Emerging market for renewable tax credit transfer deals takes shape

The nascent transfer market for renewable energy credits will begin to see pricing differences based on technology, insurance, creditworthiness and duration, industry experts said during an April 27 webinar hosted by law firm Norton Rose Fulbright.

As of 2023, developers of solar, wind and other low-carbon energy technologies can convert tax credits into cash payments by selling the credits to unaffiliated corporate entities, opening the door for direct ownership and potentially creating extra income from unused credits if transfer markets materialize.

In response, companies such as Reunion Infrastructure Inc. are developing platforms similar to those used for commodities like oil and natural gas.

"Our vision is to run regular options that settle based on buyer bids and seller asks for both spot and forward contracts," Reunion President Billy Lee said during the panel discussion. "What we're trying to do is bring in passive investors who may not have previously been adjacent to renewable energy and ... make sure that they have as low-risk a proposition as possible."

While most tax credit buyers and sellers are waiting on the sidelines for the IRS to provide clarity on how to monetize tax credits in the Inflation Reduction Act, known as "transferability," a few transactions for projects coming online in 2023 have already settled in the range of 90 to 92 cents per dollar of tax credits, Lee noted.

Pricing differences

But risk factors will still drive price variation as more deals are completed, according to Jamie Stahle, senior managing director at financial advisory firm CCA Group.

"When you move away from some of the larger-scale, more mature projects where you either have more challenging projects or different technology or a new asset class ... you start to see some divergence in price just based on the characteristics of the project or the counterparty," Stahle said.

Jack Cargas, managing director and head of tax equity origination at Bank of America Corp., said that whether a tax credit is for production or investment will also affect pricing. Investment tax credits are subject to penalties that take back, or recapture, some of those funds if there are any ownership changes within a project's first five operating years.

Pricing differences are also expected to emerge between production tax credits (PTCs) when it comes to liability.

"To the extent a seller is offering [representations] and warranties, or perhaps a seller can provide strong evidence of the provenance of the tax credit ... to show proof that this PTC emanated from that wind turbine with that serial number, that may be a more attractive credit and command a slightly higher price than another PTC which doesn't have the same indemnity or establishment of provenance behind it," Cargas said.

Whereas "fact-based indemnities" may be enough for an experienced developer, according to Cargas, Marathon Capital LLC CEO Ted Brandt said the investment bank expects "insurance to be a requirement."

"There needs to be the equivalent of title insurance where a corporate buyer that buys a credit and finds out the credit was fraudulent or somehow-or-another deficient, and all of a sudden has explaining to do internally, [can] get their money back," Brandt said.

New structures

The way a transfer is structured may also affect price, and future options could include selling PTCs both on a forward basis and through a hybrid option that commits the buyer to pay some of the "overall projected value" as well as "any excess ... on a pay-go basis," Bank of America's Cargas said.

There could even be vehicles that combine tax credit transfers and traditional tax equity, which monetizes credits by selling them to large financial firms and other companies with significant tax liabilities by creating partnerships that own projects.

Bank of America, for example, could "enter into a tax equity partnership where perhaps we keep 50% of the tax credits and the partnership sells the other 50% to a corporate buyer," Cargas said. "That could be a very good application and we think there are numerous circumstances where we can be an investor and a buyer."

Even as transferability advances, it will still be less attractive than traditional tax equity because transfers cannot monetize depreciation.

"There will certainly be a huge amount of stranded depreciation left on sponsors' balance sheets," Marathon's Brandt said, but with the caveat that projects running at maximum capacity more often than others are "efficient enough that the lines cross and it's more favorable to the sponsor" than tax equity.

Emerging market

Utility holding companies NextEra Energy Inc., Alliant Energy Corp., Avangrid Inc. and Xcel Energy Inc. have expressed interest in purchasing tax credits directly and selling any excess.

"We've talked to about 20 counterparties already, and there is a significant amount of interest in the purchases of our tax credits, not only this year but for a longer term," Xcel Energy Executive Vice President and CFO Brian Van Abel said April 27 on the utility's first-quarter earnings call. "We're pretty confident, in terms of our ability to execute on this at a good price for our customers."

Alliant subsidiary Wisconsin Power and Light Co., meanwhile, is among the first utilities planning to swap tax equity partnerships for full ownership. In 2022, it "terminated" planned tax equity financing for 12 solar projects and requested approval to dissolve a tax equity partnership for three other projects operating and under construction.

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