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The third annual Infocast Solar + Wind Finance Investment Summit was held in Scottsdale, AZ from March 10 to 13. The conference attracted a record number of attendees with 3,200 tickets sold. There was much discussion of the various proposed energy tax credit rules that have been released since the last conference. The volume of new rules feels like a career worth of tax guidance condensed into a year.
Below are soundbites from various panel discussions. They are organized by topic, rather than chronologically. They are edited for clarity. You can click on the links below to go to the topic of interest to you:
- Transferability,
- Pricing of Tax Credit Transfers,
- Energy Community Adder,
- Domestic Content Adder,
- Prevailing Wage and Apprentice,
- The 2024 Election,
- Storage,
- Supply Chain,
- Increasing Demand for Electricity, and
- Interconnection Challenges
Transferability
Background: Credit Suisse projected that the energy tax credit market in 2031 would be $83 billion. That’s up from estimates of $20 to $23 billion of traditional tax equity investments in 2023 and $4 to $9 billion of tax credit transfers in 2023. The only way the expected level of demand can come to being is through the transferability market.
The transferability market is a function of the Inflation Reduction Act of 2022 (IRA), which for the first time allowed federal energy tax credits to be transferred using a bill of sale. Our article about the proposed transferability regulations is available here. Below are the transferability soundbites.
“Transferability is working as designed by Congress. The additional funding that will be needed will come from the transfer market.”
American Multinational Financial Institution, Managing Director
“We have continued to see the big developers dominate the tax credit transfer market, so I don’t know if we have achieved the goal of expanding the market for smaller developers.”
Trade Association, Vice President
“Tax credit insurance is the great equalizer.”
Tax Credit Insurance Broker
“Transferability is the only solution we have for the demand for more tax equity.”
Wind and Solar Developer, CEO
“Potential corporate buyers are showing increasing interest in transferability.”
American Multinational Financial Institution, Managing Director
“Transferability is a game changer. We created a tax credit transfer desk in the middle of last year. We are seeing entrants who never thought we would see in this market. It is a sea change. 2024 is the dawn of a new age.”
American Multinational Investment Bank, Managing Director
“It remains to be seen if transferability is the gateway drug to traditional tax equity transactions for corporate investors.”
Tax Credit Syndicator, Partner
“Sometimes the tax equity investor commits to use or sell all the credits, sometimes half the credits; sometimes the tax equity investor gives a price floor on selling the credits; sometimes the price floor is combined with upside sharing.”
Boutique Investment Bank, Co-Founder
Electric Reliability Council of Texas (ERCOT) “is moving to a transferability market because most of the traditional tax equity investors are oversaturated in ERCOT. That’s not going to change.”
Wind and Solar Developer, CEO
“The lack of a monetization market for depreciation tax benefits is leading to higher power costs to consumers.”
Wind and Solar Developer, CEO
“Tax equity investors were getting comfortable taking longer commitments, while tax credit buyers are managing to the next estimated tax payment date.”
Boutique Investment Bank, Co-Founder
“We are surprised at how much diligence these buyers are doing for transfers. That might be a function of the counsel they are hiring. We need to help buyers understand they are doing more diligence than they have to do.”
American Multinational Investment Bank, Managing Director
“Some players in the transferability market are coming in without much knowledge of the industry. They take some comfort from a tax equity investor staying in the deal.”
American Multinational Investment Bank, Managing Director
“A lot of tax credit buyers just don’t have the team to do the due diligence. It is the tax department and the treasury department moonlighting in tax credits. Such tax credit buyers may feel better if there is tax credit insurance, and they can rely on the underwriter’s diligence.”
Tax Credit Insurance Broker
“Fifty percent of utility scale solar projects are opting for the production tax credit (PTC). Unless you can find a buyer for five to ten years of PTCs at a fixed price, then traditional tax equity may work better for PTC projects.”
American Multinational Financial Institution, Managing Director
“Companies don’t get ‘Scope 1’ or ‘Scope 2’ emissions benefits for ESG reporting purposes from buy tax credits, but it can be a good story about their environmental efforts.”
Tax Credit Transfer Advisor
“Advising sponsors we look at different alternatives. Now, there are a lot more alternatives. There’s a ‘combination partnership’ where the sponsor sells the tax credits itself.”
