Clean Energy Financing: Is the Transferable Tax Credit Market Right for Your Company?

By: Pivot Energy

May 30 2024

The Inflation Reduction Act (IRA) ushered in a new era of clean energy financing by introducing transferable tax credits. Previously, only companies with substantial tax liability could benefit from the tax credits associated with renewable energy projects. Notwithstanding an organization’s tax liability, the financial structures necessary to monetize these tax credits can be costly and challenging to implement properly. The transferable tax credit market opens the door for a wider range of businesses by establishing a dynamic marketplace where companies with varying degrees of tax liability and risk tolerance can benefit from purchasing these credits to simultaneously reduce their tax burden and support the clean energy economy.

Whereas our first blog on this topic unpacked the key differences between transferable tax credits and traditional tax equity investments, here we’ll delve deeper into the crucial question – which entities could benefit most from the growing transferable tax credit market? Keep reading to determine which project finance mechanism might be preferable to your company’s portfolio.

Companies Best Positioned to Leverage Transferable Tax Credits

American tax codes can be daunting for even the most seasoned financial professionals. While the transferable tax credit market will cater to a wide variety of companies, it can be tricky to evaluate whether this new financial instrument is right for your business. Choosing between transferable tax credits and tax equity investments isn’t always going to be cut and dry. Let's break down the impact on large, medium, and small enterprises.

Small- and Medium-Sized Enterprises (SMEs)

The arrival of transferable tax credits marks a significant shift in renewable energy financing, enabling organizations to find opportunities for reducing their tax liability with renewable energy tax credits even without the massive tax liabilities of traditional tax equity investors. Renewable energy tax credits no longer need to be owned by the project owner. Moreover, the tax credits associated with a single project can be transferred to multiple tax credit purchasers. Under the previous paradigm, tax credits would be “left on the table” if the sole tax equity investor could not consume all of them. Lastly, transferable credits remove the need for complex tax equity partnerships, allowing entities to invest directly with project owners. This can streamline the process and potentially lower transaction costs.

All of these factors create a landscape of new opportunity for small- and medium-sized enterprises to access tax credits that did not exist prior to the passage of the IRA.

Large Enterprises

For bigger businesses with significant tax appetite, traditional tax equity opportunities remain robust. Demand for the traditional model is not expected to diminish significantly, even as novel opportunities for transferrable credits continue to expand rapidly. Traditional tax equity can still offer advantages over transferrable credits, particularly for larger projects or volumes of credits. Organizations with the resources and expertise to structure these investments can expect more financial efficiency from these complex structures that justify the additional effort and cost. 

New opportunities in transferrable credits cannot be overlooked as organizations evaluate their unique goals and circumstances in addition to their appetite for complexity and value. Larger institutions may be drawn to hybrid opportunities where some of the benefits, such as gain on sale and bonus depreciation, can still be utilized to generate additional tax credits while using tax credit transfers rather than tax equity investments to monetize those credits.

Helpful Questions to Ask Yourself

Whether you're a corporate giant or a growing business, transferable credits offer the flexibility to invest in a variety of projects and portfolios in your region previously only available to institutional tax equity investors. This access to new investment opportunities can enable the creation of local jobs and supporting community sustainability efforts. If you’re still not sure which method would be best for your business, here are some quick questions to ask yourself:

  • How much tax liability does your company typically owe? Large tax liabilities make you a prime candidate for offsetting them with tax equity investments.
  • Are you looking for pure financial return, a sustainability boost, or both? Diversifying your portfolio through transferable tax credits allows you to cater to various goals.
  • How comfortable is your business with potential project risks? Leveraging transferable tax credits to spread your investment across multiple projects can mitigate risk.

Ready to Explore Your Options?

Carefully assessing your specific needs will be critical to determining if transferable credits are the key to unlocking your clean energy investment potential. Consulting with experienced tax advisors and financial professionals is essential to navigate the legalities and determine the optimal credit type and volume for your company's needs.

The transferable tax credit market is a dynamic and rapidly evolving landscape. At Pivot Energy, we are committed to helping businesses navigate this new frontier of clean energy financing. If you’re interested in purchasing one of these tax credit opportunities, contact us today to see if your tax liability and timing needs align with one of our solar project portfolios.

 

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