Post-OBBBA, Transferable Energy Credits Still Crucial: CLA

The Impact of the One Big Beautiful Bill Act (OBBBA) on the Transferable Clean Energy Credits Market

Despite modifications brought about by the One Big Beautiful Bill Act (OBBBA), the transferable clean energy credits market remains a viable strategy for developers and investors. The OBBBA has preserved the framework for credit transferability, with some additional conditions, such as restrictions on transfers to certain foreign entities and swifter deadlines for wind and solar projects.

Introduced by the Inflation Reduction Act of 2022 (IRA), tax credit transferability has become a potent cash planning tool. Clean energy project owners could sell their tax credits for cash, facilitating easier capital access and strategic planning. Even with the advent of OBBBA, tax credit transferability largely remains, providing a solid groundwork for credit transactions for the coming years.

Understanding Tax Credit Transferability

Section 6418 of the Internal Revenue Code, enacted under the IRA, empowers entities that produce certain federal clean energy tax credits to sell them to unrelated parties for cash. This is particularly beneficial for developers who do not have enough tax liabilities to utilize the credits themselves. It also provides a viable alternative to traditional tax equity structures, which generally commit investors to partnerships for several years.

On the purchase side of the transfer market, C corporations greatly benefit from the savings offered by transferable credits. Despite the wide attraction, C corporation buyers have been the primary market drivers. By paying less than the face value for a credit (sometimes as much as 15%) and not being taxed on the savings, corporations have been able to reduce their tax duties and enhance cash flow.

OBBBA’s Influence on Tax Credit Transferability

While early drafts of the OBBBA suggested rollbacks to tax credit transferability, the final legislation largely preserved Section 6418, but with some new restrictions. These include the inability to transfer credits to prohibited foreign entities, mirroring broader national security and trade policy objectives, and changes to the underlying credits eligible for transfer. The most substantial of these pertains to wind and solar projects, which have been highly transacted in the market and now face a loss of eligibility due to the OBBBA’s expedited termination date.

Furthermore, the IRS tightened compliance and documentation standards, especially around the beginning of construction safe harbor provisions.

These changes necessitate many wind and solar developers to expedite project plans to maintain tax credit eligibility. For more in-depth information on this matter, you can watch CLA’s webinar on tax credit transferability.

Rising Popularity of Manufacturing Credits

Sections 45X and 45Z, created under the IRA, benefit certain clean energy manufacturing activities directly. These sections have become buyer favorites, due to their steady stream of credits and a lower risk profile. Plus, they can be transacted in tranches on a quarterly basis and are usually not subject to recapture.

For clean energy manufacturers in the United States, the Section 45X Advanced Manufacturing Production Credit, effective from January 1, 2023, has been a significant boon. On the other hand, the Clean Fuel Production Credit, introduced by Section 45Z, targets the transportation sector’s decarbonization and is expected to introduce a wave of new production tax credits to the market.

CLA’s Role in Facilitating Tax Credit Transactions

In spite of rollbacks of the IRA, the preservation of Section 6418 in the OBBBA opens up opportunities for tax credit monetization for both renewable energy developers and corporate taxpayers.

CLA’s renewable energy practice aids in executing tax credit transactions for renewable energy developers, corporate taxpayers, and high-net-worth individuals. With nearly 60 credit transactions accomplished in the last 12 months, the team understands the complexities of the transfer market and can guide you through credit purchases seamlessly.