experts discuss mechanics of discounted tax credit trades ahead of formal IRS guidance

The IRS is not expected to issue guidance on tax credit transferability until 2Q23 at earliest, but that hasn’t stopped some market players from getting involved earlier. Currently, PTC and ITC tax credit trades are beginning to materialize with dealer quotes in the low 90s, although some desks have quotes at deeper discounts.

The size of the discount to par is partially associated with trades that are contingent or will be effectuated once the guidance is issued. A course correction is expected, but it will not likely pick up pace until at least six months following the approval of the guidance, according to market observers.

The price of the credits also depends on the sponsor involved and the tax credits could certainly trade lower if the developer or sponsor is smaller, according to one source familiar with the situation. Despite the chance to capture a higher return on transferability from less experienced sponsors, the source pointed out that overall trading volumes will likely be smaller initially since bigger well capitalized developers are expected to continue to stick with traditional tax partnerships for the near-term.

One interesting possible area for trading is in standalone storage, which benefits from an ITC for the first time, and other newer technologies are also expected to benefit particularly as merchant storage has never worked well with long-term tax equity partnerships.

As reported, the first tax equity financing for a standalone storage project closed last month as Eolian utilized the ITC to close two of its merchant projects in ERCOT. The tax equity funding was provided by a fund managed by Churchill Stateside Group (CSG).

Benefits to transfer

Keith Martin of Norton Rose recently posted an update on how transferability is starting to get worked out in the marketplace, highlighting the advantages of increased flexibility.

“Until now, any tax equity investor planning to share in the ITC on a new renewable energy project had to be a partner in the partnership that owns the project placed in service. This meant tight deadlines to put tax equity in place. The ability to sell tax credits allows more time not only for investors to syndicate their positions, but also for developers who decide to forego tax equity to transact.”

The demand side from firms interested in participating in the transferability marketplace is expected to range from large corporates to family offices, and has already sparked shops such as Reunion Infrastructure and others to seek growth funding to help build up their services.

Reunion has seen interest on the buyside from firms who are more interested in a portfolio of diversified and high-impact projects, rather than from a single project.

“The diversification increases execution confidence, limits exposure to any recapture thereby reducing insurance costs, and maximizing impact through enabling more projects,” said one of Reunion’s Co-Founders Billy Lee in a recent interview with NPM.

Trading potential

The rising influx of investors into the market and more willingness from developers to participate in transferability is expected to result in a steady growth of trading over the medium-term.

That should create more options for developers looking to monetize their tax credits in addition to the traditional M&A options, including single project and project portfolio sales. That market continues to run red hot so far in 2023, spurred on in part by more interest from international capital providers.

Deals are being transacted for either single site projects or portfolios of projects and also at varying degrees ofownership at the project level. This past January, Danish pension fund AIP Management took a 60% stake in two paired California projects from Clearway Energy Group and Greenvolt Power Renewables, a unit of Portuguese-listed Greenvolt Group, acquired a 50% stake in Wyoming solar project, 163 MW Goshen Solar, from Cowboy Energy LLC.

*This story was originally published exclusively for NPM subscribers last month.


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