Clean Energy Credit Sellers Look Beyond Wall Street for Buyers

Green energy developers are looking to increase the market for energy tax credits by appealing to corporations in addition to their traditional investment bank customers.

The 2022 tax-and-climate law known as the Inflation Reduction Act allowed green energy developers to effectively sell credits for the first time. The move, plus the establishment of generous new and beefed-up tax credits, set off a wave of renewable energy development.

To cash in on the growing supply of credits, sellers will have to expand the pool of interested buyers beyond the traditional energy tax credit investors of big banks and other investment firms, since supply of the credits is now exceeding demand. Corporate buyers are gaining in interest, but for many, it’s the first time delving into the world of green energy tax credits.

US companies have already begun inking deals, but many more are needed to close the gap between supply and demand.

“Corporates need to come off the bench,” said Lauren Collins, a partner at Vinson & Elkins.

Once nonenergy companies that are new to tax credit investing start to understand the credit market and companies publicly disclose that they have saved millions of dollars through the tax breaks, “we’ll start to see more pressure on other corporates to start doing credit purchases,” she said.

The impact is largely on price. While sellers have no problem finding someone to buy their credits, the question is whether there’s enough demand to keep prices high enough to justify the cost to generate them.

Educating Potential Buyers

As the Treasury Department releases more guidance, energy developers are getting a good handle on how to claim credits and what will be eligible for the bonus credits, said Greg Matlock, EY Americas energy transition and renewable energy leader.

“The largest distinguishing factor is on the buy side where purchasers are quickly getting more comfortable with the process, the documents, and the risks,” he said.

There’s a lot for them to learn.

BDO Principal Gabe Rubio said corporations still getting comfortable with taking the first step to buy energy credits are spending a lot of time learning first.

“What’s having the greatest impact right now is heads of tax, heads of treasury, CFOs are talking to each other about doing these transactions,” said Rubio, who advises companies interested in capitalizing on tax credit opportunities.

Corporate executives are increasingly taking note of their peers’ and competitors’ experiences as deals are announced or show up in financial filings, he said.

“Say you’re VP of tax, and your VP of tax friend calls you and says, ‘Hey, have you heard about this?’ Or your CFO comes to you and says, ‘Hey, one of my friends told me about this,’” Rubio said. “That’s having a huge impact.”

As demand grows, he said, first-movers will be able to secure better pricing and terms before the market is flooded with buyers.

“The more educated companies that are willing to act sooner are going to generally get better price and payment terms,” Rubio said. “Those that act later in the year are going to just be in a situation where they have more limited options and as a result of that may end up paying a higher price because of that scarcity.”

A Growing Market

Data from Crux, which provides an online marketplace for transferable tax credits, estimated there were between $7 billion and $9 billion in transferable tax credit transactions in 2023.

A recent report by Evercore ISI estimates that more than $100 billion of transferable credits will be generated in 2030.

Not all of that $100 billion will be transferred. It will be divvied up between developers using them to offset their own tax liabilities, tax credit transfers, direct pay—in which tax-exempt groups get cash for the credits generated—and more traditional tax equity deals which, while much more complicated, allow developers and their investors to benefit from depreciation and a basis step up.

In a tax equity deal, a green energy developer and at least one investor form a partnership that gets the credit. The ownership of the credits is then passed on to the investor partners while the developer typically keeps ownership of the facility largely built with the investor funds.

While the transferability market has taken off, it’s going to take a lot more buyers to get in the mix to absorb the growing flood of green energy tax credits slated for sale on the new market. The traditional tax equity market accounts for about $20 billion a year, Matlock said, so a lot more will be needed on the transfer side to soak up whatever credits are left after that.

Sellers are banking on corporate giants to see the benefit to buying credits at a discount to offset their tax bills. Credit pricing indicates that buyers are getting comfortable with many of the deals getting done.

Collins said tax credit prices typically are being quoted at between 88 cents and 96 cents on the dollar. Companies buy credits at a discount, with the difference between the total value of the credit and the price paid totaling the tax benefit the buyers receive.

“If you can buy a $1 credit for 95 cents, you just saved your company 5 cents. Why wouldn’t you do that over and over and over again?” Collins said.

Hybrid Deals

Once corporate buyers are in, sellers and market makers are hoping they can upsell tax credit buyers into doing more complex, but more profitable, tax equity deals.

Foss & Company Partner and Managing Director Bryen Alperin said the complexity of tax equity deals can be intimidating, especially for companies new to the space. But as buyers get comfortable buying credits year after year, they may be open to taking the next step. Foss & Company works with institutions looking to invest in tax credits.

“A lot of them are still doing their first deal and wanting to buy some transfer credits,” Alperin said. “We’re hopeful that over the next two to three years that companies buying transfer credits today will eventually get into doing more complicated tax equity investments and eventually start doing these hybrid investments.”