Tax credit transfer rules shift solar development strategies

investment tax credit

The Inflation Reduction Act (IRA) altered the landscape for the transferability of energy tax credits, specifically with the Investment Tax Credit (ITC). These changes have led to a change in how solar projects are financed and built with the expanded accessibility of these credits.

Solar Builder recently polled several industry experts to understand how tax credit transfer rules are impacting their business, as well as other permitting concerns. Here’s what they had to say:

How have the tax credit transfer rules impacted development strategies? Examples?

Hannah McGovern, VP of Capital Markets, DSD Renewables: “The tax credit transfer rules have shifted development strategies in several key areas. For underwriting during the origination and acquisition stage, developers no longer need to factor in tax equity partnership flips when considering project economics. With these new transferability rules, developers are now able to explore transfer-flip hybrid structures or preferred equity structures, which really broadens the scope of available ITC monetization options. Another factor to consider is that this has also led to an increase in ITC insurance costs, as ITC buyers typically require more comprehensive insurance coverage on the credit’s value. Ensuring that developers are in compliance with Prevailing Wage and Apprenticeship requirements for projects exceeding 1 MW is becoming increasingly important as more ITC buyers want to see PW&A covered on the insurance policies.

“In general, these rules have enabled expansion into a wider range of solar markets and have opened the door for new opportunities. Tax credit buyers are becoming more agnostic to project types and offtakers, which allows developers to explore and screen a broader variety of projects than they would have otherwise. Also, traditional tax equity financing for distributed generation projects has focused on creditworthiness and has sometimes avoided community solar risk. Now, transferees may be less sensitive to credit risk so long as they’re insured, which enables developers to pursue projects that wouldn’t traditionally find homes amongst tax credit investors who are regulated institutions.

“Additionally, developers that are deploying on-site solar for corporate customers and selling them the power generated, are able to now offer them an additional product: tax credits. With corporate customers having the option to purchase tax credits directly from the developer, they are able to reduce their federal tax liability. These rules lead to more flexible development strategies and new opportunities for the industry, while really enhancing the value proposition of solar for commercial customers and ITC buyers.”

David Carpenter Green Lantern Solar

David Carpenter, VP of Development &Chief Legal Officer, Green Lantern Solar: “It may impact our strategy if we decide to hold a project. For example, we are investigating the possibility of a tax transfer for one of our small projects, but the value gets eroded pretty quickly due to transaction costs. 

“As an NTP developer, securing tax equity isn’t a primary concern for us, and we don’t anticipate challenges in that market in the near future.”

Megan Byrn Standard Solar developer

Megan Byrn, VP of Business Development, Standard Solar: “In the near term, the impact has been mixed. While it expands the pool of tax capacity, it also introduces downward price pressure on the value of tax credits for traditional financing partners, alongside a new segment of brokers and associated fees.

“In the longer term, we see increasing opportunities to directly partner with large corporate customers to provide a full suite of products to help achieve their sustainability and financial goals which can include tax credit transfers in addition to the more traditional energy and renewable credits.”

Bernardi Burns McDonnell solar developer

Adam Bernardi, Director of EPC Sales & Strategy for Renewables at Burns & McDonnell: “As an EPC contractor, we are not always privy to the development aspect of projects, but it seems like a double-edged sword. On one side, it opens up the market to developers who may not have existing relationships with tax equity providers. On the other hand, it could cause delays as developers get comfortable with the transfer market and associated pricing.”

For more solar developer insights, be sure to check out the Q3 issue of Solar Builder.

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