A long-awaited final rule released April 25 outlining how tax credits for clean energy projects can be transferred under the Inflation Reduction Act made no significant changes to the guidance under which renewable developers and investors have been operating.
That guidance, released in June 2023, expanded and reshaped renewable project finance markets in the US through transformative provisions including the establishment of "elective payment," or direct pay, which allows electric cooperatives and other tax-exempt organizations to claim the equivalent of a tax credit as a cash payment from the IRS; and "transferability," which allows for-profit project owners to raise cash by selling federal tax credits to a third party.
Although the final rule from the US Treasury Department's Internal Revenue Service contained no significant differences compared to preliminary guidance, the agency did respond to comments calling for changes, according to Keith Martin, renewable energy tax expert and co-head of projects at Norton Rose Fulbright.
"The main two rejections are the IRS rebuffed suggestions that it should make it easier for individuals to buy tax credits — most tax credit buyers are large companies — and it rebuffed suggestions that it should allow bonus credits to be sold separately from the underlying base tax credits," Martin wrote in an email.
The agency also declined to modify guidelines allocating to tax credit buyers the risk that investment tax credits will have to be taken back, or recaptured, if there are any ownership changes within a project's first five operating years.
"Commenters recommended that the final regulations allocate the risk of recapture to the eligible taxpayer for several reasons, including that the eligible taxpayer would have the greatest ability to cause or prevent a recapture event," the final rule said. "Other commenters stated that placing the risk of recapture on the transferee taxpayer creates increased transactions costs, reduces the number of market participants, and distorts the market value of the transferred credits."
That risk will be "pretty onerous" for buyers, and any "credit support backstopping the transferors' representations are going to impact pricing," said Mona Dajani, a project development and finance attorney at Shearman & Sterling, describing the provision in a June 2023 interview.
The final rule also confirms a 20% penalty for excessive transfers that can only be avoided by significant due diligence involving third parties to confirm the availability and amount of credits in a transaction.
Alfred Johnson, co-founder and CEO of Crux Climate Inc., which operates a platform for buyers and sellers of the transferable tax breaks, noted in an email that the final rule also "affirmed that future year tax credits can be used to underwrite loans, creating valuable liquidity for project developers."
Crux had $8.8 billion of tax credits for sale on its platform as of April 3, according to a company report.
In 2024 so far, Crux "has seen the emergence of more advanced bridge lending strategies and joint venture structures designed to enable a step-up in basis to fair market value for [investment tax credit] projects," the company said.
The investment tax credit provides a base rate of 6% for a project up front, while the production tax credit provides a base credit rate of 0.3 cent/kW that can be claimed annually for the first 10 years of a project's operation that is viewed as lower-risk.
Renewables projects that have used tax credit transfers to finance development in 2024 include Matrix Renewables Spain SL's 200-MW Pleasant Valley solar facility in Idaho and Vesper Energy Development LLC's 600-MWac Hornet Solar Project in Texas.
Alliant Energy Corp. management said in February the company is planning about $200 million in tax credit transfers for 2024 and estimates tax credit sales will exceed $300 million annually starting in 2025.
Many project developers are also opting for hybrid structures that combine tax equity and tax credit transfers from the beginning as the tax equity market likely maxed out at the $20 billion banks invested in 2023.
"The rules will strengthen existing transfer markets and add much-needed liquidity for clean energy businesses as they navigate high interest rates and other economic headwinds," Ben Norris, vice president of regulatory affairs at the Solar Energy Industries Association, said in a statement.
The tax credit transfer market has "grown from zero to four billion-plus in the last 12 months," S&P Global Commodity Insights Climate and Cleantech Executive Director Peter Gardett estimated in February. This growing market has helped to partially offset investors' hesitation around tax equity stemming from proposed increases to capital requirements for large banks under the yet-to-be finalized Basel III global banking standards.