Insurance Market Sees Entry Into Sellable Energy Tax Credits

Companies eager to get a slice of the billions of dollars of clean energy tax credits from the Biden administration’s tax-and-climate law are finding an extra layer of security from insurance firms and brokers.

The August 2022 Inflation Reduction Act creates paths for taxpayers to increase their clean energy tax credit amount to up to 70% of project costs and allows for many of those credits to be bought and sold.

But the newness of the law and remaining ambiguities leave many companies weighing the risk of claiming credits. If there is a challenge to a tax credit in an audit, an insurance policy could help pay the tax that is owed and some additional expenses accrued.

Recent guidance from the US Treasury is helping to ease companies’ worries about entering the new market and cement insurers’ plans to bridge the gap in these deals with tax credit insurance.

“Tax insurance is really intended to provide certainty when there’s not certainty,” said Jordan Tamchin, a senior vice president and practice leader at CAC Specialty, an insurance brokerage.

Navigating Risk

When a company is interested in tax credit insurance, it will hire a broker to find competitive terms. The selected insurance firm will negotiate a policy and begin underwriting and evaluating the risk.

The insurance guards against three common types of risk: the structure of a transaction, the qualification for the credit, and recapture or loss of the tax credit.

For some, the law provides for the credit amount to be increased to 30% from 6%, if laborers and mechanics are paid the local prevailing wage and companies are using trained workers participating in a registered apprenticeship program on a project. This requirement applies to projects that started construction on or after Jan. 29, so for projects that started before that date, companies still get the full credit amount without having to meet the labor requirements.

Bonus credits can be added if certain requirements are met. These additions may be covered by tax insurance policies, companies said. Projects that are located in a low-income community, energy community, or source materials domestically are eligible for the tax credit boost.

An insurance broker will look at the terms, claims-making history, and whether the insurance company has worked in the renewable energy space. The cost of the insurance will depend on the scope of the coverage and developer balance sheet.

“A lot of clients are very conscious about pricing, and so that plays a big factor into their decision-making,” Tamchin said.

Requests are getting more creative since the Inflation Reduction Act, said Hannah Tucker, an assistant vice president at QBE North America, a global insurance company.

“We’ve obviously seen some requests for things that we just cannot do,” including for protection in cases of law, tax code, and guidance changes, Tucker said.

The IRS and Treasury are expected to issue more guidance this spring on the labor requirements to obtain the full value of some of the credits.

A New Market

Insurance companies also are insuring the buyers and sellers—players in a new market for directly buying and transferring tax credits that is shaking up renewable energy development financing.

The Treasury Department on Wednesday released proposed rules outlining that a buyer, who claims the credit but does not have control over the project, will bear the financial risk in the event of recapture of the credit.

Prior to the law, many companies weren’t able to monetize their credits due to the high costs and complexity of a tax equity structure, which was the only existing method for companies to sell their credits. The new transferability market appeals to any company that wants to offset some of its taxes.

A lot of first-time actors in the space will be “looking to tax insurance to provide that kind of sleep-at-night assurance that allows them to sell that up the chain internally to get comfortable moving forward with purchasing tax credits,” said Corey Lewis, a managing director at Aon Transaction Solutions. “We really see tax insurance used as a key differentiator. It helps take deals from a no to yes.”

Insurance policy holders may consider a shared policy.

“Regardless of who holds the policy, who’s the beneficiary of the policy, the bottom line is that everyone is incentivized by exactly the same outcome,” said Antony Joyce, a senior vice president and tax insurance specialist at Marsh. “The insurance effectively aligns the seller and the buyer.”

For the seller of the credit, insurance can help protect the balance sheet and liquidity of the transfer.

“We are going to see an increased need for tax insurance,” said Yash Jafari, a senior vice president of tax at DUAL Transaction Solutions. “We are going see more deals in the market because now there’s fluidity into how these rules are going to work.”