Tax Credit Transfers: An Opportunity for Clean Energy Deployment

When the Inflation Reduction Act (IRA) was first enacted into law in August 2022, it included provisions that allow businesses and investors to transfer tax credits as a financial incentive, designed to encourage more investment in renewable energy and clean energy transition infrastructure at a broader scale. The IRA’s tax credit transferability rules are designed to make the financing of clean energy projects more flexible and efficient for corporations, by creating a market where tax credits can be bought and sold.

What is a Tax Credit Transfer (TCT)?

Traditionally, tax credits could only be used by the entity that owns the underlying eligible asset. This gave rise to complex tax equity partnership structures, where investors could claim the tax credits and depreciation benefits of clean energy assets via ownership. Under the IRA’s 2022 provisions, tax credits can be transferred or sold to other corporations through a much simpler transaction. This “transferability” clause creates a new open-access market where businesses of all sizes can actively participate. Additionally, raising funds for clean energy projects has become more streamlined because of these provisions. Developers who might have otherwise previously struggled to secure limited tax equity funding now have a more accessible mechanism for raising bridge financing or for selling their tax credits to fund projects’ development and construction. It is anticipated that this collaborative effort will help the market for tax credits become broader and even more efficient over time, supporting a wider variety of clean energy projects and technologies, to benefit the decarbonization of the grid.

Accelerating the Transition to Sustainable Infrastructure 

Using TCTs, previous barriers to market entry have been lowered, incentivizing corporations to bring liquidity into the market. New diverse participants in the open market also help to accelerate the transition of sustainable infrastructure through increased financing options. Clean energy tax credit transfers offer corporations a strategic avenue to advance their sustainability, decarbonization, and/or renewable energy goals, while also reaping positive tax and economic benefits. Utilizing an existing and budgeted expense in their tax bill, companies can leverage these tax credit purchases to achieve financial returns with limited risk, versus other potential investment structures.

Following the passage of the IRA, Schneider Electric itself took a proactive role in educating clients about the benefits of tax credit transferability and the advantages of investing in clean energy. With dozens of Fortune 500 clients leveraging well over $10 billion in annual tax credit appetite, Schneider Electric’s advisory business has facilitated significant new engagement in this market, providing clients with a steady stream of tax credit transfer opportunities and ensuring an efficient due diligence and transaction execution process. Through this TCT service, clients are diligently guided through every step of the process, from educational materials, and developing internal governance strategies, to tax credit sourcing, due diligence, and ultimately funding, ensuring a comprehensive and supportive experience along the way.

TCT Projects in Action: Helping Clients with Sustainability & Economic Goals

In February 2024, Schneider Electric announced its own investment in Texas-based clean energy projects through a Tax Credit Transfer Agreement (TCTA) with ENGIE North America. The projects, which included solar and battery storage systems, are set to be operational starting in 2024 and will help Schneider progress on the path toward a future goal of 100% renewable energy in North America. This agreement represents the first-ever large-scale tax credit transfer and REC offtake of its kind, which facilitated the successful, early achievement of Schneider’s renewable energy objectives in conjunction with the tax credit transfer transaction.

Schneider Electric also recently worked with Crux, a sustainability technology firm to purchase Section 45X Advanced Manufacturing Production Tax Credits from Silfab Solar, a North American leader in the design, development, and manufacture of premium solar PV modules. By acquiring these tax credits, Schneider Electric provided Silfab with additional funding that will help expedite the company’s growth in U.S. solar energy manufacturing, for both commercial and residential applications.

In late 2024, Schneider’s advisory team also recently expanded their longstanding relationship with Kimberly-Clark, whose trusted brands are an indispensable part of life for people in more than 175 countries. This occurred by facilitating and advising the company as they finalized Tax Credit Transfers of over $237.75M from four battery energy storage (BESS) projects across Texas. These projects are crucial for the energy transition, as they contribute to the stability and reliability of the grid. Read more, here.

Going Beyond Tax Savings: Combining TCTs + RECs

Navigating the complexities of tax credits and sustainability can be challenging. Schneider Electric’s Sustainability Business has developed a comprehensive approach that goes beyond just securing tax savings. A unique TCT and Renewable Energy Certificate (REC) solution (“TCT + REC”) helps corporations realize significant tax benefits while providing a streamlined path to achieve their sustainability objectives. 

While some firms focus on tax credits alone, Schneider’s clients typically seek to obtain sustainability and decarbonization co-benefits alongside their tax credit investments.  As an illustrative example, Schneider’s team can help clients achieve both tax credit and renewable energy objectives, providing a one-stop shop for managing TCTs and sourcing RECs together. The savings generated from tax credit transactions can be reinvested into procuring RECs, facilitating a more straightforward path to achieving sustainability targets in a financially attractive fashion. The approach not only maximizes financial benefits but also supports a more sustainable future.

RECs represent an expense for companies investing in clean energy, while Tax Credit Transfers offer potential savings that can offset such costs. The concept of using TCT savings to fund REC purchases is still a newer mechanism in the marketplace, spearheaded by Schneider, with significant market interest in this approach. For example, a company could hypothetically purchase $100M in tax credits for $95M in cash, saving $5M on taxes, and then purchase 100,000 MWhs of RECs/year for 10 years at $5/REC. This innovative concept holds promise for optimizing decarbonization strategies through participation in renewable energy tax credit investments.

Overcoming Obstacles and Taking Action

Tax credit investing has become more accessible over the last few years thanks to the IRA’s transferability clause. Together with its clients and industry collaborators, Schneider is at the forefront of guiding companies through this evolving landscape. A dedicated TCT team focuses on educating and working to guide newer entrants in the tax credit industry on the nuances of transferability, while also identifying valuable tax credit opportunities and providing comprehensive support throughout the process. From explaining risks and benefits to assisting with negotiations, performing due diligence, and underwriting, and closing—tax credit investing is simplified at every step.

To learn more, visit Tax Credit Investment.

At Climate Week 2024, Schneider was also recognized for its work on Tax Credit Transfers by the RE100 as a “ChangeMaker.” Recipients were chosen by an international, independent judging panel, for their ambitious and pioneering work in accelerating the global transition to 100% renewable electricity. Read more, here.

Contributors:

Hans Royal, Senior Director, Renewable Energy & Carbon Advisory
Emily Rose, Associate Director, Head of Renewable Energy Tax Credit Investing