parties that want our business," Burkhartsmeyer said in an interview ahead of a recent industry event. "It's a very active time, which means we'll get competitive pricing, we'll get commercially attractive structures ... it's all great progress and I think that the IRA can be credited with a lot of that because it's brought a credit to market that we can all utilize."

"There's no question that in order for the financial markets to meet the requirements of the growing renewable energy industry, it's going to take a robust tax credit transferability market," added Arevon Energy Inc. President and CEO Kevin Smith. "That means we need other players entering into the market, and we are seeing other players entering in."

Arevon in February secured a $350 million financing package for its 200-MW/800-MWh Condor Battery Storage Project in San Bernardino County, Calif. As part of the deal, Stifel Financial Corp., a newer name in energy storage project finance, committed to purchase investment tax credits.

That was part of Arevon's more than $2.3 billion in deals disclosed in recent months for large-scale solar and battery projects, combining conventional tax equity, debt financing and tax credit transfers.

"I think people are going to be leaning on the transfer credit market pretty heavily as we move forward and it'll get more and more mature as more deals get done ... and more tax credit buyers look to get in on the fun," Smith said.

Expanding the pie

The tax credit transfer market blasted off midway through 2023 following preliminary federal government guidance, generating an estimated $7 billion to $9 billion of activity last year, according to Crux Climate Inc., which operates a platform for buyers and sellers of the transferable tax breaks.

"We think [the market] will something like double in 2024," said Crux CEO and co-founder Alfred Johnson.

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Crux has nearly $9 billion in 2024 and 2025 tax credits for sale on its platform. In the first three months of this year, buyers made roughly $1.5 billion in bids, mostly targeting renewable energy and battery storage projects.

"We need to go from a $7 billion-$9 billion [annual] market to a $50 billion market by the end of the decade," Johnson said in an interview. "So the market is going to have to scale up considerably in terms of participants and efficiencies, standardization [and] all the requirements of a market that is much larger than today's market."

A broader pool of tax credit buyers, ranging from big banks and smaller financial services firms to industrial, energy, retail and technology companies, could help to counter economic upheavals or regulatory headwinds, such as new capital requirements for major banks currently under consideration.

"The more you expand the pie across both industry type and size of companies, the more protected you are in further instances of shock that may affect one segment of the economy more than others," said Johnson.

Reunion Infrastructure Inc., which also operates a marketplace for tax credit transfers, has over $6 billion of credits for sale on its platform.

"The market has picked up significantly this year," Reunion CEO and co-founder Andy Moon said during a Roth Capital Partners webinar in March. Reunion sees the annual tax credit transfer market surging to over $80 billion by 2030.

"It's probably the fastest-growing type of transaction our group is seeing, of more than 120 lawyers," Keith Martin, co-head of projects at Norton Rose Fulbright, added on the webinar.

Moon and Martin cited 2023 market estimates of $4 billion-$6 billion and $4 billion-$9 billion, respectively.

Even if last year's market launch was at the lower end of those estimates, "that's a pretty extraordinary growth rate for something that is fundamentally unproven," S&P Global Commodity Insights climate and cleantech executive director Peter Gardett said in an interview. "We've seen deals every week."

'Core infrastructure'

US Treasury Department data further supports expectations of a steep growth trajectory for energy tax credit transfers. As of March 8, roughly 500 companies had requested registration numbers for credit transfers associated with roughly 45,000 facilities or projects through an online portal that opened in December 2023 to help speed tax returns.

Most of those registrations are associated with wind, solar and battery facilities. Some suppliers of rooftop solar and storage systems are also taking advantage of tax credit sales. Sunnova Energy International Inc., for instance, recognized $207.4 million in investment credit tax sales in 2023, the company stated in February in a 10-K filing to the SEC.

Others are seeking to sell tax benefits for manufacturing, carbon capture and clean transportation projects. PV producer First Solar Inc. at the end of last year announced it would sell $700 million in tax credits to financial technology provider Fiserv Inc. to support its expanding operations, touted as "the first significant credit transfer of its kind in the solar manufacturing industry."

The scale of growth for tax credit sales "means the benefits should remain compelling for corporations for the foreseeable future," according to Patrick Worrall, vice president of tax credit marketplace at LevelTen Energy Inc., which on April 23 unveiled a new platform for corporate buyers to solicit credits from roughly 100 renewable energy developers.

"The key to success for a new investor in tax credits is information," Worrall said in an email. "All tax credits are not equal and having a complete view of the market and the resources to analyze is valuable."

The emergence of the US clean energy tax credit transfer market is part of a bigger picture of renewable energy as "core infrastructure" investments, added Commodity Insights' Gardett.

"It is certainly true that anything that makes an incentive easier to use, makes it easier to finance the resulting project," Gardett said. "But the reason this is core infrastructure is as much because the perceived technology risk has fallen and the willingness of everybody to simply deploy more renewables and treat them as normal financial assets."