The tax code change unleashing $25B in clean energy investment

Tax credits are the driving force behind the Inflation Reduction Act’s unprecedented investment in clean energy. But there’s a catch to relying on tax credits: The amount of money a company can receive from them is limited to what it pays in taxes each year.

In recent decades, a workaround that helps firms monetize a greater amount of tax credits — and therefore build more solar, wind, storage, and other clean energy projects — has blossomed. Known as the tax equity market, it’s now a roughly $20 billion per year financial sector in which banks and other large financial institutions partner with clean energy developers and use their tax credits to reduce their massive tax burdens.

But even this approach has its limitations. That’s why the climate law sought to revolutionize how clean energy developers and other companies earning tax credits can monetize them by introducing a concept called transferability — and so far, it looks to be a runaway success.

So finds the latest report from Crux Climate, one of the companies working in this rapidly growing field. By year’s end, Crux forecasts that the volume of transactions in this new market will reach $22 billion to $25 billion, up from just $4 billion last year.

That’s an extraordinary pace of growth for a class of clean energy tax-credit financing that didn’t exist until mid-2023, said Crux CEO Alfred Johnson.

“Transferability is on a path to eclipse the traditional path of tax equity — if not this year, then in 2025,” Johnson said. And while ​“it took decades for tax equity to reach that size, transfers got there in about 15 months.”

Why transferability is a big change

The transferability market’s growth is a testament to the radically simpler nature of this approach compared with the traditional tax-equity structure.

Under the old rules, investors seeking to use credits to offset their taxes have to be co-owners of the project claiming them. That requires project developers to set up complex and specialized partnerships and structures with banks and investment firms with large tax liabilities, which has limited the market to only the largest and most sophisticated project developers and would-be financiers.

Transferability, by contrast, allows manufacturers of advanced energy technologies, wind and solar project developers, battery and EV-charging installers, and other cleantech sectors eligible to receive tax credits to sell them directly to companies or institutions looking for a way to reduce their tax burden.

That’s a simpler approach, though maybe not as simple as it sounds. That’s why companies like Crux, Basis Climate, Common Forge, Evergrow, Ever.green, Reunion Infrastructure, and others have stepped in to create and manage marketplaces that enable credit recipients and would-be buyers to structure deals, assist in due diligence, and secure insurance for tax-credit ​“recapture” risk, among other steps required to complete transactions.

Nor have tax-credit transfers supplanted traditional tax-equity markets, Johnson said. All in all, Crux forecasts that total U.S. tax-credit monetization will exceed $40 billion. A similar forecast from Reunion Infrastructure in September pegged the total 2024 market at $45 billion and up, of which $21 billion to $24 billion is expected to be transfers.

But transfer markets are open to a much wider variety of buyers and sellers of tax credits. That’s crucial to realizing the full potential of the scale and range of clean energy tax credits created by the Inflation Reduction Act, which will require more participation than what the traditional tax-equity markets can provide.

“There is far more demand for tax equity than there is supply,” said Keith Martin, an attorney with law firm Norton Rose Fulbright and an expert on clean energy tax equity. Transferability is ​“a way of relieving pressure on the market, by making it possible for small and midsize developers who struggle to raise tax equity to finance their projects.”

Johnson agreed that ​“only utility-scale developers with established technologies and a track record were able to access tax-equity financing.” Smaller-scale projects could tap into tax-equity markets only by being acquired into larger portfolios, he said.

With transferability, ​“we’ve seen smaller deal sizes transact in the transfer market, and newer technologies being able to access the market with reasonable speed,” he said.

The typical tax-equity deal is at least $100 million. But more than 80 percent of the transferability deals Crux tracked in 2023 were below $50 million, although bigger deals have taken a larger portion of the market since then, he noted.

Earlier this year, clean energy developer Black Bear Energy and finance company Evergrow closed a tax-credit transfer of undisclosed value for 556 kilowatts of solar projects for multifamily properties — a scale of distributed solar development that would have had to be bundled into a bigger portfolio to tap into tax-equity financing in the past.

