The Inflation Reduction Act of 2022 (the “IRA”) encompassed multiple policy pushes from the current Biden administration but specifically addressed climate change.[1] Included within the IRA is a broadening of the applicability of renewable energy tax credits by offering developers the opportunity to monetize the credits at a discounted price to corporations.[2] Effective January 1, 2023, the IRA permitted developers and corporations to commence one-time transfers of clean energy credits.[3] For the opportunity to occur, Section 6418 was created and, on April 30, 2024, final regulations (the “Final Regulations”) were released by the Treasury Department and IRS.[4] As stated within the Final Regulations, any eligible taxpayer, that is not subject to the exclusions stated in 26 U.S.C. § 6417(d)(1)A(A), may welcome the opportunity to transfer all or a portion specified within the respective taxable year if sold to an unrelated party.[5] With a wide range of credits within the market, Investment Tax Credits and Production Tax Credits have been at the focus for monetization.
Investment Tax Credits
To provide clean energy incentives to developers, the IRS initially enacted Section 48 – Investment Tax Credit (“ITC”) in 1962.[6] Section 48 allows taxpayers the ability to claim credits based on the amount of their eligible investment in the property prior to the placed in service date.[7] The IRA altered the scope of Section 48 by including additional technologies and expanding the phaseout schedules.[8] ITCs can be applicable to a wide range of technologies, including but not limited to solar, wind, battery energy storage systems, and biogas.[9] The ITC ranges from 6% to 30% dependent if the prevailing wage and apprenticeship requirements are met.[10] However, the credit is able to further increase up to 60% if the project becomes eligible for energy community, domestic content, or low-income communities bonus credit.[11] A crucial element of ITCs is based on their potential of being recaptured.[12] Recapture for Section 48 is governed by Section 50(a) showing a five year potential recapture period, reducing by 20% per each year.[13] Recapture is triggered if the eligible property is disposed of or ceases to exist within the five year period.[14] When going through a transaction with a developer, the corporation purchasing the credits will need to become aware of risks like recapture to fully understand the purchase about to be made.
Production Tax Credits
Similar to ITCs, Section 45 – Production Tax Credit (“PTC”), originally enacted in 1992, are heavily transacted on within the 2023 and 2024 tax years.[15] PTCs are calculated based on the number of kilowatt-hours (kWh) generated by the renewable energy project from technology such as, but not limited to, wind, biomass, solar, and hydropower.[16] Similar to ITCs, prevailing wage and apprenticeship requirements must be met with respect to the construction of the facility or repairs to the facility.[17] PTCs are eligible to increase by 10% if the property is located in an energy community or qualifies for domestic content.[18] A critical distinction between ITCs and PTCs can be found with the reduced risk of PTCs as there is no recapture called out in Section 45.[19] Therefore, when a corporation is conducting their diligence on a transaction regarding PTCs, the reduced risk is able to be accompanied with the purchase. Due to this, the reduced risk of PTCs can result in reduced discounted pricing for the corporation, subject to additional project characteristics.
What’s Next
The IRA has opened a vast market for developers and corporations to transact. Expressly, over $265 billion in clean energy investments have been confirmed in relation to the IRA as of August 2024 by the Biden administration.[20] From being effective on January 1, 2023, total transfer activity has been estimated to be up to as much as $9 billion for the 2023 tax year.[21] From there, it can be estimated the first half of the 2024 year surpassed the total 2023 activity with a push to reach $20 billion to $25 billion by the end of the year.[22] A wide variety of support leads all parties to believe a continued exponential growth of transferability can be expected within the coming years. Although not limited to just the action of transferring credits, Goldman Sachs predicts the IRA will cost the United States government up to $1.2 trillion by the year 2032.[23] The current actions of the 2023 and 2024 purchases can be stated as a steppingstone into what the market will become.
Challenges Following the 2024 Election
It is hard to say how the transferability market will adjust following the 2024 Election. Both Democratic Vice President Kamala Harris and former President Donald Trump have shown similar goals of lowering energy costs and increasing the United States job sector.[24] Harris, being closely aligned to the Biden administration, has a high probability of progressing the opportunities found within the IRA.[25] Trump, however, has not been as evident with his interpretation of the IRA but has recently stated his goal of “[rescinding]all unspent funds under the misnamed Inflation Reduction Act,”.[26] Trump has also been known to vocalize his disliking to electric vehicle charging infrastructure which currently produces tax credit opportunities for developers.[27] However, inconsistency is found during Trump’s prior administration where ITCs were extended additional years as they were approaching their phaseout period.[28] An additional, yet significant, aspect can be found with which states are incurring renewable energy investments by developers. State investments in renewable energy can be seen as a bipartisan approach, as the IRA has brought opportunities to all regions of the United States.[29] Simply put, the coming months will become of focus for the outlook of transferability.
