The tax code change unleashing $25B in clean energy investment

Tax credits are the driving force behind the Inflation Reduction Act’s unprecedented investment in clean energy. But there’s a catch to relying on tax credits: The amount of money a company can receive from them is limited to what it pays in taxes each year.

In recent decades, a workaround that helps firms monetize a greater amount of tax credits — and therefore build more solar, wind, storage, and other clean energy projects — has blossomed. Known as the tax equity market, it’s now a roughly $20 billion per year financial sector in which banks and other large financial institutions partner with clean energy developers and use their tax credits to reduce their massive tax burdens.

But even this approach has its limitations. That’s why the climate law sought to revolutionize how clean energy developers and other companies earning tax credits can monetize them by introducing a concept called transferability — and so far, it looks to be a runaway success.

So finds the latest report from Crux Climate, one of the companies working in this rapidly growing field. By year’s end, Crux forecasts that the volume of transactions in this new market will reach $22 billion to $25 billion, up from just $4 billion last year.

That’s an extraordinary pace of growth for a class of clean energy tax-credit financing that didn’t exist until mid-2023, said Crux CEO Alfred Johnson.

“Transferability is on a path to eclipse the traditional path of tax equity — if not this year, then in 2025,” Johnson said. And while ​“it took decades for tax equity to reach that size, transfers got there in about 15 months.”

Why transferability is a big change

The transferability market’s growth is a testament to the radically simpler nature of this approach compared with the traditional tax-equity structure.

Under the old rules, investors seeking to use credits to offset their taxes have to be co-owners of the project claiming them. That requires project developers to set up complex and specialized partnerships and structures with banks and investment firms with large tax liabilities, which has limited the market to only the largest and most sophisticated project developers and would-be financiers.

Transferability, by contrast, allows manufacturers of advanced energy technologies, wind and solar project developers, battery and EV-charging installers, and other cleantech sectors eligible to receive tax credits to sell them directly to companies or institutions looking for a way to reduce their tax burden.

That’s a simpler approach, though maybe not as simple as it sounds. That’s why companies like Crux, Basis Climate, Common Forge, Evergrow, Ever.green, Reunion Infrastructure, and others have stepped in to create and manage marketplaces that enable credit recipients and would-be buyers to structure deals, assist in due diligence, and secure insurance for tax-credit ​“recapture” risk, among other steps required to complete transactions.

Nor have tax-credit transfers supplanted traditional tax-equity markets, Johnson said. All in all, Crux forecasts that total U.S. tax-credit monetization will exceed $40 billion. A similar forecast from Reunion Infrastructure in September pegged the total 2024 market at $45 billion and up, of which $21 billion to $24 billion is expected to be transfers.

But transfer markets are open to a much wider variety of buyers and sellers of tax credits. That’s crucial to realizing the full potential of the scale and range of clean energy tax credits created by the Inflation Reduction Act, which will require more participation than what the traditional tax-equity markets can provide.

“There is far more demand for tax equity than there is supply,” said Keith Martin, an attorney with law firm Norton Rose Fulbright and an expert on clean energy tax equity. Transferability is ​“a way of relieving pressure on the market, by making it possible for small and midsize developers who struggle to raise tax equity to finance their projects.”

Johnson agreed that ​“only utility-scale developers with established technologies and a track record were able to access tax-equity financing.” Smaller-scale projects could tap into tax-equity markets only by being acquired into larger portfolios, he said.

With transferability, ​“we’ve seen smaller deal sizes transact in the transfer market, and newer technologies being able to access the market with reasonable speed,” he said.

The typical tax-equity deal is at least $100 million. But more than 80 percent of the transferability deals Crux tracked in 2023 were below $50 million, although bigger deals have taken a larger portion of the market since then, he noted.

Earlier this year, clean energy developer Black Bear Energy and finance company Evergrow closed a tax-credit transfer of undisclosed value for 556 kilowatts of solar projects for multifamily properties — a scale of distributed solar development that would have had to be bundled into a bigger portfolio to tap into tax-equity financing in the past.

On Monday, Navajo Power Home, which provides solar and battery systems for off-grid homes on Navajo and Hopi lands, announced that it had worked with Basis Climate to sell what might be the smallest tax-credit transfer to date — a $355,000 investment tax credit tied to solar-battery systems for about 100 homes. In a press release, Basis co-founder Derek Silverman cited the deal as a proving point for the company’s goal to ​“make it easy for buyers and sellers alike to transact on sub–$1 million deals.”

At the same time, tax-credit transfers are also bankrolling major projects. Bank of America got the ball rolling in August 2023 with a deal to buy $580 million in wind-energy tax credits from a $1.5 billion wind farm being built by clean power developer Invenergy. Multiple $100 million–plus transfers have closed in the past 15 months for utility-scale clean energy projects involving wind-power developer Avangrid and solar developer Recurrent Energy.