Boutique Investment Bank, Co-Founder
“Transferability was supposed to make tax credit monetization simpler, but we have added complexity with the hybrid partnership structures.”
Boutique Accounting Firm, CPA
“There is a 200 bp increase in the cost of tax equity.”
Boutique Investment Bank, Co-Founder
“But there is a question of what is driving this increase [in the cost of tax equity]. There are 11 new credits, so supply and demand is different.”
American Multinational Investment Bank, Managing Director
“You are going to see tax equity investors wanting the option to have the tax credits sold.”
American Multinational Financial Institution, Managing Director
“You have to remember that for certain purchasers the investment tax credit (ITC) at-risk rules apply and the passive activity loss rules apply to all the transferred tax credits, and those rules are not for the faint of heart.”
Boutique Accounting Firm, CPA
Pricing of Tax Credit Transfers
All of the soundbites in this section are from executives from a company that has a website that matches tax credit buyers and sellers.
“We’re seeing pricing from $.81 to $.94” per $1.00 of credit.”
[NRF has seen pricing higher than $.94.]
“We are expecting a $15 to $18 billion annual market in tax credit transfers.”
“Smaller credit sales mean a lower price to compensate the buyer for doing the work on a small credit purchase.”
“Tax credits have vintages like wine. Big demand now for 2023 credits.”
[Explanation: tax credits from 2023 can be sold in 2024, so long as neither buyer nor seller has filed its 2023 tax return (including delays in filing due to allowable extensions).]
“There are sub-markets based on vintage, risk, and ITC v. PTC.”
“Some sellers will accept a lower price for better cash flow. For instance, a resi solar company may accept a lower price from a seller that will pay for ITC in the same month the projects are placed in service.”
“Some tax credit buyers just want to maximize yield. They will do their own due diligence, rather than requiring an insurance policy or a creditworthy guarantor, and in exchange will require a lower price.”
[NRF has not encountered such buyers yet.]
“Some sellers are offering to hold some of the sale proceeds in escrow to cover potential tax indemnities.”
[NRF has not seen this yet.]
“Most credits are being sold in advance of placed in service.”
[This likely means the contract is signed, but the buyer is likely to insist on waiting to pay until placement in service and the satisfaction of other conditions precedent.]
Energy Community Adder
Background: the IRA provides for a 10 percent increase in tax credits for projects located in (i) census tracts (or adjoining census tracts) with closed coal mines or closed coal-fired power plants or (ii) statistical areas with .17 percent fossil fuel industry employment in any year after 2009 and in a more recent year unemployment not less than the national average.
The energy community adder rules are particularly technical. Our article about the rules is available here. Below are the energy community adder soundbites.
“If the project is in an energy community everyone wants to take a piece of the cake starting from the land owner, so there is not much left for the developer.”
US Subsidiary of a Spanish Energy Company, CEO
“The Energy community adder has become make or break for projects. A project is not competitive if it is in a region where most projects qualify for the adder but is in a pocket that does not qualify.”
Wind and Solar Developer, CEO
Domestic Content Adder
Background: the IRA provides a 10 percent tax credit bonus for projects satisfying the domestic content rules. The rules require that all steel and iron used in structural elements of the project must be made in the US. Further, a percentage of the components must be from the US. That percentage is 20% ratcheting up annually until reaching 55% in 2027 for offshore wind, and for other technologies 40% ratcheting up annually until reaching 55% in 2028.
Our article about domestic content is available here. Below are the domestic content soundbites.
“The Big 3 [(GE, Siemens and Vestas)] are in a good position on domestic content at 45% or more.”
US Subsidiary of a Canadian Energy Company, Vice President
“There are details to be worked out for domestic content about how to provide the documentation.”
US Subsidiary of a German Energy Company, CFO
[Explanation: The current iteration of the IRS’s guidance on domestic content requires that it be measured based on the manufacturers’ cost. Therefore, developers that want to claim domestic content bonus must ask their manufacturers for the direct costs incurred to make the components in the project. In theory, such developers have to ask their manufacturers outside the US for their direct costs too in order to include them in the denominator of the domestic content ratio. Some developers find their non-US manufacturers to be unwilling to provide this information, which leads to having to use the cost the developer paid for the imported components, which one would expect to be materially greater than the manufacturer’s cost (i.e., it is a conservative approach for imported components).]
