Clean Energy Tax Credits Open New Market for Big Companies

The Biden administration is taking steps to facilitate the purchase of clean energy tax credits by large companies, fueling the growth of a new market central to last year’s climate legislation.

This system aims to attract fresh capital to projects involved in clean energy generation, including wind power, solar energy, clean hydrogen, and battery technology, among others. President Biden, his advisors, and numerous climate analysts consider the utilization of tax credits to expand the pool of investors in clean energy projects crucial for achieving the United States’ emissions reduction targets.

On Wednesday, the Treasury Department introduced proposed regulations outlining the process for clean energy developers to sell their tax credits. Additionally, the government issued related rules to enable state and local governments, nonprofits, universities, and tribes to claim tax credits, even if they are exempt from income taxes.

Many clean energy companies do not generate sufficient profits to utilize all of the available tax credits. Consequently, under the new rules, a utility-scale solar installation could sell its tax credits to a technology company seeking to reduce its tax liability, despite having no direct involvement in the project. Similarly, a school district could receive a direct cash payment for purchasing electric vehicles equivalent to the tax credit that a for-profit entity could claim.

“Today marks a significant milestone on our path to a clean energy future,” remarked John Podesta, the White House climate adviser.

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The traditional approach for monetizing otherwise unusable tax credits involved a complex system called tax-equity financing, which incurred substantial transaction costs and primarily attracted interest from banks and insurance companies.

Since the passage of the new climate legislation, market participants have actively engaged in negotiations for streamlined tax-credit transfers while awaiting the finalization of government rules. The proposed regulations outline reporting requirements for projects and establish the conditions for selling credits.

Tax credits can be transferred only once, with the recipient generally assuming the legal risk of potential audits. Lawyers and dealmakers anticipate that buyers will purchase tax credits at a discount, with prices varying depending on the project developer’s track record and other factors. Many anticipate prices to surpass 90 cents on the dollar, meaning that a large company could pay over $90 million for $100 million worth of tax credits.

Keith Martin, co-head of U.S. projects at law firm Norton Rose Fulbright, specializing in tax credits and project finance, stated, “This market will quickly gain momentum.” He highlighted that the firm has nearly finalized three transfer deals, pending Treasury guidance, while an additional 17 deals are at different stages of development.

Existing tax-equity investors like JPMorgan Chase and Bank of America are exploring opportunities to leverage transferable tax credits, while companies new to this type of investment may require more time to become comfortable with the emerging market.

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However, uncertainties remain. Some buyers may opt for insurance policies to safeguard against potential Internal Revenue Service rulings that certain projects are ineligible for tax credits. Furthermore, new international tax regulations may restrict U.S. companies’ ability to utilize transferred credits for tax reduction purposes.

According to recent estimates from both public and private sectors, the clean-energy credits under the Inflation Reduction Act have proven more popular than initially projected, potentially costing the government hundreds of billions of dollars more than anticipated.

Congressional Republicans argue that many of these credits disproportionately benefit corporations and resemble spending programs rather than tax cuts. Earlier this year, the House voted to repeal numerous new and expanded credits, and the Ways and Means Committee recently voted to scale back a smaller set of credits. However, Biden and the Democratic-led Senate are likely to block these efforts.

“It’s obvious which party is bailing out the wealthy,” commented Rep. Jason Smith (R., Mo.), chairman of the committee.