Purchasing renewable energy tax credits is one of the most effective ways for corporations to reduce their federal tax burdens, while also advancing the energy transition and supporting their sustainability initiatives. But what exactly are renewable energy tax credits?
Renewable energy tax credits are federal tax incentives that renewable energy facilities receive for the clean electricity they generate, or for the investment in a project itself. These tax credits act as a revenue stream that can be used as a means of financing a project’s construction. Renewable energy tax credits have been critical to the growth of the renewable energy industry in the US for many years, and the value they create unlocks as much as 60% of renewable energy projects’ financing needs.
The passage of 2022’s Inflation Reduction Act (IRA) brought fundamental changes to the way that renewable energy tax credits work; including new types of credits, a new provision that allows businesses to transfer unused credits by selling them to other companies, and an expansion of the types of companies that are allowed to purchase tax credits. Understanding how to use these credits is crucial for businesses looking to maximize cost savings and boost their environmental efforts.
Wondering how the House version of theOne Big Beautiful Bill Act and pending Senate changes could affect tax credit transfer deals? Is it still possible to get deals done? LevelTen’s SVP of Marketplaces, Rob Collier, wrote an article to provide you with the facts and practical takeaways — read it here.
How the Inflation Reduction Act (IRA) Expanded Renewable Energy Tax Credits
The Inflation Reduction Act (IRA) represents the most significant overhaul of federal clean energy tax incentives since their introduction two decades ago. The IRA expanded the scope of renewable energy tax credits for businesses, making them more accessible and flexible for businesses of all sizes. Of the many changes the IRA presented, the introduction of transferable tax credits, or “transferability,” is one of the most impactful.
Oftentimes, renewable energy developers can’t make full use of the tax credits their projects generate because their federal tax burden simply isn’t large enough. So, they look for other ways to monetize the benefits of their tax credits.
Before the IRA, accomplishing this typically meant developers needed to work with tax equity (TE) investors that could monetize their credits to help finance development. Tax equity investors, such as large banks, provide developers with cash in exchange for equity (an ownership stake) in the renewable energy project itself. As partial project owners, these investors receive tax credits and tax deductions through a method of asset depreciation called MACRS. The combination of tax credits and MACRS allows the TE investor to reduce their tax liability. Additionally, TE investors benefit from the project’s revenue. But tax equity structures are quite complicated, and few companies can, or want to, partake in them — limiting the number of financing partners willing to monetize clean energy developers’ tax credits.
But the IRA has introduced a far simpler way for renewable energy projects to monetize their tax credits: transferring credits to other companies by selling them for cash that can be used to finance project development. The IRA also expanded the types of businesses that could earn tax credits, along with other important changes.
Key Changes Introduced by the IRA
- Transferability: Developers can now transfer their tax credits by selling them to other companies for a discount on their face value. This creates an immediate financial benefit for developers, streamlining their access to additional capital. Transferability ultimately means that far more companies can invest in tax credits, and in doing so, support the energy transition.
- Expanded Eligibility: The types of investments that qualify for tax credits have been expanded to include more clean energy technologies and industries, broadening the range of businesses that can take advantage of these credits. For example, energy storage projects, clean hydrogen producers, and US-based manufacturers of renewable energy components now qualify for various IRA tax credits.
- Long-Term Outlook: Under the current law, the IRA's tax credits have a 10-year sunset date, but this timeline will automatically extend if the US fails to meet predetermined, power-sector emissions reduction goals by 2032. This provides clean energy developers and investors with a degree of long-term stability and planning opportunities to drive the energy transition.
- Large Opportunity: Estimates indicate that between $40 billion and $60 billion of additional tax credits will be generated annually due to the IRA. These credits increase the financial incentive for businesses to support clean energy projects and investments.
Key Terms in Clean Energy Tax Credits
When discussing renewable energy tax credits, several key terms often come up. Understanding these terms will help clarify the roles and responsibilities of different parties involved in renewable energy projects:
- Sponsor: The sponsor is the developer or financial owner of the solar, wind, storage, or other clean energy project. They secure financing for the project and oversee its development.
- Owner: The project owner may be the sponsor, a third party, or a combination of several parties. In renewable energy tax structures, the sponsor may form partnerships with other entities that own part of the project (this third party may be the seller).
- Seller: Depending on the tax structure, the seller of the tax credits could be the sponsor, or a tax partner.
- Buyer: The buyer (or "transferee taxpayer") can be a corporation, partnership, individual, trust, or similar taxpayer. They purchase the project’s tax credits to reduce their tax liabilities.
- Clean Energy Project: This term refers to all technologies eligible for tax credits under the IRA, including solar, wind, and other renewable energy technologies.
