What you need to know about the IRA and tax equity – GWC Mag

The Inflation Reduction Act 2022 permits owners of new clean energy infrastructure to exchange cash for eleven different types of federal tax credits. To be sold, tax credits had to be created in 2023 or later.  These tax credits are as follows:

1. Production Tax Credit (PTC) 45
2. Clean electricity PTC 45Y
3. Investment Tax Credit (ITC) 48
4. Clean electricity ITC 48E
5. Qualifying advanced energy project credit 48C
6. Advanced manufacturing production credit 45X
7. Alternative fuel refueling property credit 30C 
8. Credit for carbon oxide sequestration 45Q
9. Zero-emission nuclear power production credit 45U
10. Clean hydrogen production credit 45V
11. Clean transportation fuels credit 45Z 

The cutoff date for selling tax credits is at least the end of the tax year in which the seller first becomes eligible for a tax credit. In this way, 2023 tax credits, for instance, may be transferred until the seller filed its 2023 tax return in 2024. In its tax year that concludes on the same day, the purchaser claims the tax credits. The buyer claims the tax credits in the tax year that ends on the same day as the seller’s tax year (or, in the case of buyers with separate tax years, that crosses the rear end of the seller’s tax year). If they are not utilised right away, the purchaser may carry them forward.  

One of the main tax credit available to solar energy developers is the Investment Tax Credit (ITC).  The ITC is the most significant financial incentive for PV companies and has attracted substantial amounts of investment to the solar energy industry.   One of the main advantages of the ITC is that it is now viewed as an asset class rather than just an offset against cost. 

Prior to the IRA, renewable energy credits were monetized through financing structures or complicated sale-leaseback provisions.  ITC was not transferable. Depreciation was also not transferable. However, the IRA added in provisions to allow certain companies to receive a cash payment in the form of a tax refund and more importantly, allows companies to sell or transfer credits to third parties.

As a result, and because project developers typically can’t absorb all of the tax benefits themselves, outside financing is generally required to realise the value of the ITC and depreciation.

This is a game changer. Very few fund managers and LPs are aware of the potential to invest in Solar and Long Duration Energy Storage (LDES) and Battery Energy Storage System (BESS) projects in particular how tax equity financing is utilised in the industry. This is an entirely new asset class underwritten by the Inflation Reduction Act of 2022. It’s only been a year in and there are lots of interesting players entering the market including Blackrock. Looking forward to to seeing how this space develops.