President Joe Biden’s landmark climate legislation, the Inflation Reduction Act (IRA), has ignited a thriving multibillion-dollar market for clean energy tax credits in a remarkably short period. The surge in activity stems from a provision in the IRA that enables project developers and manufacturers to directly sell their credits for cash, thereby facilitating the transferability of tax breaks.
Guidance from the US Treasury Department and Internal Revenue Service has confirmed that this provision encompasses 11 types of tax credits. Revolutionizing the landscape of clean energy financing, the IRA has liberated developers from navigating restrictive and intricate tax equity deals, which previously constrained their access to capital primarily from a limited pool of investors, predominantly large financial institutions.
Frank Burkhartsmeyer, the CFO of battery storage developer GridStor LLC, highlighted that the IRA has hastened the energy storage sector’s ability to deliver cost-competitive zero-emission capacity. This effect is particularly pronounced in regions where renewables have surpassed capacity market growth. GridStor recently announced its inaugural tax credit sale to JPMorgan Chase & Co. to bolster its California Goleta Battery Storage Project, emblematic of the broader trend of soaring solar PV and battery storage installations in the US, propelled by the IRA’s impact on clean power financing.
The IRA has notably bolstered the battery storage industry by introducing new investment tax incentives and providing an alternative to traditional tax equity financing structures. Developers now have the flexibility to sell tax credits for cash, attracting a broader range of corporate taxpayers to support diverse projects. Market participants and analysts stress that the IRA has diversified the pool of potential investors, leading to increased competition in pricing and more appealing financing structures for financial powerhouses like JPMorgan Chase and Bank of America.
Arevon Energy Inc. President and CEO Kevin Smith emphasized the critical role of a robust tax credit transferability market in meeting the renewable energy sector’s demands, underscoring the necessity for additional players to enter the market to ensure its vitality. Arevon recently secured financing for its Condor Battery Storage Project in California amounting to $350 million, accompanied by commitments from Stifel Financial Corp. to acquire investment tax credits.
Unleashing the Potential of Clean Energy Tax Credits
The tax credit transfer market witnessed a substantial surge in activity in 2023, estimated to reach $7 billion to $9 billion, as per Crux Climate Inc. This momentum is anticipated to persist, with Crux CEO Alfred Johnson projecting the market to double in size in 2024. Crux has observed significant interest, with nearly $9 billion in tax credits available for sale on its platform.
Buyers are submitting approximately $1.5 billion in bids in the first quarter of 2024, primarily focusing on renewable energy and battery storage projects. The burgeoning renewables and battery storage sectors are poised to propel the growth of the clean energy tax credits market, with some analysts asserting that this financial mechanism is more effective than carbon pricing due to its lesser impact on energy costs.
For example, a study on a clean energy tax revealed that its benefits outweigh its costs by four times. Furthermore, the study demonstrated that the tax incentives yield higher emission reductions per tonne of CO2 compared to other available climate policies.
Scaling Up for the Clean Energy Future
Johnson from Crux underscored the imperative need for the clean energy tax credit market to significantly scale up to meet future demands, aiming for a $50 billion market by the decade’s end. This expansion necessitates enhanced participation, efficiency, and standardization across the market.
Diversifying the pool of tax credit buyers, encompassing large banks, smaller financial services firms, and companies from various sectors such as industrial, energy, retail, and technology, can help mitigate economic uncertainties and regulatory challenges. By broadening the participation base, the market becomes more resilient to shocks affecting specific sectors.
Reunion Infrastructure Inc., another platform for tax credit transfers, has also witnessed substantial growth, with over $6 billion in credits available for sale on its platform. CEO Andy Moon projected the market to surpass $80 billion by 2030, indicating robust long-term growth potential. The market’s rapid expansion is evident from various industry estimates, with projections ranging from $4 billion to $9 billion in 2023.
An executive from S&P Global Commodity Insights highlighted the market’s remarkable growth rate, despite its fundamentally untested nature. This growth trajectory underscores the market’s potential to become a significant player in clean energy financing, as more deals are finalized, and additional buyers enter the market, solidifying the role of transfer credits in expediting the transition to a sustainable energy future.