How Your Business Can Benefit from Renewable Energy Tax Credits
Renewable energy tax credits offer businesses financial benefits and complement other sustainability investments. Here are some of the main advantages:
- Reduce tax liabilities: Renewable energy tax credits allow businesses to directly reduce the amount of taxes they owe to the federal government.
- Support sustainability: Clean energy tax credits support the energy transition; project developers depend on them for up to 60% of project financing. Purchasing tax credits can demonstrate that your business is playing a role in financing the construction of new solar or wind projects, providing new clean energy to the grid. In fact, expanding the tax credit market is critical to unlocking the full potential of the IRA.
- Fund internal sustainability initiatives: Increasingly, corporations are thinking about how tax savings through the purchase of renewable tax credits can be used to fund their internal sustainability programs. For example, tax savings can be used to purchase renewable energy certificates (RECs) or mitigate the cost of power purchase agreements (PPAs) — helping companies meet their Scope 2 emissions reduction targets. Furthermore, corporations can procure tax credits and PPAs or RECs from the same clean energy project, increasing their impact on that project by unlocking multiple streams of critical financing.
- Enhance organizational reputation: By investing in renewable energy tax credits, businesses demonstrate their commitment to pushing the energy transition forward, bolstering their reputation with the public, customers, partners, and investors as sustainability leaders.
Wondering how the House version of One Big Beautiful Bill Act and pending Senate changes could affect tax credit transfer deals? LevelTen’s SVP of Marketplaces, Rob Collier, wrote an article to provide you with the facts and practical takeaways — read it here.
How the Tax Credit Transfer Process Works
Below is a high-level overview of the steps involved for tax credit buyers in clean energy tax credit transfers. For more details, download our complete guide to transferable tax credits.
1. Secure internal approval to procure tax credits. While many corporate finance and tax teams are likely familiar with tax credits, it’s quite likely that they are new to renewable energy tax credits and their unique considerations, including tax year alignment and financial risks. Legal teams will also play an important role in contract review. If a corporation has never conducted a tax credit transfer before, additional legal support will be required to establish new contracts. Securing alignment between sustainability, finance, and legal teams is important before engaging with a tax credit marketplace, broker, or seller. A first time tax credit buyer may want to consider engaging a tax advisor, too, such as one of the firms within LevelTen’s partner network.
2. Determine desired tax credit procurement volume. Sustainability teams need to collaborate with their finance and tax colleagues to determine tax burden, tax filing schedule, desired volume of tax credits, as well as budget. For example, if an organization has a $50MM tax burden and is aiming for a 10% discount (save $5MM on tax bill), it would need to secure investment tax credits (ITCs) or production tax credits (PTCs) for $0.90 (paying $45MM to cover its $50MM tax burden).
Tax credit pricing is affected by a number of factors including timing of procurement, technology and credit type, quality of the project, tax credit insurance requirements, and transaction fee. Although transaction fees are often paid by the seller, the seller usually builds the fee back into the tax credit’s price.
3. Determine desired tax credit type and technology. There are benefits and risks to ITCs and PTCs (learn more in our guide). Industry reports show that wind and solar tax credits account for roughly half of tax credit transaction volume. That’s because wind and solar are proven technologies that carry less risk. Tax credits for newer technologies may offer more value but carry more risk.
4. Search for tax credits. Corporations have many options to choose from to source tax credits - from brokers to tax credit marketplaces to working directly with sellers. LevelTen’s Tax Credit Marketplace provides buyers with access to a vast supply of tax credits since 90% of North American renewable energy developers are on our platform. Buyers can browse available listings from tax credit sellers actively seeking buyers. Our technology and relationships allow us to do custom RFPs and bilateral outreach, too, for buyers with highly specific needs.
5. Conduct due diligence. Buyers must conduct detailed due diligence of the project, the commercial agreement’s structure and involved parties, and the tax credits they plan to purchase.
6. Make (or commit) to a payment. Payments and transfers can happen immediately, or at a future date, if the buyer makes a forward commitment (typically this is only possible for investment-grade companies or those backstopped by credit security).
7. Complete a transfer election statement. Sellers must complete pre-filing registration and obtain a valid registration number in order to sell tax credits. Buyers must submit a transfer election statement with this number, and other transaction details.
8. File your return. Buyers must file a federal tax return for the taxable year in which eligible credits are taken into account — thereby lowering their federal tax liability.
Maximize Your Tax Savings with Clean Energy Tax Credits
Renewable energy tax credits offer businesses a powerful way to reduce tax liabilities while supporting the transition to renewable energy. To explore these opportunities further, download our complete guide, and start incorporating the benefits of clean energy tax credits into your broader sustainability strategy, today.
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