The Biden administration’s $370 billion clean energy aid package is boosting activity from consultants, lawyers and brokers after it allowed green tax credits to be sold on the open market for the first time.
Clean energy finance veterans say the groundbreaking structure of the incentives in the Inflation Reduction Act could prove as significant as their unprecedented size, offering new sources of capital and a range of opportunities for intermediaries.
Entrepreneurs are already exploring new products, including tax credit trading platforms, to take advantage of the legislation.
Meanwhile, the first sale of the IRA tax credit could happen at any moment, lawyers and consultants told the Financial Times, as financial terms from renewable energy developers are already circulating.
“The market is now. People are working feverishly to set this up,” said Greg Matlock, head of US renewables at consultancy EY. “It’s a booming industry on multiple fronts.”
The IRA has been billed as the largest energy transition aid package of any country, spreading much of the government’s money into the green technology supply chain and causing consternation in Europe that it could attract significant investment to the United States.
The law gives developers and manufacturers of renewable energy projects new ways to get tax credits up front — a critical element because projects typically don’t generate taxable profits for years.
Companies with tax liabilities they want to pay have been able to invest in “tax equity” partnerships with developers, but the deals involve complex, long-term commitments, so players have been limited to big banks and a few other groups.
“The tax base favors certain types of projects and certain types of investors, but we don’t need JPMorgan to tell us we have a good project,” said John Gimigliano of KPMG’s national tax practice. “It’s the democratization of finance.”
More companies are expected to be tax credit buyers, said Elias Hinckley, a partner at law firm Baker Botts, now that they don’t have to endure the “brain damage” of tax equity partnerships. According to EY’s Matlock, the credits have attracted companies that do not have a significant tax liability every year but want to enter the market occasionally.
The IRA aims to spark an influx of capital into emerging sectors such as hydrogen, renewable gas and especially battery manufacturing — among critical new technologies as the Biden administration tries to compete with China in the global race for clean energy, and coal -decarbonises the American economy. .
In addition to the 30 percent investment tax credit, some developers who meet wage requirements or locate projects in former fossil fuel areas may receive additional tax credits.
Vinson & Elkins attorneys said the credits are equal to 50 percent of the project’s fair value, but 60 to 65 percent of the developers’ hard costs. Early indications are that tax investors can buy $1 in tax credits for about 90 cents.
The IRA also allowed developers of solar projects to take tax credits based on annual production instead of the initial investment, meaning they could be sold in smaller lots to a wider range of buyers. “There are only so many tax investors who can write the big check,” said Vinson & Elkins attorney Mike Joyce. “The IRA has resolved and addressed some of the capacity disruptions.”
Lawyers and consultants said they’ve seen a big uptick in work since the law passed, and more is expected as new financial structures emerge and buyers and sellers of tax credits need due diligence.
Erik Underwood, who worked as a corporate financier on renewable energy projects for Marathon Capital and Aela Energia, founded the startup Basis Climate in October, two months after the IRA passed. Basis aims to be a marketplace for tax credits for relatively small-scale solar energy projects.
“The IRA is a game-changer for climate finance,” Underwood said. “Our view is that this will enable the next thousand companies to participate in climate projects.”
The IRA also created an opportunity for new types of insurance products, said Jordan Tamchin, head of the tax insurance practice at brokerage CAC Specialty. There can be considerable subjectivity in calculating the value of a tax credit, and therefore there is a risk that some or all of it could be clawed back by the Internal Revenue Service in an audit, he said.
He predicted that the first tax credit transfer could be finalized by the end of this month.
Hinckley, a lawyer at Baker Botts, said significant uncertainty remained about the law’s implementation as the US Treasury Department worked to issue guidance on loan transfers and other provisions. Traditional tax equity structures may dominate for a while, he said, while loans are sold on margin. However, IRA-stimulated activity will increase rapidly.
“Right now I would describe it as 95 percent enthusiasm and 5 percent activity, but in the next few months that will change and there will be a lot of dollars flowing in,” he said.
Where climate change meets business, markets and politics. Explore the FT’s coverage here.
Are you curious about FT’s environmental sustainability commitments? Learn more about our science-based goals here