Schneider’s novel use for tax credit transfers

Schneider Electric is using the Inflation Reduction Act’s transferability clause to further its decarbonization efforts — an approach that could gain traction as companies explore the potential of the nascent tax credit transfer market. 

• The top line: This week, Schneider announced its investment in solar and battery projects via a tax credit transfer agreement with Engie North America. But rather than simply pocket the savings resulting from the tax credit purchase — and 45X sales go for an average credit price of 89 cents on the dollar, according to a market report from Crux — Schneider plans to reinvest them into renewable energy credits from Engie projects. The company will then use those credits to offset its scope 2 carbon emissions. 
• The market grounding: Almost overnight, tax credit transfers have become a booming market since Treasury Department guidance governing their use took effect in June 2023, to the tune of between $7 billion and $9 billion in 2023. The Schneider-Engie deal, however, takes a new approach in that the two French companies are essentially partnering on the projects, and demonstrating the potential of these transactions to ultimately reduce the investor-buyer’s overall emissions. 
• The current take: John Powers, vice president of strategic renewables for Schneider, said the companies are not viewing the deal solely as a “standalone tax play or as a standalone way to support solar and wind.” Rather, he said, companies like Schneider are asking: “how can we do that while also using that savings to further our own decarbonization?”

The $80 million deal represents Schneider’s first publicly announced corporate tax transfer agreement. It sees Schneider helping to fund four Engie solar and storage projects in Texas that are anticipated to come online over the course of 2024. 

With the tax savings (of an undisclosed amount) resulting from the sale, Schneider is purchasing 110,000 megawatt hours of renewable energy credits from Engie projects. The French energy giant sold the most clean energy PPAs to corporations in 2023, according to BloombergNEF’s evaluation, with 2.4 gigawatts of deals.

While Powers said Schneider considered several potential partners for the deal, Engie won out in part because the two companies have previously worked together. The two have collaborated on helping clients procure more than 1.6 gigawatts of renewable energy projects in North America since 2017.

But also, Powers added, “it was critical for Schneider to get that decarbonization credit,” so the company evaluated potential deals through the lens of whether enough RECs would be available to hit its scope 2 decarbonization goals.

“Not every project is going to have RECs specifically available for the tax investor, because many of those would have gone with the power purchase agreement,” Powers said.

‘A seismic shift’

While this deal is somewhat unusual, Powers said that there is a real change underway. 

In his role in the Schneider Sustainability Business — which both advises the Schneider Electric parent company and acts as a consultant for other companies, especially on corporate renewable energy procurement — Powers is in the rare position of both having participated in the specific transaction between his parent company and Engie, and advising other major companies interested in forging similar deals.

Clients with a combined over $10 billion in annual tax revenue are interested in potentially pursuing these credits: “You can kind of see what a seismic shift that could be for financing in these markets,” he said.

In Powers’ experience, the option of transferring tax credits is essentially clearing the bottleneck of finding tax investors for renewable energy projects, which is critical given that very few developers have a big enough tax bill to monetize the tax credits on their own. 

Historically, just about 10 to 20 of the Fortune 500 have invested in these projects using the traditional tax equity model, Powers said. And that landscape has been dominated by big banks like Bank of America and J.P. Morgan. But transferability — “a much more approachable structure” for both buyer and developer — offers an alternative to traditional tax equity. 

“It opens up a tremendous new avenue for investment for these projects,” Powers said, “and a new appetite for investment, because many of these companies are looking to help decarbonize the U.S. grid.”