Soaring US tax credit deals boost solar, storage build
Reuters Events Renewables
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For this week's newsletter, we looked into the fast-growing U.S. tax credit market that is bringing new financing sources to clean technology projects. Solar is leading the way but storage is rising fast and new technologies will gain the benefits in the coming years. Read on to find out more.
Also below, Donald Trump would scrap clean power rules if he wins the presidency but he's yet to target the Inflation Reduction Act. Meanwhile, the solar sector is leading growth in U.S. energy jobs and the Bureau of Land Management has expanded its area for faster solar build to 31 million acres of public land.
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Soaring US tax credit deals boost solar, storage build
Solar is spearheading growth in tax credit transactions that will lead to wider deployment of clean energy and usher in new technologies in the coming years.
A transferable tax credit market created by the 2022 Inflation Reduction Act is drawing more investment into solar and other clean energy technologies, from a wider range of investors.
The new rules allow clean energy project developers to directly sell tax credits to investors and are designed to attract greater private sector investment in clean energy infrastructure and manufacturing. Buyers benefit by offsetting their tax liabilities and supporting their sustainability targets.
Transferability makes development capital more accessible and cheaper for project developers. Previously, many developers did not have adequate tax burdens to use tax credits themselves and investors could only use tax equity arrangements that involve more complex accounting and administration.
Solar developers can access either investment tax credits (ITCs), which are allocated to project costs, or production tax credits (PTCs), which are based on the energy output. Manufacturers gain PTCs on components produced.
Tax credits can provide up to 60% of project construction costs because bonus adders are available for meeting wage and apprenticeship standards, minimum domestic content levels and locating projects in communities with low incomes or affected by fossil fuel divestment.
The tax credits will be available until at least 2032, offering market participants “greater certainty and stability, facilitating long-term planning,” Hans Royal, Senior Director of Renewable Energy & Carbon Advisory at Schneider Electric, a supplier of energy management and distribution solutions, told Reuters Events.
Schneider Electric advises various corporate clients, many of which are new to the tax credit market. It also buys credits for its own purposes.
Planned US utility-scale power additions in 2024
The tax credit market is growing fast. The total value of U.S. clean energy tax credit transfers is forecast to rise by 50% this year to $25 billion, according to Crux, a financial services company that facilitates deals. Solar will represent the largest share, accounting for around 40% of deals this year, it said.
Higher transfers are expected in the coming years and all classes of solar should benefit from favourable economics and capital access, Crux CEO and co-founder Alfred Johnson, told Reuters Events.
A rise in domestic solar manufacturing following the inflation act combined with falling interest rates could help this trend "accelerate through the end of the decade," he said.
New buyers
Recent solar tax credit transactions include a $103 million PTC facilitation agreement in June by developer Recurrent Energy with Bank of America for its 160 MW North Fork Solar Project in Oklahoma.
Elsewhere, Orsted sold $680 million in PTCs and ITCs from 550 MW solar and 300 MW storage assets in Arizona and Texas to J.P. Morgan in May and U.S. solar supplier First Solar sold up to $700 million of advanced manufacturing PTCs from its 2023 module production to financial tech firm Fiserv in December 2023.
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Larger developers that have established relationships with big investors are the primary participants in the transfer market, but many smaller investors previously unfamiliar with the energy industry will also find these investments "lucrative," Akshay Thyagarajan, Domestic Climate Policy Analyst at thinktank the Center for American Progress, told Reuters Events.
Transferability eliminates certain investment risks such as project cash flow risk, increasing a small investor's appetite for purchasing tax credits. Associated insurance costs are typically covered by the seller, the legal and administrative costs are lower than traditional tax equity deals, and there is simpler accounting and less ongoing management required.
Most buyers are not in the energy industry and were not previously involved in tax equity but they tend to “get comfortable with solar tax credits pretty quickly," Johnson said.
For developers, transferability offers access to cash through credit sales rather than waiting to file tax returns, Thyagarajan said.
This means developers can sell credits at an earlier stage and there is no need to accumulate a ‘critical mass’ of projects to pull in outside money, he said. Meanwhile, the lower administrative burden means more companies are willing to invest in smaller projects.
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Intermediaries in tax credit transfers include U.S. Bancorp, which closed 10 transfer deals in 2023 with five corporations, covering utility-scale solar and wind, residential solar, community solar and stand-alone battery storage projects.
Despite a simplification of tax credit rules, third party intermediaries such as banks, brokers and platforms can "create efficiencies around underwriting, due diligence and legal documentation," U.S. Bancorp Impact Finance Senior Vice President – Tax Credit Syndications, Chris Roetheli, told Reuters Events.
New technologies
Going forward, developers accessing the transfer market will range “from large utility-scale developers to smaller residential and distributed generation projects," Johnson said.
"We’ve observed that [energy] storage is the fastest growing part of the energy complex, albeit from a smaller baseline," he said. "We’d expect that a rising share of solar projects will incorporate a storage component."
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The transfer market will grow as new clean energy technologies are manufactured and deployed, across electricity and renewable fuel sectors, and market participants get more comfortable with various types of credits and structures, said Roetheli.
The market will bring more liquidity for sponsors to tap into and this will lead to more risk-taking and more capacity being built, he said.
Reporting by Neil Ford
Editing by Robin Sayles
Other major news in solar and storage...
Donald Trump would rescind many of President Joe Biden's clean energy rules if he wins the Presidential election against Kamala Harris on November 5, the Republican's presidential campaign said on August 29, Reuters reported.
The U.S. solar sector created over 18,000 new jobs in 2023, representing a growth rate of 5.3%, the fastest rate in the energy industry, the Department of Energy (DOE) said in its latest U.S. Energy and Employment Report.
The U.S. Bureau of Land Management (BLM) has set out a final expanded Western Solar Plan that will make 31 million acres of public land available for faster solar deployment, a larger area than the 22 million acres identified in a draft plan in January.
The UK government has allocated power contracts to a record 93 new solar power projects, approving 3.3 GW of capacity in its latest clean power auction.