US Solar Tax Credit Transfer Market Sees Growth – pv magazine
TL/DR –
The Inflation Reduction Act (IRA) has allowed for the transfer of solar project tax credits from project owners to other commercial entities with tax liabilities, transforming the financial landscape of the solar industry. The old tax equity models required the future owner of the tax credits to share in the project’s risk, but the new system simplifies the process by eliminating the need for the new owner to be a partner in the solar project. However, for smaller projects, the documentation should be simpler, whereas larger projects still require substantial legal expertise, and some industry groups have found that traditional tax equity models may remain advantageous for larger projects due to the ability to sell the project’s depreciation.
The Inflation Reduction Act (IRA) and Solar Finance
The Inflation Reduction Act (IRA) has revolutionized solar finance by introducing transferable solar tax credits. This feature enables online transactions and the development of innovative techniques to enhance value.
Under the IRA, solar project tax credits can be transferred from the project owner to other commercial entities with tax liabilities. This simplifies the process, eliminating the need for the credit’s new owner to be a partner in the solar project.
Industry groups have found that for larger projects, traditional tax equity models may still be advantageous due to the opportunity to sell the project’s depreciation.
Recent Developments in Solar Tax Credit Transfers
Evergrow, a specialty finance company, announced their first IRA tax credit transfer in October, connecting high net worth individuals with Connecticut-based solar developer Davis Hill Development.
Larger solar tax credit transfer deals are also happening, as shown by Blackstone and Bank of America’s $580 million worth of tax credits transfer, funding $1.5 billion in solar and wind projects.
Tax Credit Transfer versus Tax Equity
Adam Shor, a boutique finance consultant, noted a growing demand for tax credits, influencing the tax equity market. According to Shor, tax credit transfer deals are gaining popularity due to their straightforward nature compared to tax equity partnerships which entail long-term risks in solar projects.
Performance Tax Credit (PTC) versus Investment Tax Credit (ITC)
David Burton, a tax attorney, said that large-scale projects often opt for the performance tax credit (PTC) over the standard investment tax credit (ITC). Analysis by CohnReznick Capital team shows that projects with higher capacity and lower costs benefit more from the PTC, while smaller projects gain more from the ITC.
Increasing Necessity of Insurance
Both experts agree on the increasing importance of insurance in these transactions to ensure the project’s eligibility for tax credits. Norton Rose Fulbright has covered this topic extensively in a detailed article.
Maximizing Return in Solar Projects
Shor emphasized a critical strategy for solar developers to maximize their returns: understanding and leveraging the “step up” in tax credit transfer deals. A “t-flip” (tax equity flip) strategy is becoming popular, where the project is initially sold into a traditional tax equity partnership to monetize available depreciation and then the credits are transferred to a third-party buyer solely interested in the tax credit aspect.
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