Transferability Revolutionizes Clean Energy Project Financing, Experts Say

Transferability is Transforming Clean Energy Project Finance, Say Dealmakers
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The introduction of tax credit transferability in the Inflation Reduction Act is reshaping clean energy project financing, allowing developers to secure funding more swiftly and enabling a broader range of investors to participate in the market. This was highlighted by speakers at a recent panel during the American Council on Renewable Energy’s Finance Forum.

Gaurav Raniwala, the global renewable energy leader at GE Vernova, noted that transaction closures have become significantly easier. “You no longer need to align two different structures simultaneously and then finalize everything amidst existing complexities. The range of participants entering the market has expanded considerably,” he explained.

A report from Crux, a financial technology company facilitating connections between tax credit buyers and sellers, indicated that lenders are increasingly interested in financing emerging technologies like carbon capture, supported by a more robust and liquid market for transferable tax credits.

Historically, project financing relied heavily on the tax equity market, which had limited capacity. “The industry aimed for a larger footprint,” Raniwala commented. “To build a dominant energy sector capable of supporting electrification and advancements in AI, we need access to all energy sources. Transferability has broadened the market beyond just traditional tax equity to include a diverse array of players.”

According to Crux’s analysis, tax equity structures have evolved into hybrid models, specifically known as t-flips, which facilitate the sale of a portion of tax credits in the transfer market. The report revealed that t-flips constituted about 60% of tax equity commitments in 2024, with expectations for that figure to rise.

Meghan Schultz, the executive vice president and CFO at Invenergy, remarked that the tax equity market, previously valued at around $20 billion annually, was dominated by a few institutions for many years. However, the introduction of transferability has more than doubled the market size, allowing tax investors and credit buyers to monetize tax benefits without necessarily owning the projects.

Raniwala also mentioned the customization of transactions based on credit profiles. For example, developers can pursue traditional tax equity financing while also having the option to transfer credits, enabling them to borrow against those credits from banks.

Despite these advancements in project financing, the future of transferability is uncertain. A recently passed House budget bill proposes to eliminate or significantly restrict the transferability of credits under the Inflation Reduction Act, along with potential reductions in the credits themselves.

Crux highlighted the uncertainty in the medium-term policy environment, which could lead to higher capital costs, reduced availability of capital, or increased equity requirements for developers seeking project financing.

Nonetheless, Crux’s report maintains an optimistic outlook on the U.S. clean energy economy, noting it directed nearly $340 billion in new investments last year. The speed of transactions facilitated by transferability is a key driver for new projects. Schultz emphasized that the ability to trade tax credits has expedited financing closures, allowing developers to proceed without needing a tax equity or credit buyer secured at the closing.

David Haug, CEO of Bildmore Clean Energy, pointed out that the option to transfer credits empowers developers to select between long-term offtake contracts or revenue contracts, reducing merchant risk. “We don’t require them to have long-term contracts or pre-sold tax credits. We are confident in the strength of the tax credit market and the merchant power market,” he stated.

Overall, the ongoing evolution of transferability in clean energy project finance marks a significant shift, promising to enhance investment opportunities and accelerate the transition to a more diverse energy landscape.