What is tax credit transferability?

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Historically, there have been two distinct U.S. federal tax credits for renewable energy projects. In 1992 a production tax credit (PTC) was enacted for wind projects and expired at the end of 2021. The solar investment tax credit (ITC), first enacted in 2006, is widely credited as one of the vital policy mechanisms that drove the massive growth of the solar industry over the last 15 years. Under the IRA, the wind PTC and solar ITC were restored and extended for several years. 

The IRA allocated roughly $43 billion to sustainable infrastructure tax credits. Developers can now earn credits using domestically manufactured equipment, ensuring fair wages and apprenticeships, and siting projects near frontline communities. More than a dozen renewable energy technologies, including electric vehicles, green hydrogen, hydroelectric, carbon sequestration, and more, are eligible. 

In addition to extending and expanding the suite of tax credits for sustainable infrastructure projects, the IRA includes a critical measure that could lower project barriers and enable a more liquid market: tax credit transferability. 

Before the IRA: No Tax Credit Transferability After the IRA: Transferability Allowed
Tax equity investor was required
Only entities with significant tax liability could monetize tax credits, so a partnership investment was necessary. A necessary tax equity buyout also created risk and uncertainty.
Tax equity investor is not required
Entities without significant tax liability can monetize tax credits to avoid a partnership investment and a tax equity buyout.
Tax equity can drain development capital
Substantial compliance, legal, and transaction costs are required, draining development cash and often resulting in lengthened timelines and added risk.
Decreased overhead and other soft costs
Fewer specialized experts will be necessary for a project to navigate tax equity successfully.
Tax equity uncertainty can delay project construction financing
Obtaining tax equity financing presented tricky barriers to construction financing and could delay project timelines.
Reduced construction financing barriers
Lenders can underwrite construction loans against future tax credit monetization, which developers can use for construction or other project-level capital.
The market was exclusive and limited
Those with large tax appetites only received tax equity investment; developers of smaller projects or ones without tax equity connections also needed help accessing the market.
A more diverse, liquid market is created.
Projects and sponsors that don’t have access to efficient tax equity can participate, thanks to a more straightforward, more liquid tax equity market.