Renewable tax credit transfer deals could double in 2024, says Crux

The nascent tax credit transfer market has continued to pick up momentum, according to a market update report released today by the startup and credit transfer marketplace Crux. 

So far this year, Crux said, bids on the platform have nearly doubled the pace set in 2023. 

• The top line: Transfers of renewable tax credits could balloon to nearly $20 billion in 2024, according to Crux CEO Alfred Johnson, though that estimate could change throughout this year. Renewable tax equity deals in the United States reached roughly $20-$22 billion in 2023, meaning the growing credit transfer market could rival tax equity as an important infusion of cash for developers. 
• The market grounding: Separately, the Internal Revenue Service said last month that requests for project registrations had reached 45,500 — a steep increase from the more than 1,000 projects the government said it had registered in January. Nearly all, or 98%, of the projects are applying for transferability, the IRS said, which allows the credits to be transferred to another entity in exchange for cash.

The tax credit transfer market is still young — it only got its start in 2023, as a result of an Inflation Reduction Act provision allowing transferability — but Johnson said it could roughly double in size over the course of 2024. Crux estimated that total deals came to between $7 billion and $9 billion in 2023, while Bank of America estimated the market size was around $4 billion.

“It's interesting to see a market that is so new evolve in real time,” said Johnson. “The overwhelming headline from this update, and what we saw in the first quarter, is that the market remains very strong.”

Total tax equity for U.S. renewables projects reached roughly $20 to $22 billion last year, according to estimates from Bank of America and JPMorgan. If Johnson’s estimate for 2024 deals holds, that would put the size of the tax credit transfer market very close to that of the total tax equity market, providing a potentially significant flow of project capital for renewables developers.

(And developers are already taking notice. In fact, the president of small solar manufacturer Heliene Solar told Latitude Media that the transferability of tax credits is the “main benefit” of the IRA for the company, and represents a potential cash flow that has compelled it to invest more in its manufacturing lines in the U.S. than those in Canada, where it’s headquartered.)

Credit transfers last year focused largely on projects that were soon to be operational, said Katie Bays, a policy and research strategist at Crux. Thus far in 2024, companies seem to be looking further out and considering monetizing credits in order to supplement project development and financing, she said. 

“That's such an important change for the market to be able to make,” Bays said, because it means that “projects can move forward counting on that capital.”

Jack Cargas, head of tax equity origination at Bank of America, said during a January event hosted by Norton Rose Fulbright that the market could provide important new funding for clean energy’s growth: “We think Congress wanted to see tax credit sales add to the volume of financing for renewable energy, rather than cannibalize the existing forms of financing,” he said. 

Today, solar continues to dominate credit trades on Crux’s platform, accounting for more than a quarter of bids in the first quarter of 2024. Storage and wind each accounted for about 17% of bids. But more nascent types of credits — like advanced manufacturing 45X and hydrogen production 45V credits, for which the Department of the Treasury released guidance in December — are likely to become more commonly traded, said Johnson. 

When new credits first begin trading, prices generally start lower, between 70 and 91 cents on the dollar, than those for more established technologies like wind and solar, according to Crux’s report. But eventually, as buyers gain familiarity with them, Crux has seen prices stabilize and increase. The same is likely to be true for newer credit categories hydrogen and carbon capture, Johnson said. 

Johnson sees the role of intermediaries helping liaise these new transactions growing as well. And as all stakeholders gain more experience, they should help these deals move more quickly. 

“The more we see transactions happen, the better we can standardize and smooth the process,” he said. “It's exciting to see [that] happen as quickly as it's happening.”