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RETC Community Adapts to Realities of Post-IRA Market, Novogradac Conference Panelists Say

Published by Nick DeCicco on Friday, December 8, 2023

Journal Cover December 2023   Download PDF

The possibilities presented in the 2022 Inflation Reduction Act (IRA) for renewable energy tax credits (RETCs) continue to evolve from concept to reality and the industry is adapting, said speakers during the Monetizing Tax Credits: Tax Equity, Transferability, More panel Nov. 2 at the Novogradac 2023 Fall Renewable Energy and Environmental Tax Credits Conference.

“I think we were all really excited when the IRA was passed last year and when the transferability guidance came out in June, but now we are all experiencing the rubber hitting the road as we move into the execution phase,” said Timmi Kloster, vice president of business development, RETC syndications for U.S. Bancorp Impact Finance.

Kloster was one of five participants who spoke with moderator Jordan Tamchin, senior vice president and tax insurance practice leader with CAC Specialty, during the panel. The hourlong discussion touched on what the tax credit market looks like, tax equity structures, the transferability market and elective pay.

What the Tax Credit Market Looks Like

Mark Williams, managing director with PNC Bank and one of the panelists, said there’s more demand for tax credits than there is supply and felt that, as the calendar year neared its end, the market for the transfer of federal RETCs–a possibility created by the IRA–was heating up. More projects are chasing tax equity than is available from traditional sources, Williams said, and he is hopeful the transfer market can fill that gap.

Kloster said U.S. Bancorp Impact Finance serves as a direct investor and syndicator of RETCs and is having banner years in both in light of all the opportunity being brought to the tax equity markets through the IRA, most notably with transferability. “Transferability is really where we expect to see the demand growing the market share given that investors will no longer need to enter into complex partnerships to acquire these tax credits with the added benefit of more simplified accounting conclusions,” Kloster said.

Alfred Johnson, co-founder and CEO of Crux Climate and another panelist, said 2023 has seen a pendulum swing over the course of the year, with more developers looking to sell credits than potential buyers early in 2023. That switched after the release of transferability guidance in June, Johnson said, and as 2023 nears its end, there’s little deal volume left and people are chasing what’s there.

“On the margin, that is pushing up prices and making deals very competitive,” Johnson said.

As far as types of investors, Williams said corporate entities are entering the market and anticipates that trend to only increase in 2024. Johnson said he’s seen a bevy of investors, including two categories of new entrants: Large public companies exploring for the first time and banks and/or private companies that previously provided low-income housing tax credit financing. Johnson said new entrants tend to lean on tax advisers for expertise and sometimes deal directly with developers as well.

Tax Equity Structures

Andrew Bernstein, managing partner with solar developer and financier Kearsarge Energy and a panelist, said he’s seeing declining interest in the inverted lease structure due to its unavailability to tax credit transfer transactions. 

“I think most of the colleagues here will say there there’s less interest in that now,” Bernstein said.

Several panelists said the partnership flip structure is on the rise since it is available in transfer transactions. The ability to monetize 99% of the tax credit is advantageous, said Adam Schurle, a partner with the law firm Foley & Lardner and member of the panel. Partnership flips allow for the possibility of selling the project for its fair market value, something Schurle said is generally unavailable for direct-equity transactions. Schurle and Kloster said hybrid approaches with traditional tax equity investors involved in partnership flip transactions are increasingly common.

“There are a lot of possibilities,” Williams said. “It’s still developing. I know a large number of sponsors are embracing this because it helps them get deals off the ground without the bottom line of traditional tax equity.”

The partnership flip is likely to be the dominant structure for some of the nation’s largest projects, Johnson said. Developers get a basis step up and can monetize depreciation; banks or investors provide the flip, buy the depreciation and can earn fee revenue on disposing of tax credits with syndication. Having a bank in a transaction brings confidence that diligence has been done on a transaction.

“It makes it a perceived de-risked kind of credit versus other credits that you might buy directly,” Johnson said. “It’s the sort of structure where everybody is getting something that they want.” 

Solar projects are becoming more complicated, Bernstein said. 

“Costs are up, there’s interconnection, so there’s not quite as much when you look at the operating cash flow to pay some of these prices,” Bernstein said. “If you are going to bring on project-level debt or even back-level debt, you’ve got to make sure there’s enough cash in there, so modeling that out makes a really interesting case to say I should really transfer come of these credits if I’m going to do the in-credit value.”

Transfer Market

While there’s tremendous energy and appetite for the transfer market, Kloster said novelty is creating complexity.

“It’s just a whole new platform that everyone’s trying to build out,” Kloster said.

Kloster and Schurle said coming up with a standardized set of documents, particularly with regard to the scope of representations and warranties as well as indemnities, is adding challenges.

“We’ve been involved in, at various stages, probably 12 to 15 transfer transactions and we probably have seen 12 to 15 different sets of documents,” Schurle said. “The documentation is something that is very complicated and still being heavily negotiated. I think eventually the industry will start to see more standardization on that front, but, at this point, it’s a lot of legwork.”

Johnson said there’s tax insurance on every deal in Crux Climate’s pipeline, with Schurle adding that indemnity is “heavily negotiated in transfer agreements.”

Johnson categorized and ranked pricing for transfer of tax credits into four groups: 1) Production tax credit (PTC) transactions, 2) sponsor-backed development projects, 3) projects from smaller developers and 4) small projects around or below $1 million. Johnson said people discuss pricing “as though it’s monolithic,” and noted that’s typically not the case.

“There are a bunch of different factors that are going to influence supply and demand,” Johnson said. “I think this will be a market where pricing shifts on a pretty frequent basis.”

Williams said the market is broad, inefficient, immature at this stage and sensitive to timing.

“There’s a time-value of money the closer you get to a quarterly tax filing date, the more valuable the credit becomes. So that’s a key takeaway,” Williams said. Kloster agreed. 

Another key takeaway, Williams said, is tax investors have no appetite for any risk.

“That’s totally unacceptable,” Williams said. “They need to get that credit, so they need an insurance policy, they need an indemnity. They’re not going to take that risk. Period. Full stop. Don’t try to sell that product.”

Elective Pay

The PTC, solar investment tax credit and Section 45Q Credit for Carbon Oxide Sequestration are available for elective pay, also sometimes referred to as direct pay.

Johnson said he’s seen bridge financing for elective pay due to the length of time it may take the government to close any gaps.

“There’s a lot of opportunity for finance, I think, in the last mile of these transactions,” Johnson said. 

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