Webinar Recap: Ten Insights on Tax Credit Transfers from Five Top Experts

Nearly two years after Congress passed the Inflation Reduction Act (IRA), many are wondering if the anticipated vibrant market for transferable clean energy tax credits has come to fruition. Back in 2022, these credits were heralded as a game changer for renewable energy finance, with the potential to simplify direct transfers and attract new participants unfamiliar with the sector. In this early market phase of the Inflation Reduction Act, there is hype and exuberance, there is risk and uncertainty, and there are good deals to be made. 

We recently brought together an expert panel to weigh in: Nicole Gambino, Senior of Counsel at Wilson Sonisini, Jaron Goddard, Clean Energy Associate at Wilson Sonsini, Dave Gibson, Managing Director, Tax Credit Syndications at Baker Tilly, Nabil Kanso, VP, Private Equity & M&A at USI Insurance and Ben Dickson, Chief Legal Officer at Ever.green. They provided practical advice for those interested in exploring tax credits, aiming to equip participants with actionable insights in navigating deals. Here are some of the key takeaways:

1. The transferability market has seen substantial engagement, with over 900 entities requesting 59,000 registration numbers for projects across all states and territories, with 97% for transferability. Most of these projects are in solar and wind, using the Investment Tax Credit (ITC) and Production Tax Credit (PTC) structures. The involvement of traditional institutional investors in these deals is a positive sign, indicating their recognition of economic benefits in transferability transactions.
2. Clean energy tax credits present a significantly larger opportunity and offer more flexible timing benefits compared to other tax credits like Low-Income Housing Tax Credits (LIHTC). The renewable energy tax credit market is projected to reach up to $90 billion (compared to $13B for LIHTC) in the coming years. Energy credits also offer superior timing compared to similar asset classes, as the benefits are not spread over a multi-year horizon. ITCs can be taken all at once, and PTCs can be bought on a forward basis, allowing immediate tax payment reductions, often resulting in double-digit annualized returns due to the quick realization of benefits. Buyers can structure payments to align with or precede tax reductions, effectively creating a direct cash grant or a government loan with a negative interest rate. This approach minimizes upfront costs and maximizes returns, though it carries risks if the credit purchase does not occur.
3. The return from tax credit transfers can be significant. Current market prices for credits range from $0.85 to $0.94+ depending on the deal's risk profile (and assuming the deal is for at least several million dollars in credits, as buyers often require larger discounts to consider smaller deals). The returns on even a 6% discount can be quite high if that return is realized through the reduction of a buyer’s quarterly estimated tax payment within a month after, or even weeks before, payment is made for the credit to the seller. 
4. Tax credits are not without risks; buyers are liable for excessive credit transfers and recapture events. Issues can occur if certain costs or appraisals are deemed ineligible or overvalued, or if conditions for specific energy percentages or PTC rates are not met. For example, if a developer claims to pay prevailing wage but does not do so, the credit value can be reduced. Additionally, there is a risk of partial recapture if a project failure or sale occurs before the end of year 5, with the recapture percentage decreasing by 20% each year. This emphasizes the importance of working with trusted partners to conduct  a robust diligence process. 
5. Investing in renewable energy projects requires a strategic approach to mitigate risks and maximize returns. Start by partnering with trusted developers known for their track record of successful projects. Ensure developers can confidently address technical queries and possess the capacity to back up indemnities, safeguarding your investment.
6. Credit eligibility, project ownership, and project viability are the key diligence areas. To reduce costs and accelerate timing, buyers often leverage diligence conducted by insurers and lenders. Buyers should seek summary documents such as appraisals, independent engineering reports, and cost segregation documents; verify claims related to energy community status, low-income bonus credit, and property ownership, seeking third-party verification when necessary. Specifically, cost segregation analysis to verify the cost basis of the credits and Prevailing Wage and Apprenticeship (PWA) compliance are two areas where third-party expertise is valuable.
7. Insurance and indemnities are essential for risk mitigation: Insurance can offer the highest level of protection against loss of tax credit value, however, it can be cost-prohibitive especially for smaller projects. Indemnification provides additional protections to buyers, including covering tax reductions, audit fees, penalties, etc. The financial strength of the seller is important to provide backing of the indemnities in the contract. 
8. The costs for buyers primarily consist of three components: diligence and legal costs, insurance costs, and brokerage costs (if utilizing a broker like Ever.green). ITC buyers seek insurance coverage to mitigate risks related to excessive credit transfer and recapture, often at over 100% of the credit value to cover potential disallowance, audit costs, penalties, and interest. Insurers typically charge between 2-3.5% for tax credit insurance, with minimum premiums often in the several hundred-thousand-dollar range. USI is working, with insights and support by Ever.green, to get greater standardization and lower premiums. 
9. Take advantage of opportunities by purchasing early, targeting high-quality projects with future placed-in-service dates, and buying from tax equity partnerships with unexpected additional credits due to energy community status. Consider smaller deals and newer technologies, such as biogas, that can offer attractive discounts. 
10. Successful deals are characterized by responsiveness in communications, transparency with information, reasonable flexibility to counterparty requests, and front-loading key areas of discovery and diligence.

In this dynamic and evolving market, navigating its complexities can be challenging. Ever.green supports both buyers and sellers in simplifying  transferable tax credit transactions to ensure successful outcomes. 

Important notice: Ever.green and its affiliates do not provide tax, legal, or accounting advice. This blog post is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.