Success of Clean Energy Tax Market to Fend Off Any Rollback Bid

The outcome of the national election has sown doubt around tax credits about what will happen in a reconciliation bill oriented toward tax or energy under the new Congress.

However, there is a reason for hope going into 2025, and the success of tax credit transfer is a big part of that.

In 2022, many people in the tax community were stunned when Congress created a broad ability to transfer energy tax credits. The concept was promising for creating more deals and greater opportunities to finance and build energy projects. It didn’t take long for that promise to be realized.

Energy tax credits are project finance tools, so their value depends on monetization. Closing more tax credit transactions means building more electricity generation plants and, increasingly, alternative fuel production plants.

While not as streamlined as some predicted, transfers are quicker to document and more straightforward to diligence. Thus, more transactions can be concluded more quickly and with lower cost.

Buyers of tax credits may realize financial benefits from transfer in addition to cost savings. Well-timed transfer transactions lead to smaller payments in respect of quarterly estimated tax because buyers don’t pay for the full amount of credits in a transfer transaction. Smaller payments reduce cash flow pressure. Further, avoiding an estimated tax payment increases a buyer’s return on its investment in tax credits because the money that would be paid to the IRS is contemporaneously diverted to a private party.

Realized savings are always more attractive when tied to minimal risk. Risk and reward depend on when the credit is created and when it’s paid for—an example would be the date an investment tax credit project is placed in service or when a production tax credit facility produces the applicable commodity. They also depend on whether the credit may be lost.

As a result, we’re seeing lower prices for investment tax credits than for production tax credits. Some investment tax credit projects are pricing lower based on perceived recapture risk—the risk that the credit must be repaid to the government if the project stops operating or is sold in its first five years.

But perhaps the biggest reason for energy tax credit transfers taking off is that transferees don’t directly or indirectly own the asset that produces the tax credit. This means that a transferee—unlike a tax equity investor—is never at risk of consolidating a project on its financial statements or explaining its performance to stakeholders.

These are key reasons why some corporations have historically shied away from tax equity. Transferring tax credits eliminates these factors entirely by stripping the transaction down to an acquisition of a mere tax asset.

Finally, some market participants are considering the value of tying tax savings to sustainability. This remains difficult with tax credit transfers for the same reasons that it’s difficult to tie the value of tax savings through tax equity investment to sustainability.

One criticism in this regard is that transfer transactions often happen toward the end of the project development cycle or after placement in service. But that ignores the fact that project developers increasingly use bridge loans underpinned by the tax credits and expect repayment using transfer proceeds.

A boom in manufacturing credits under Section 45X and potentially Section 48C of the tax code are on the horizon. Over the last two years, we’ve seen a steady increase in investment in domestic manufacturing plants oriented toward Section 45X credits, and recently have seen more sales of these credits and the beginning of some novel structures associated with them.

Section 45X credits are for specific components of solar, battery, and wind projects, as well as a variety of inverters and critical minerals. They’re also production tax credits, which are lower risk since they’re not subject to recapture.

Code Section 48C credits are an application-based investment tax credit that may be awarded for manufacturing lines producing a variety of products, such as alternative fuel vehicles and electrolyzers, as well as environmental efficiency improvements at existing manufacturing plants.

However, Section 48C credits are at political risk. Many of the awards from these credits haven’t been finalized and, with the change in administration, the new executive team may simply drop them to reduce the need for “pay fors” in the reconciliation process.

Yet, terminating the allocation cycle would hurt the US manufacturing base. These credit applications have withstood a gauntlet of feasibility reviews and stand to benefit technologies that the market—not just Congress—sees a need for.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Elizabeth Crouse is tax partner at Holland & Knight in Portland.

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