The Inflation Reduction Act has incentivized the planning and construction of record-breaking numbers of clean energy capacity installations despite near-term challenges with costs and supply chains.
The IRA has also created a market for tax credits, which has grown to as much as $9 billion as the legislation introduced federal transferable tax credits.
This process allows for-profit project owners to monetize certain tax credits by transferring them to other taxpayers. Essentially, this enables renewable project owners and developers to sell tax credits for cash and simplifies financing for clean energy projects.
The Treasury said in 2023 guidance that the IRA allows businesses not using direct pay for the tax credits to sell all or a part of any clean energy credits to a third party in exchange for tax-free immediate funds.
With this type of tax credit, businesses can take advantage of tax incentives if they do not have sufficient tax liability to fully utilize the credits themselves.
“Entities without sufficient tax liability were previously unable to realize the full value of credits, which raised costs and created challenges for financing projects,” the Treasury said. Related: Producers Bet on Norway’s Arctic to Find More Natural Gas
This could help simplify financing for clean energy projects, additionally boosting clean energy expansion in the United States.
So, under the IRA, direct pay and transferability expand the reach of tax credits to tax-exempt entities to implement clean energy projects and opens a potentially large market for tax credits transfers among companies.
“Making renewable tax credits broadly transferable helps address current constraints in the nation’s tax equity market, while the new direct pay regime makes it easier for tribes, state and local governments, co-ops and other nonprofit entities to participate in the clean energy transition,” Gregory Wetstone, President and CEO of the American Council on Renewable Energy (ACORE), said in a statement at the time.
In 2023, the first full year after the IRA was passed, the transaction volume for 2023 tax credits for clean energy was estimated at between $7 and $9 billion, according to a new report by Crux, a platform for developers, tax credit buyers, and financial institutions to transact and manage transferable tax credits.
“Transferable credits are likely to be the main driver of tax attribute investment in future years,” the report noted.
Transferability has largely leveled the playing field for smaller projects and newer technologies in the clean energy space, Crux noted, adding that about 80% of transactions in its dataset had a face value of $50 million or less. Such deals typically have limited access to traditional tax equity—so the option to transfer tax credits “is proving to be a powerful mechanism for technologies that qualify for tax credits for the first time – including advanced manufacturing, biofuels, and electric vehicle charging equipment,” Crux said.
The pricing of the transferable tax credits – higher than expected – also points to confidence in the new market for clean energy tax credits. The average credit price was 92 to 94 cents per dollar of tax credit.
According to Crux’s survey and analysis, all market participants – buyers, sellers, and intermediaries – believe this market is about to boom.
“The clear majority of market participants expect the market to grow significantly in 2024, in both participation and deal size,” Crux said in the report.
“This consensus indicates that buyers, sellers, and intermediaries largely share the view that participants were ‘testing the market’ in 2023 with intention to commit more fully in 2024.”
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Meanwhile, the U.S. clean energy industry set a third-quarter installation record, although challenges to growth remained, the American Clean Power Association (ACP) said in its latest quarterly report in November.
The industry brought online 5,551 megawatts (MW) of utility-scale clean power capacity in the third quarter of 2023, enough to power 813,000 American homes. Third-quarter installations increased by 13% year-over-year and set a record for the strongest third quarter to date. Clean energy developers began commercial operations at 88 projects across 24 states, ACP said.
“Even as we face a number of near-term challenges, these record-breaking numbers tell us that the U.S. clean energy sector continues to grow on a healthy, long-term trajectory,” ACP CEO Jason Grumet said.
By Tsvetana Paraskova for Oilprice.com
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