Dive Brief:
- The Inflation Reduction Act tax credit transfer market has accelerated since 2023, and is likely to continue until deal volume reaches between $20 billion and $25 billion this year, says a mid-year market intelligence report released Monday by Crux, a finance technology company that connects tax credit buyers and sellers.
- Total transfer activity in 2023 was as much as $9 billion, while activity during the first half of this year totaled between $9 billion and $11 billion, Crux estimates.
- The market was bolstered in April by the IRS’s release of final guidance for the tax credit transferability mechanism, said Crux CEO Alfred Johnson, and prices for individual credits — such as the 45X advanced manufacturing credit — have increased as those credits receive guidance.
Dive Insight:
In a release, Crux said that the growth of the market has “outpaced expectations of volume, diversity of technology investments, and price consolidation.”
That outpacing was “pretty significant,” Johnson said. In the early market, he said, the balance between tax equity and transferability was still in question, but “it is becoming increasingly dominant as a strategy that those tax equity facilities are designed with the right to be able to transfer the credit.”
“That is a really positive development,” he said, “because what it means is that even more demand can be accommodated within the structures that allow the market to grow in size.”
Johnson said he expects Crux to continue seeing less friction in transactions, and that the company is “investing quite heavily in the technology to make these deals more efficient.”
Efficiency will continue to increase as more category-specific final guidance is issued, he said, and Crux believes there are more opportunities to “further streamline” tax credit transactions.
“[Speed is] really important,” Johnson said. “There's a piece of wisdom in financial markets broadly that time kills deals, that the longer parties are negotiating around something, the more things that can come up along the way that derail it.”
He added, “I think as we get towards a more transactable market here — one that is able to accommodate the level of supply that is coming to the market over the coming years — it'll be really important that these transactions be as efficient as possible.”
Crux’s report found that 2024 got off to a slower start in the first quarter before buyer participation ramped up in the second quarter, and the report’s authors posit that buyers may have held off “due to uncertainty around the potential extension of certain tax credits, most notably the research and development tax credit.”
“But, when Congress failed to pass the tax extender bill, buyers increasingly turned to transferable clean energy tax credits to manage their tax liabilities,” the report says.
So far this year, around 75% of transactions have come from wind, solar, storage and solar plus storage, Johnson said. The other two largest segments are advanced manufacturing and bioenergy, which the company anticipates “will grow in the back half of this year, because a lot of the utility scale, wind, solar, storage has already transacted in the market,” he said.
“Other eligible technologies — hydrogen fuel cells, electrochromic windows, microgrids, geothermal facilities, and others — are typically priced at a discount to the well-known [investment tax credits] due to a relative lack of liquidity for these technologies,” said the report. “Nonetheless, these technologies are transacting and attracting tax credit buyers.”
“We expect smaller deals and technology types that are less established to trade in higher volumes towards the end of the year,” Johnson said.
On average, ITCs — which “require the buyer to truly understand the risks that may be associated with recapture of the credit and valuation,” Johnson said — trade at a slight discount to the production tax credits due to the additional work involved.
The report also found that 25% of 2024 reported deals have included a forward component, including a full or partial purchase of future year tax credits.
“I would say certainly the market is very closely watching what a number of different external factors will do over the course of the year,” Johnson said. Those factors include macroeconomic factors like interest rates, as well as the upcoming election and potential 2025 tax legislation.
However, he said, “pricing remains really healthy, both on current year and future year tax credits.”
“I think the market is expecting that as investments get made all across the country, in red states and blue states and communities of all shapes and sizes, with different technology profiles associated with the credits, that there will continue to be strong support publicly and legislatively for the program,” Johnson said.