[1] Lance T. Brasher et al., Transferability: IRS Guidance Energizes Participation in a New Tax Credit Monetization Strategy, Skadden (Dec. 13, 2023), https://www.skadden.com/insights/publications/2023/12/2024-insights/other-regulatory-developments/transferability-irs-guidance.
[2] Id.
[3] Transferable Clean Energy Tax Credits Market Observations: ‘The First Inning’, Houlihan Lokey, 1 (2023), https://cdn.hl.com/pdf/2024/transferable-clean-energy-tax-credits.pdf.
[4] Transfer of Certain Credits, Internal Revenue Service, 1 (2024), https://www.govinfo.gov/content/pkg/FR-2024-04-30/pdf/2024-08926.pdf.
[5] 26 U.S.C. § 6418(a).
[6] Proposed regulations issued on Section 48 energy credit, PWC (Nov. 2023), https://www.pwc.com/us/en/services/tax/library/pwc-proposed-regulations-issued-on-section-48-energy-credit.html#:~:text=Section%2048%20provides%20a%20tax,in%20their%20entirety%20and%20consistently.
[7] Proposed Regulations – Section 48 Investment Tax Credit, Forvis Mazars (Apr. 24, 2024), https://www.forvismazars.us/forsights/2024/04/proposed-regulations-section-48-investment-tax-credit.
[8] Michael Bernier et al., The Inflation Reduction Act’s energy- and climate-related tax provisions, (Susan Minasian Grais ed.) The Tax Adviser (Jan. 1, 2023), https://www.thetaxadviser.com/issues/2023/jan/the-inflation-reduction-acts-energy-and-climate-related-tax-provisions.html.
[9] Clean Energy Tax Incentives for Businesses, IRS, 1 (2024), https://www.irs.gov/pub/irs-pdf/p5886.pdf.
[10] Id.
[11] Summary of Inflation Reduction Act provisions related to renewable energy, United States Environmental Protection Agency (Oct. 3, 2024), https://www.epa.gov/green-power-markets/summary-inflation-reduction-act-provisions-related-renewable-energy.
[12] 26 U.S.C. § 48(a)(10)(C).
[13] 26 U.S.C. § 50(a)(1)(B).
[14] 26 U.S.C. § 50(a)(1)(A).
[15] Renewable Electricity Production Tax Credit (PTC), DSIRE (Aug. 13, 2024),
https://programs.dsireusa.org/system/program/detail/734.
[16] Clean Energy Tax Incentives for Businesses, supra note 9, at 1.
[17] 26 U.S.C. § 45(b)(7); 26 U.S.C. § 45(b)(8).
[18] 26 U.S.C. § 45(b)(9); 26 U.S.C. § 45(b)(11).
[19] 26 U.S.C. § 45.
[20] FACT SHEET: Two Years In, the Inflation Reduction Act is Lowering Costs for Millions of Americans, Tackling the Climate Crisis, and Creating Jobs, The White House (Aug. 16, 2024), https://www.whitehouse.gov/briefing-room/statements-releases/2024/08/16/fact-sheet-two-years-in-the-inflation-reduction-act-is-lowering-costs-for-millions-of-americans-tackling-the-climate-crisis-and-creating-jobs/.
[21] Jonathan Touriño Jacobo, Up to US$9 billion in transferable tax credit transactions made in 2023 in the US, PVTech (Jan. 23, 2024), https://www.pv-tech.org/up-to-us9-billion-in-transferable-tax-credit-transactions-made-in-2023-in-the-us/.
[22] Id.
[23] Michele Della Vigna, Carbonomics, Goldman Sachs, 8 (Mar. 22, 2023, 9:10 PM), https://www.goldmansachs.com/pdfs/insights/pages/gs-research/carbonomics-the-third-american-energy-revolution/report.pdf.
[24] Jacob Fischler, Energy and climate: Where do Harris and Trump stand?, Missouri Independent (Oct. 18, 2024, 5:45 AM), https://missouriindependent.com/2024/10/08/energy-and-climate-where-do-harris-and-trump-stand/.
[25] Id.
[26] Kelsey Tamborrino, Trump vows to pull back climate law’s unspent dollars, POLITICO (Sep. 5, 2024, 3:48 PM), https://www.politico.com/news/2024/09/05/trump-inflation-reduction-act-00177493.
[27] Fischler, supra note 24.
[28] Jeffrey Ryser, Congress passes ITC and PTC ‘extender bill’ for renewables, but confusion injected by Trump, (Debiprasad Nayak ed.) S&P Global (Dec. 23, 2020), https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/electric-power/122320-congress-passes-itc-and-ptc-extender-bill-for-renewables-but-confusion-injected-by-trump.
[29] Clean power state-by-state, American Clean Power (2024), https://cleanpower.org/facts/state-fact-sheets/.