“For domestic modules, we are seeing reversed engineered pricing that makes the cost the same after the domestic adder as the cost of imported modules.”
US Subsidiary of a Spanish Energy Company, CEO
“First Solar Series 7 modules are in good shape from a domestic content standpoint. Aside from First Solar, it is hard for solar project to meet the required levels. It is confusing in regards to trackers and other issues. Will tax equity step-up if you are a bit on the edge. We need additional manufacturing in the US to really make domestic content fly.”
US Utility Scale Renewable Energy Company, CEO
“To qualify modules as domestic content, you need to make cells domestically. Building a cell factory in the US takes two to three years”
US Subsidiary of Chinese Solar Module Manufacturer, CEO
“If there was a flaw in the IRA, there should have been a better transition from an import supply chain to a domestic supply chain. Nonetheless, I am grateful for the IRA and should not complain.”
Wind and Solar Developer, CEO
“To qualify a project for domestic content, it requires an incredible amount of collaboration across companies and disciplines.”
Alternative Investment Manager, Partner
“The rules have been clearly laid out for the energy communities. That’s not the case for domestic content. … Domestic content feels like a black box.”
American Bank Holding Company, Business Development Officer
“We are seeing liquidated damages in supply contracts that are not significant given the exposure for the customer on the domestic content adder and any potential penalty.”
Regional Accounting Firm, Managing Director
“The IRS’s domestic content guidance violates the Buy American Act due to going down to the component level.”
Trade Association, Vice President
“Domestic content is the most commonly insured adder.”
Tax Credit Insurance Broker
Prevailing Wage & Apprentice (PWA) Requirements
Background: projects with over one megawatt (a/c) of capacity that begin construction, under the tax law’s definition, after January 28, 2023 must comply with the prevailing wage and apprentice requirements or their tax credits are divided by five.
Our article about the rules is available here. Below are the PWA soundbites.
“My company has created its own certified apprenticeship program.”
Construction Company, Executive Vice President
“At the end of 2023, there were 10 million open jobs in the construction industry. That was 4 million more than pre-IRA.”
Construction Company, Executive Vice President
“Developers that have market share are able to push PWA risk on to the construction contractor, while a smaller developer may be less able to.”
Regional Accounting Firm, Managing Director
The 2024 Election
“The election is like a slot machine. What if they all come up red. We don’t have fears of something really draconian happening. I think the issues would be along the edges. The wind business and the basic IRA construct is going to be around.”
Privately Held Large Renewable Energy Developer, CFO
“People are going to power through what’s happening politically. In Trump’s four years, there were more coal plant shutdowns then in eight years under Obama.”
US Utility Scale Renewable Energy Company, CEO
“Wind is pretty resilient in terms of changes in Presidential administrations.”
Independent Engineering Firm, Vice President
Storage
“Domestic content is very sparse for storage. It is going to cost more money for American made goods.”
Storage Consultancy, CEO
“No one has transacted based on Tesla’s domestic content tax opinion yet. We have a Tesla project covered by that opinion and are cautiously optimistic, but we have not been able to transact yet.”
Storage Developer, CEO
“The ITC changes the algebra of who is paying for what for storage projects.”
Renewable Energy Developer, CFO
“We now have 10 states with storage targets and a sprinkle of incentive and rebate programs.”
Storage Consultancy, CEO
The two biggest storage markets are Texas and California. Eighty percent of the storage projects we reviewed in the last two years are in those two markets. California has a lucrative incentive for storage and is adding ‘slice of day’ incentive, so one hour batteries can participate. Texas has volatility, and batteries like volatility.
Independent Safety Science Company, Director
“There are three ways to make money from storage. First, there’s time of day arbitrage with the duck curve in California [(i.e., buy power to charge your battery at midday when supply is high and sell power in the evening when demand is high)]. Second, there’s scarcity pricing in ERCOT [(i.e., hope it is a hot summer and there is not enough power generated for all the air conditioners)]. Third, there is volatility pricing for ancillary services.”
Storage Developer, CEO
“The business model of yesterday and probably today is ancillary services. Most storage projects that are getting built in ERCOT are achieving their returns through ancillary services. There is going to be more emphasis on energy arbitrage.”
