Renewable Energy & Cleantech

On May 2, Schneider Electric’s Tax Credit Investment team hosted a “Tax Credit Transferability & Corporate Buyers” webinar attended by more than 250 commercial and industrial organizations. Subject matter experts Hans Royal, Senior Director, Renewable Energy & Carbon Advisory, and Emily Rose, Associate Director, Head of Renewable Energy Tax Credit Investing looked at tax credit investment for new entrants and ways to leverage tax credits as a mechanism to decarbonization.

The audience submitted nearly 40 questions that exceeded our 15-minute allotment. This blog series includes our team’s responses to those questions. We posted the first installment recently and will post a third installment soon.

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Q. The cash flow impact and opportunity cost of a $9M outlay to eventually save $1M can be hard to navigate. Is there an analysis to show how the cost of the RECs acquired with a transferable tax credit compares to the price of an unbundled REC?

A. Great question. It’s important to dive into where the funds come from, how they materialize in savings, and how RECs come into the picture. The short answer is, yes there is plenty of analysis and the Schneider Electric team is ready to guide companies through this question (and many others). The longer explanation here will help flesh out how TCT deals work and flaws in framing a $9M investment to eventually save $1M. 

One of the benefits of TCTs is how the cash flow and "return" work. It's important to understand the source of cash used to purchase tax credits is an expense line item, not a capital investment. Large companies calculate their expected tax liability and then set aside those funds for their quarterly tax payments. Tax credit buyers divert a portion of those funds that would otherwise be sent to the IRS. By contrast, most capital expenditures often must meet certain return requirements, compete with other investments, and are frequently at risk of being put on hold.

Obviously, REC and tax credit pricing is project-dependent. But, if we temporarily set aside considerations like the time value of money, tax benefits on the REC purchase, and other items, here's a simple calculation that gets to the heart of your question:

Assume tax credits are purchased for $0.90 on the dollar and REC pricing is $7/MWh. An investor could spend $9M to receive $10M in tax credits and generate $1M in savings. The savings could then be used to procure ~140,000 MWh of RECs.

This scenario provides the buyer with three distinct benefits at a net-neutral cost:

• • • • Support of a meaningful amount of renewable energy added to the grid

      • A leadership role in helping a new clean energy project come online

      • Reduced Scope 2 GHG emissions

The company’s alternative, of course, would be to pay the IRS $10M and purchase RECs at a direct $1M out-of-pocket cost — or not to purchase them at all.

Q. Who bears the risk of audit or recapture? How can these risks be mitigated for the buyer? 

A. Either party in the transaction is subject to an audit by the IRS. The buyer bears the risk of project-related recapture within a transfer deal, while the seller is liable for any partnership-level-related recapture. There are some buyer protections on the actions of the partners within a partnership, and our team is experienced in explaining the nuances on this and other topics in a transaction.

The risks of recapture affecting the buyer are mitigated by a combination of the indemnity/guaranty provided by the seller, recapture insurance policies, structure, qualification analysis, and contractual protections from lenders that mitigate the recapture risk associated with ownership transfer through foreclosure.

Q. How is the 2024 market shaping up? Is it a buyer's market, a seller’s market, or balanced?

A. The TCT market is currently a sellers' market for strong developers with proven execution ability, strong partnerships, and balance sheets when it comes to solar and wind transactions. Newer technologies and middle-market developers have a more balanced supply/demand dynamic.

Q. If my organization wants to get into a 2024 transaction, how long does it take? Are there tax credits still available? What about 2023 and 2025?

A. The amount of time it takes Schneider Electric to execute a deal is largely driven by the buyer. In an ideal scenario, our team can identify a project that matches your needs within weeks and get you to closing documentation within six to 12 weeks. While 2023 credits are a bit scarce at this point, we’re actively sourcing a large volume of 2024 credits and have access to an abundance of 2025 credits.

If you would like more information on these or related questions, the Tax Credit Investment team at Schneider Electric can help. Get in touch with us at TaxCreditInvestment@SE.com for a deeper dive into your organization’s opportunity through tax credit transfer.