The Inflation Reduction Act (IRA) is most known for extending clean energy tax credits, which give investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop renewable energy projects and other clean energy investments. One of the more exciting provisions is the IRA’s “transferability” rule, which allows tax credit sponsors, including clean energy project developers, to “transfer” their tax credits by selling them for cash to corporations seeking to lower their tax burden.
Many clean energy developers sell their tax credits because they lack the adequate tax burden to use them efficiently. In 2023, the first year that the IRA tax credit market existed, over $2.5 billion of IRA tax credits were sold under the new transferability rules, according to publicly announced deals.
However, corporate demand for IRA tax credits is presently smaller than tax credit supply — which means new opportunities for doing business, such as LevelTen’s Tax Credit Marketplace, which can facilitate the purchase and sale of federal clean energy tax credits.
“Demand for tax credits is off to a good start, but we need a lot more to revolutionize project financing in the way the IRA intended. Developers are eager for more tax credit investors, and the clean energy transition is at stake,” said Patrick Worrall, Vice President of Tax Credit Marketplace at LevelTen Energy.
LevelTen’s Tax Credit marketplace …
- enables corporations, tax advisors, and sustainability advisors to procure tax credits from an extensive network of approximately 600 clean energy developers in the U.S.
- includes streamlined management of requests for proposals (RFPs), deal diligence, and transaction execution.
- provides access to LevelTen’s other clean energy marketplaces to also procure a power purchase agreement (PPA) or renewable energy certificates (RECs) in addition to tax credits and further lower tax burden.
Solving tax credit deal challenges
Buyers need help sourcing and filtering high-quality, low-risk tax credits. Tax credits are only delivered after the project —such as a utility-scale solar farm— is placed in service or begins production. But many obstacles can jeopardize timely project completion and tax credit delivery.
“Unlike other tax credit platforms, LevelTen’s Platform includes project maturity scores that factor in development milestones including interconnection status, helping tax credit buyers understand the likelihood of that project getting completed on time,” said Worrall. “We have been sourcing high-quality projects since 2018. All the developers and their projects are already enabled on our Platform.”
There are also two key risks that buyers need to be aware of after the tax credits have been purchased: 1) excessive credit transfer and 2) recapture risk.
“Buyers can see their tax reductions reversed and can incur penalties should the IRS challenge and disallow a tax credit. Further, actions by the owner of the eligible project can result in a “recapture” by the IRS, forcing the forfeiture of financial benefits,” said Worrall. “LevelTen and our network of advisors understand the protections that buyers should seek against these risks. We have a long history facilitating clean energy term sheets and contracts for our corporate customers, on deals worth over $14 billion.”
Not enough corporations understand the sustainability benefits of tax credits, or how tax credit purchases can fit into broader sustainability strategies. Tax credit purchases advance the energy transition by providing clean energy developers with critical capital to develop new solar, wind, battery storage, and other types of clean energy projects. This impact is significant, as 30-60% of clean project financing comes from tax credits.
“Tax credit buyers make it possible for new clean energy sources to get added to the grid. Without these buyers, the projects won’t get built. A second-level benefit we see is corporate buyers using the profit from their tax credit transaction to support other sustainability programs,” said Worrall, “For example, tax credit profits can be considered against the cost of renewable energy purchases, which have increased in price by nearly 13% over the past year. While these are separate transactions, the overall cost of being a good steward of the environment comes down.”
How the LevelTen Tax Credit Marketplace Works
- Buyers can create tax credit RFPs based on the amount of credits sought, type of technology desired, and other criteria that may be important to the buyer.
- LevelTen socializes the RFP to its extensive network of project developers and other entities with tax credits available to sell.
- LevelTen collects the proposals, contextualizes them with market data and intelligence, and delivers recommendations in a standardized format that helps buyers or their advisors shortlist attractive projects and ultimately select the best offer. LevelTen claims 90% market penetration of renewable developers active in the US.
“It can be overwhelming for a buyer to evaluate all the options and select a project that best meets their needs,” said Worrall. “By working with LevelTen, buyers or their advisors get access to the whole tax credit market.
Solar and wind generation account for approximately 200 GW of capacity, and LCRI estimates that between 800 gigawatts (GW) to 3,700 GW are needed. The impact of an efficient tax credit marketplace should not be underestimated.
— Solar Builder magazine
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