Clean Energy Tax Credit Transferability
What are the tax credits?
Clean energy projects have historically been financed in part by tax credits generated per project. The Inflation Reduction Act increased the types of projects eligible to claim credits, the quantity of credits generated per project, and made the credits durable until 2034.
The tax credits create a dollar-for-dollar reduction in tax liability, and sell at a discount to their face value, allowing buyers to reduce their tax bill based in proportion to the purchase price of the credit.
There are two primary types of tax credits:
Investment Tax Credits (ITC): Generated at the time of the project's commercial online date, based on the fair market value of the project.
Production Tax Credits (PTC): Generated in proportion to the energy production of the project.
For 2023, the tax credits listed on Common Forge will be investment tax credits.
What is Transferability?
Tax credits require a tax liability in order to be monetized. In general, project owners lack the tax bill to fully monetize the tax credit, and so transferability allows them to straightforwardly sell the credit to counterparties with tax credit appetite. The tax credit transfer mechanism reduces the all-in cost of the renewable energy project, and accelerates decarbonization at large.
Who Can Use the Credits?
In general, the intent of the Inflation Reduction Act is to allow the renewable energy industry to monetize the tax credits either through transferability or joint project ownership.
Transferability allows the tax credits associated with a project to be sold once -- from project owner to eligible buyer. Eligible buyers are generally C Corporations with U.S. Federal tax liabilities.
When Can the Credits be Used?
Tax Credits can be claimed in the year that the project goes online. For that reason, Common Forge prominently lists the project's commercial online date in its listing. Once the project is online, the tax credit can be carried back three years or carried forward twenty two years.
What Projects Generate Tax Credits?
Energy storage, solar, wind, electric vehicle charging, carbon sequestration, and hydrogen projects all generate tax credits. The amount of credits generated per project depends on the project’s technology, the developer’s use of ITC or PTC, and the project’s location.
