The introduction of the transferability of federal renewable energy tax credits has been one of the hottest issues of 2023 in clean energy finance.

The passage of last year’s Inflation Reduction Act (IRA) has spurred unparalleled interest in the renewable energy sector in a multitude of ways, including the tax credit transfer option for incentives such as the solar investment tax credit (ITC) and the production tax credit (PTC).

The IRA has created an “explosion of growth” in terms of interest on developer and investor sides, said Bryen Alperin, managing director at tax credit syndicator Foss & Company, in May during the Monetizing Tax Credits: Tax Equity, Transferability panel at the Novogradac 2023 Spring Renewable Energy and Environmental Tax Credits Conference in San Diego, California. John Eliason, co-head of energy project finance for the Greenberg Taurig law firm, moderated the panel.

Alperin said projects that were difficult to bring together before the passage of the IRA are becoming viable now, pushing the industry players to increase the size of their pipelines.

Availability of Tax Credit Equity

But whether there’s enough tax credit equity available is another subject. Alperin was one of three panelists who said that in the short term, there may not be enough tax equity in the market available, but that as more investors enter and transferability stabilizes, “we’ll reach an equilibrium, hopefully.”

“I don't think there's actually adequate supply right now in the market of tax equity. Not yet,” said Darren Van’t Hof, managing director of environmental finance for U.S. Bank. Van’t Hof said that there is likely a coming labor shortage given the growth projections of just the solar and wind industries alone.

Jordan Tamchin, senior vice president and tax insurance practice leader with insurance firm CAC Specialty, said there’s an “imbalance” in tax equity at the moment, but that time will likely help to ameliorate those concerns. Tamchin said the greatest areas of growth he’s seen in the renewable space since the passage of the IRA include battery storage, fuel cells and carbon capture sequestration.

Van’t Hof cautioned that larger banks such as U.S. Bank may not be the best place to go when it comes to emerging technologies as banks are heavily regulated, meaning that even new products which seem viable can take years to bring online. “The systems within institutions aren’t designed to be innovative,” Van’t Hof said. “They're designed to control and manage risk. So, anything that's new takes time.”

Tax Equity vs. Transferability

Weighing the needs of a given project will also help determine whether a traditional tax credit equity structure or transferability is the best fit. Van’t Hof said there’s still a place for traditional renewable energy tax credit transactions as there’s still a need to monetize depreciation, provide project finance lending and bridge tax equity commitments, creating a bridge where lenders can capitalize until the credits are available. “Our phone is ringing every day,” Van’t Hof said.

Alperin agreed, saying Foss & Company’s structures for transactions have not changed, but that transferability adds new tools that participants in the industry can use.

‘Bad Boy Acts’

One complexity of transferability is who is legally liable for what Tamchin called “bad boy acts,” where there is intentional disposition of an asset or interest which triggers recapture. This is a controversial subject particularly on the issue of recapture. Tamchin said this is an area where the insurance market could play a role to alleviate the creditworthiness and possibly pay out the loss to the buyer. “But the insurers are going to want to be able to subrogate against the seller for that bad boy act,” Tamchin said.

Another idea supported by Tamchin is a clearinghouses or platforms that allow efficient transfer of tax credits. “I think it's a great idea and I think it will take off,” Tamchin said.

What’s Next

While the industry awaits further guidance on transferability and other aspects of the IRA, Novogradac and the Renewable Energy Working Group will work to provide analysis and commentary. The group, which is led by Novogradac partners, focuses on renewable, clean energy and energy efficiency tax credits, can provide professionals with the information and analysis needed to better understand the far-reaching effects of the IRA. Participants in the working group include attorneys, investors, syndicators, lenders, for-profit and nonprofit developers, sponsors, consultants and other renewable energy professionals. To join these individuals and help shape the industry in the future, consider joining the working group by visiting this link.