The transferable tax credit market is growing ‘more rapidly than anyone thought’

The IRA is widening the market for clean energy financing. But buyers and sellers of tax credits are still figuring it out.

January 18, 2024
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Photo credit: Spencer Platt / Getty Images

It’s been six months since the Inflation Reduction Act kicked off a new market for buyers and sellers to trade clean energy tax credits for cash. New data shows that the transferable tax credit market is expanding quickly and opening up new financing opportunities to a wider class of projects. 

  • The top line: A market analysis from Crux estimates that the transferable tax credit market was worth $7 billion to $9 billion in 2023, “outpacing expectations in overall size, technology diversity, and price consolidation.” 
  • The market grounding: Treasury guidance went into effect in June of 2023. In the first six months of trading, total deal value of the transferable tax credit market climbed to roughly one-third the value of traditional tax equity. 
  • The current take: “This is the first time that the government has created an asset class like this and hit ‘go.’ It performed more rapidly than anyone thought,” said Crux CEO Alfred Johnson, who will participate in an upcoming forum on the market, hosted by Latitude Media.

Investment tax credits and production tax credits laid the foundation of the US renewables market. But under traditional tax equity, only a small number of large banks and insurance companies with tax liability could partner with project developers and take advantage of the credits. That is suddenly changing.

The Inflation Reduction Act created a new 10-year structure for wind, solar, storage hydrogen, carbon capture, and manufacturing tax incentives that allows credits to be sold for cash. The structure has spawned new marketplaces where tax credits can be traded.

One such platform, Crux, released a market survey this week on deal volume, pricing, and the makeup of market participants. After only six months of activity, it found that trading of transferable tax credits amounted to $7 billion to $9 billion in 2023 — bringing total tax financing for renewables to roughly $30 billion. Total tax financing for clean energy could hit $50 billion by 2025, boosted by credit sales.

“It’s amazing how quickly we got there relative to tax equity,” said Crux’s Johnson.

Image credit: Crux

One distinguishing feature of the market: deal sizes and technology types are shifting.

According to Crux, the vast majority of deals surveyed were for $50 million or less — typically too small for traditional tax equity. They also featured a wider range of sectors, including advanced manufacturing, storage, and biofuels. 

“Tax credits from advanced manufacturing facilities and bioenergy projects were almost as popular as tax credits from solar projects,” reported Crux. 

First Solar’s recent $700 million sale of 45X tax incentives at $0.96 per dollar of credit is an early sign of a healthy, diversifying market. 

“We are seeing vitality in lower deal sizes, and pricing is more favorable than anticipated. That means more money is flowing into other industries,” said Johnson. 

There are also many hybrid deals getting negotiated, which give the right for tax equity sponsors to sell tax credits. 

However, many market participants are sitting on the sidelines, concerned about risk and transparency. More than 70% of credit buyers said that the cost and complexity of project due diligence was a limiting factor. Credit sellers, who are already much more active, worry more about price transparency and the cost of insurance.

“We’re creating a new market out of whole cloth. This is all happening at once,” said Johnson. “The participants are new. The structure of the market is new. The software is new. All of that requires transparency to achieve the scale that we all hope it does — and give people more confidence to participate in the market.”

Want to know more about how the market for transferable tax credits will work? Sign up for Latitude Media’s Frontier Forum on January 31. Crux CEO Alfred Johnson will break down the budding market for clean energy tax credits. We’ll dissect current transactions and pricing, compare buyer and seller expectations, and look at where the market is headed in 2024.

2023 in Review: A Report on the Booming US Clean Energy Tax Credit Market

A wide range of companies can now invest directly in domestic wind, solar, bioenergy, EV, and manufacturing projects. Learn more in this free event, supported by Crux.

January 31, 2024 1:00 PM
Register HereWatch Now
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