The IRA Tax Credit Market: 2023 Wrap-Up
The landmark Inflation Reduction Act of 2022 has set a course for our country to reach its ambitious goals of reducing carbon emissions by 50% by 2030 and using 100% carbon-free electricity by 2035. The climate legislation is unique in that it democratizes investment in new clean energy projects and infrastructure, so that companies of all sizes can participate.
How so? The “transferability” of the tax credits under Section 6418 of the Internal Revenue Code means that you no longer need to be an equity owner in a project to monetize the tax credits; you can buy them through a simple purchase agreement.
So far this year we’ve seen:
Investment in clean energy has now been made accessible to a broad set of US companies through transferable tax credits
Corporate buyers are weighing the benefits of buying transferable tax credits against key risks, such as recapture
Early indications are that buyers can purchase credits at $.90-.95 on the dollar, depending on a number of deal factors, generating an immediate return
In addition, buyers are concerned with the slow rollout of IRS regulations, how rules will apply to new technologies, and finding a balance between production tax credit (PTC) and investment tax credit (ITC) opportunities
The Ever.green team provides the hands-on deal sourcing, structuring, due diligence, and transaction support that buyers need in order to close tax credit deals
Headwinds are lessening but challenges remain
The central challenge for buyers of ITC’s is that buying tax credit, under the current legislation, exposes the buyer to several risks. In particular, the buyer is exposed if the credit is calculated incorrectly up front, which is referred to under the Code as “excessive credit transfer.” The buyer is also exposed if something happens that invalidates the tax credit during the five years after it is granted, which is referred to under the Code as “recapture.” Buyers of PTC’s do not face recapture risk, but do face other risks related to the fact these credits are produced over a ten-year window.
Buyers have generally sought to protect themselves from these risks with a mix of tax insurance and indemnification from the seller, and the level of coverage is a major driver of the tax credit’s pricing. It should be noted that the new laddered structure of the credits and lack of widely available public data on recapture events has hampered actuarial efforts and may be leading to higher pricing on insurance (4-6%) and indemnification in these early days.
Other considerations facing buyers in the marketplace:
The IRS rollout has been slower than hoped for. Some initial guidance is late, much guidance has yet to be finalized, and the portal to register projects (as required under the transferability regulations) has yet to open. We are hopeful that this will be done by the end of the 2023 year but wouldn’t be surprised if it pushes to Q1 2024. This environment has led to early adopters on the buy side, but the bulk of buyers are not expected to emerge until 2024. The takeaway is that this is a buyer’s market for now, and favorable deals terms can be had.
Buyers are focused on proven technologies like solar, wind, and storage, which had been the subject of tax equity investments before the IRA and, as such, are more familiar to participants and have established precedents from past IRS rulings.
We are seeing both ITC and PTC opportunities. As noted above, PTCs have a different risk profile. Sellers generally want to monetize as many years as possible, creating risk around the project’s future production and the buyer’s future tax bills. In contrast, buyers of ITCs can realize the entire benefit of their purchase in one year, even in advance of their purchase, through a reduction in estimated tax payments. Also, pricing on PTC deals can be higher than ITC deals, reducing the savings opportunity for a company’s tax bill.
How Ever.green can help
With Ever.green you get a hands-on, dedicated team, legal documents to support transactions, and an ecosystem of 3rd party partners to support any diligence and filing needs. Deals have the greatest chance of success when both sides’ expectations are aligned, and our job is to facilitate that outcome through our strong relationships with both buyers and sellers.
Interested in exploring tax credit opportunities? Schedule a call to learn more.