Transferability is transforming clean energy project finance, say dealmakers
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The tax credit transferability provision included in the Inflation Reduction Act has introduced new deal structures and is allowing clean energy developers to secure project financing faster, said speakers at a Thursday panel at the American Council on Renewable Energy's Finance Forum.
'The closing of transactions has become so much easier,' said Gaurav Raniwala, global renewable energy leader at GE Vernova. 'You don't have to line up two different structures simultaneously and then close everything when there's already enough mess going on. And the type of players that are now able to enter the market has broadened significantly.'
A Wednesday report from Crux, a finance technology company that connects tax credit buyers and sellers, said lenders are 'increasingly' looking to finance less established technologies like carbon capture, and that 'this openness is supported by the robust and progressively more liquid market for transferable tax credits.'
Raniwala said that financing had previously relied on the tax equity market, which 'was limited in capacity. The industry wanted to be bigger.'
'If you really want to have a dominant energy industry which has abundance of supply to help with electrification, to help with all the AI stuff, we need all sources of energy out there,' he said. 'And I think what transferability did was it broadened the market from just traditional tax equity to a whole host of players.'
Crux's analysis said that 'tax equity structures have evolved to hybrid structures, or t-flips, which explicitly contemplate the sale of a portion of tax credits in the transfer market' and found that t-flips 'made up about 60% of the tax equity committed in 2024, and that share is expected to rise.'
'Historically, the tax equity market was about a $20 billion a year market dominated for many years by a handful of institutions,' said panelist Meghan Schultz, executive vice president and CFO at Invenergy. 'And with the transferability market, the size more than doubled … it allows the tax investor, the tax credit buyer, to be able to monetize those tax benefits without actually needing to be an owner in the project.'
Raniwala noted that transactions can also now be customized based on credit profile. 'As an example, you could do the traditional tax equity, but now you know you can transfer the credits, so you could also borrow against those credits from banks.'
Despite this sea change for project financing, transferability itself is endangered, as the budget bill that passed the House last month would eliminate or severely restrict transferability for the credits included in the IRA — and eliminate or shave down the credits themselves.
'The medium-term policy environment contains significant uncertainty, which investors in clean energy and manufacturing projects must navigate,' Crux said.
Crux's report noted that the Senate will have to pass its own version of the budget, and 'senators have telegraphed their desire to make substantive changes to the House's version. That said, the near-term uncertainty may lead some developers to face higher costs of capital, more limited capital availability, or higher equity requirements as they seek to finance their projects.'
Despite looming threats to the IRA, Crux's report took a bullish stance overall on the U.S. clean energy economy, noting that it 'directed nearly $340 billion in new investment in the United States last year.'
One factor driving new projects is the added transaction speed offered by transferability.
The tax credit trade has 'allowed people to close financing much more quickly, to not need to have that tax equity or tax credit buyer lined up at close, knowing that there is this liquid market for the tax credits,' Schultz said. 'It's facilitated speed to market for projects, because you can be efficient in your financing.' The lowered cost of debt and added flexibility of being able to lend against the expected transfer of your credits has also streamlined the process, she said.
David Haug, CEO of Bildmore Clean Energy, said the option to transfer the credits allows developers to choose 'whether you want to have a long term offtake contract, or a long term revenue contract or a hedge to lock in your revenues or not.'
'Most of the projects that we're providing [preferred] equity for have a significant component of merchant risk,' he said. 'So we do not require them to have long term offtake contracts. We also don't require them to have pre-sold the tax credit. If they want to go all the way to commercial operation with no tax credit sale agreement in place, we will do that because we're betting that the tax credit market is strong, and we're also betting that the merchant power market is strong.'
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IRA tax credit transfer transactions could reach $25B this year, says Crux
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