Storage Consultancy, CEO
“If you are going to hire someone to optimize your trading strategy please do a trial run before hiring them.”
Storage Consultancy, CEO
“Today’s procurement is piecemeal. If you are going to demand an integrator provide a performance wrap of the battery storage system, that is going to add on 25 percent to the cost of the system.”
Storage Consultancy, CEO
“About 15 sub-systems all have to be integrated into a battery storage system. Most of them are installed in the field and not in the factory. The manufacturers all show up with laptops and thumb drives trying to get the system commissioned.”
Independent Safety Science Company, Director
“I would rather not pay for extend warranties and performance guaranties, which are like a safety blanket, and spend the money on spare parts and knowing that I can do my own operations and maintenance.”
Storage Consultancy, CEO
“The safety blanket of the wrap is more like a wet newspaper.”
Storage Consultancy, CEO
“All batteries are going to have issues in the first six to 12 months. Call it teething or optimization.”
Independent Safety Science Company, Director
“At some level, we are still dealing with the physics of small numbers [in analyzing the performance of a relatively small number of battery storage systems]. What we monitor and measure today does need to change.”
Independent Safety Science Company, Director
“Using HVAC (forced air cooling) to cool battery containers is not a good thing to do. It causes accelerated degradation, which is like a cancer. HVAC also takes up space. The substitute for HVAC is liquid cooling. Liquid cooling is much more uniform and allows for much greater density in the container that holds the battery. We have noticed a migration away from HVAC towards liquid cooling. ”
Storage Consultancy, CEO
“A year or two ago the price of lithium was crazy, and it has kind of settled down. If electric vehicle demand surges again, we will see lithium prices go up.”
Renewable Energy Developer, CFO
“Rather than lithium pricing, we see international trade tensions as the greater risk to the storage industry.”
Renewable Energy Developer, CFO
Supply Chain
“There is an increasing demand everywhere for transformers. You have electrification increasing all over the world. Transformer manufacturers are making a really good margin right now.”
US Arm of a European Utility, President
“Transformers have become the supply chain constraint. Transformers are showing up on the project site just a couple of months before commissioning.”
Construction Company, Executive Vice President
“Costs are stabilizing.”
Privately Held Large Renewable Energy Developer, CFO
“The 45X credit [for manufacturers] is powerful. American Clean Power says it has spurred 117 factories in the US. The 45X credit qualifies for 5-years of direct pay out of the 10-year credit period.”
Privately Held Large Renewable Energy Developer, CFO
“The Chinese manufacturers are growing super fast. The Chinese are going to be very competitive in other markets but not the US.”
US Arm of a European Utility, President
Increasing Demand for Electricity
“The biggest driver of growth for power is a good economy.”
US Subsidiary of a Canadian Energy Company, Vice President
“The demand for power is growing at a historical rate due to electric vehicle charging, new factories being built in the US, and the data center story. New capacity will be needed and hopefully a lot of that will be renewables. Solar cannot get the job done alone. If you are looking for 24/7 carbon free power, then wind has to be part of that.”
Privately Held Large Renewable Energy Developer, CFO
Interconnection Challenges
Background: for utility scale project developers, it used to be that a power purchase agreement was the most difficult piece of the puzzle, while interconnection required paperwork, patience and posting a deposit but was generally available. Now, interconnection is the most difficult piece and obtaining an interconnection agreement can take almost as long as a bachelor's degree.
“The best resources for wind are the center of the country: Southern Power Pool (SPP), ERCOT and Midcontinent System Operator (MISO). In SPP, you are in interconnection queues for three years. Those things are starting to get reformed. SPP interconnection queues are getting better.”
US Subsidiary of a Canadian Energy Company, Vice President
“Congestion studies are the first step for any new wind project.”
US Arm of a European Utility, President
“The biggest bottleneck is interconnection queues.”
Alternative Investment Manager, Partner
“Interconnection is the single biggest issue we all have to face. You have to take a view on how many projects near yours will actually be built.”
US Subsidiary of a Spanish Energy Company, CEO
“Transmission is the single biggest issue effecting the wind industry for both onshore and offshore. Inter-regional transmission needs to increase by five-fold. Transmission moves power from A to B but also provides reliability.”
Privately Held Large Renewable Energy Developer, CFO