On Monday, Navajo Power Home, which provides solar and battery systems for off-grid homes on Navajo and Hopi lands, announced that it had worked with Basis Climate to sell what might be the smallest tax-credit transfer to date — a $355,000 investment tax credit tied to solar-battery systems for about 100 homes. In a press release, Basis co-founder Derek Silverman cited the deal as a proving point for the company’s goal to ​“make it easy for buyers and sellers alike to transact on sub–$1 million deals.”

At the same time, tax-credit transfers are also bankrolling major projects. Bank of America got the ball rolling in August 2023 with a deal to buy $580 million in wind-energy tax credits from a $1.5 billion portfolio of renewable projects being built by clean power developer Invenergy. Multiple $100 million–plus transfers have closed in the past 15 months for utility-scale clean energy projects involving wind-power developer Avangrid and solar developer Recurrent Energy.

Other large-scale deals have centered on tax credits created for the first time by the Inflation Reduction Act, such as the 45X Advanced Manufacturing Production Credit. In January, First Solar, the country’s biggest solar panel manufacturer, announced two deals to sell up to $700 million worth of production tax credits.

Similar advanced manufacturing tax credits have made up a large share of the tax credits being sold to date, Johnson said. This snapshot of third-quarter 2024 deals shows a diverse range of technologies being supported, including numerous advanced manufacturing (“Adv Man”) deals. 

Credit owners aren’t earning a full dollar for every dollar of tax credit they sell. Typical discounts for tax-credit transfers have ranged from about 85 cents on the dollar for the earliest deals to 95 cents or more per dollar for the largest and safest transactions. These discounts reflect the cost of managing and insuring the transactions, as well as the perceived level of risk the buyers are taking on.

Still, there are reasons for companies like First Solar to choose to sell tax credits for less than what they’ll eventually be worth, Johnson said. A big one is ​“the time value of money,” he said. ​“You very well may say that 95 cents today is better than a dollar in a year,” and transferability pays up front.

Similar incentives are leading the banks and investment firms that specialize in tax equity deals to embrace transfers as part of their deals, said Martin. ​“Every partnership-flip tax-equity transaction since the Inflation Reduction Act passed — or almost every one — has given the partnership the right to sell the tax credits,” he said.

As of last week, Norton Rose Fulbright had closed 57 large tax-credit sale transactions worth more than $6 billion in 2024, representing ​“a significant share of the market,” he said. Of the roughly $19 billion in tax-credit transfers conducted as of the end of this year’s third quarter, about $10 billion were via sales by ​“hybrid tax-equity partnerships” or other structures set up to make use of both tax equity and transferability, he said.

Another sign that tax-credit transferability is coming into its own is the increasing volume of what Johnson called ​“forward commitments” from buyers seeking to secure tax-credit purchases for years to come.

Tax credits are tied to the year in which they’re awarded and must be used to offset tax burdens within tightly regulated time periods to satisfy the rules set up by the Internal Revenue Service. But various structures have evolved to allow buyers to commit to purchase future tax credits from clean energy developers and manufacturers.

The number of deals involving these forward commitments has risen steadily from about 11 percent in the first quarter of 2024 to about 36 percent as of the third quarter, according to Crux data. That’s good for project developers, since nailing down prices for tax credits in future years is ​“valuable to your financial planning and your ability to access capital in higher amounts and at lower cost.” 

To be clear, tax-credit markets will need to grow much larger over the coming decade to achieve the full scope of clean-energy and climate progress enabled by the Inflation Reduction Act. This data from investment banking advisory firm Evercore ISI indicates that the $40 billion–plus in tax-credit market activity expected for 2024 will have to more than double to about $100 billion by 2030.

There’s no assurance this growth will continue, of course — particularly if the political party that has opposed the policies that it is premised upon takes power. Next month, U.S. voters will decide whether to elect a candidate who cast the tie-breaking vote in the U.S. Senate to pass the Inflation Reduction Act or a candidate who has vowed to rescind the law’s key clean energy and climate provisions and claw back all unspent federal funds.

But Johnson noted that the trends in clean energy and manufacturing tax-credit markets indicate that major U.S. banks and corporations appear to be betting on growth. ​“When we show that there is significantly more accelerating forward-bidding behavior on tax credits, that is reflective of confidence that this is a highly effective market,” he said — one ​“that is working and that is unlikely to be going away.”