Lessons Learned from the First Year of Clean Energy Tax Credit Transfers

Partner Lauren Collins joined Basis Climate and leading industry professionals to review transactions and lessons learned from tax credit transfers closed in 2023. Basis Climate is building a marketplace for clean energy tax credits.

To view a recording of the presentation, click this link. Basis published the following key takeaways after the program:

• The tax credit transfer market in 2023 was very active. Between the panelists the group covered over 30 transfer deals, worth billions of dollars. Expectations for 2024 are very high with more guidance and precedent being established by the first year of transfer deals.
• Production Tax Credit transfers were highly coveted due to their risk profile but the panelists saw the highest volume of transactions from Investment Tax Credit transfers.
• One panelist pointed out that ITCs associated with merchant battery storage have proven to be relatively easy technology assets to transfer given that there are less contractual agreements to diligence.
• In 2023 Hybrid Structure deals (tax equity with a transfer out / sale of tax credits) were a popular option to enable large tax credit sellers to “step-up” the value of their tax credits and monetize depreciation alongside tax credits. It also allows buyers to rely on tax equity investor diligence and indemnities.
• Insurance continues to be very important for ITC transfer transactions. Tax insurance is used to reallocate risk from the sellers to an investment-grade insurer to protect the buyer in a recapture or disallowance scenario. This is especially important for cases where smaller developers are selling credits to larger buyers.
• Tax credit buyers can simplify transactions by focusing on underwriting the insurance product more than the project and developer counterparty risks.
• Expert accounting and tax consulting is necessary for multinational buyers to consider implications of BEAT, Pillar II, and other complex tax strategies.
• With a number of on-shore manufacturing facilities coming online in 2024/25, we could see an avalanche of 45X credits. These are perfect for transfer given the seller can’t achieve step-up – meaning there is little financial upside to tax equity-like sales, no recapture risk, and credits are easy to diligence.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.