The Biden administration’s $370bn package of subsidies for clean energy is generating a surge of activity for consultants, lawyers and brokers, after allowing green tax credits to be sold on the open market for the first time.
Veterans of clean energy finance say the groundbreaking structure of the incentives in the Inflation Reduction Act could turn out to be as significant as their unprecedented size, bringing new sources of capital as well as a host of opportunities for middlemen.
Entrepreneurs are already exploring new products, including trading platforms for tax credits, to capitalise on the legislation.
Meanwhile, the first sale of an IRA tax credit could come any moment, lawyers and consultants told the Financial Times, as financial term sheets from renewables developers are already circulating.
“The market is now. People are working feverishly to get this up and running,” said Greg Matlock, renewable energy leader for the Americas at the consulting firm EY. “This is a burgeoning industry on multiple fronts.”
The IRA has been hailed as the largest package of support for the energy transition by any country, extending government largesse deep into the supply chain for green technologies and causing consternation in Europe that it could pull significant investment away to the US.
The law gives developers of renewable energy projects and manufacturers new ways to get the value of tax credits upfront — a critical element, since projects typically do not make taxable profits for years.
Companies that do have tax liabilities they want to offset have been able to invest in “tax equity” partnerships with developers, but the deals represent complex, long-term commitments so the players have been limited to big banks and a few other groups.
“Tax equity favours certain kinds of project and certain kinds of investors, but we don’t need JPMorgan now to tell us we have a good project,” said John Gimigliano of KPMG’s national tax practice. “It is the democratisation of finance.”
More companies are expected to become buyers of tax credits, said Elias Hinckley, partner at the law firm Baker Botts, now that they do not have to endure the “brain damage” of a tax equity partnership. EY’s Matlock said the credits would appeal to companies that did not have significant tax liabilities every year but wanted to step into the market occasionally.
The IRA is designed to spark an influx of capital into nascent sectors such as hydrogen, renewable gas and especially battery manufacturing — among the new technologies considered critical as the Biden administration tries to compete with China in a global clean energy race and decarbonise the American economy.
On top of a 30 per cent investment tax credit, further tax breaks are available to certain developers complying with wage requirements or locating projects in former fossil fuel areas.
Stacked up, the credits will be equivalent to 50 per cent of a project’s fair value, but as much as 60 to 65 per cent of developers’ hard costs, said lawyers at Vinson & Elkins. Early indications suggest tax investors could buy $1 of tax credits for about 90 cents.
The IRA has also allowed developers of solar energy projects to take tax credits based on annual production instead of based on the initial investment, meaning they can be sold in smaller chunks to a wider range of buyers. “There’s only so many tax investors that can write the big cheque,” said Mike Joyce, a Vinson & Elkins deal lawyer. “The IRA has unlocked and dealt with some of the capacity logjam.”
Lawyers and consultants said they had seen a big uptick in work since the passage of the law, with more to come as new financial structures are developed and buyers and sellers of tax credits start needing due diligence work.
Erik Underwood, who had worked as a corporate financier on renewables projects for Marathon Capital and Aela Energia, founded the start-up Basis Climate in October, two months after the IRA’s passage. Basis is aiming to be a marketplace for tax credits on relatively small solar projects.
“The IRA is a sea change for climate finance,” Underwood said. “Our view is that it will enable the next thousand companies to participate in climate projects.”
The IRA has created an opportunity for new kinds of insurance products, too, said Jordan Tamchin, tax insurance practice leader at CAC Specialty, a broker. There can be significant subjectivity in calculating the value of a tax credit, and therefore a risk that the Internal Revenue Service might claw back some or all of it in an audit, he said.
He predicted the first tax credit transfer could be finalised by the end of this month.
Baker Botts attorney Hinckley said that considerable uncertainty remained over the implementation of the law, as the US Treasury works to put out guidance on the transfer of credits and other provisions. Traditional tax equity structures could dominate for a while, he said, with sales of credits happening at the margins. However, activity spurred by the IRA will increase quickly.
“I’d characterise it as 95 per cent enthusiasm and 5 per cent activity at the moment, but in the next few months that will change and there will be a lot of dollars flowing,” he said.
