The Inflation Reduction Act made Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) generated by renewable energy developments transferable, which allows project developers to sell credits to third parties (e.g., corporate buyers) without the need for complex partnership structures. Schneider Electric recently partnered with the Clean Energy Buyers Association to explore emerging opportunities in tax credit investment.
Hans Royal, Senior Director – Renewable Energy & Carbon Advisory, and Emily Rose, Head of Tax Credit Investing, hosted a lively, virtual discussion that generated dozens of questions across the two sessions. Our team collected the unanswered questions from the initial one-hour session and provided thoughtful, concise answers here.
I would like to verify that this solution avoids hedge accounting and IFRS accounting hurdles and to understand if there are any IRS implications associated with the purchase.
Quick disclaimer: accounting decisions and approaches should be discussed with your internal and external accounting experts as Schneider Electric is not a professional accounting firm.
However, our perspective is that indeed this solution avoids the typical derivative/hedge accounting/mark-to-market issues that IFRS presents with VPPAs. Tax Equity and Tax Credit Transfers also have different accounting: for tax equity investing, in the absence of IFRS guidance, most similarly situated companies utilize guidance provided for GAAP accounting. Tax equity investments are governed by ASC 323 (for the investment) and ASC 740 (for the tax credits). Tax credit transfer guidance should be out imminently, but we believe the expected accounting treatment is simply a credit to cash, and a debit to taxes payable with the profit recognized in the year of the credit.
Regarding IRS implications, that’s a broad question. Obviously, TEI and TCT are both heavily reliant on IRS tax policy.
How are the delays in the construction of Solar farms impacting the RECs?
Projects seeking Tax Credit Investment are currently mostly 2024/2025/2026 CODs depending, so once CODs are achieved, then RECs would start to be delivered, assuming RECs are included in the TCI deal.
Why is it that prices are still increasing even with tax credit incentives? Would the price have increased more without the incentives?
Assuming this question concerns the current price trend of VPPAs. Yes, the price would likely increase more without the tax credits under IRA. The price of energy (or financial instruments connected to the price of energy) is volatile due to a variety of reasons, and other inputs like commodity costs, interest rates, construction costs, supply and demand for renewables have all created upward price pressure on VPPAs. We’ll see. Sometimes it takes a while to see the impacts of policy on the market- it hasn’t been a full year since IRA passed yet, so it’s unclear if the upward price trend will continue, or not.
Is there any transparency into who buys and how much of the Renewable Energy Credits are acquired? If so, can you identify that?
It certainly depends; voluntary buyers of RECs often report their purchases publicly, whereas compliance buyers often are public and must disclose. Usually, it’s possible to understand who is purchasing RECs, especially if there’s a PPA/VPPA and the buyer publicly discloses it, which happens often.
How available are TCI deals which include the RECs and additionality claims?
This is a new market, so it’s premature to give any hard data around this, but Schneider Electric’s unique approach to the market has uncovered significant opportunities for our clients.
If a company is just starting to work on developing its renewable procurement strategy, is TCI a good strategy to develop initially, or is it a later-stage approach?
TCI is a great strategy to look at alongside other options given current market conditions, as long as the company has usable tax appetite in the USA.
What is the minimum annual MWh/REC amount recommended for TCI?
There’s no hard rule for this, but at some point, the complexity of TCI may not be worth the effort. A minimum 50,000+MWh/year of REC needs is a decent rule of thumb, but Schneider Electric works with some clients with lower needs, and certainly many with much higher needs.
Under what conditions can the ITC go up to 60%?
If a project qualifies for additional incentives vis a vis meeting requirements for utilizing “Made in USA” components, location in an energy (oil/coal) community, or location in a low-income census tract, an additional 10% is added to the 30% credit for each one.
How can I ensure that I do get access to the RECs?
This would be negotiated via the utilization of a purchase and sale agreement, but importantly, finding the right projects with RECs available at the right time in their development cycle is crucial. Schneider Electric’s unique approach and structure to the market helps unlock TCI with RECs and additionality.
Why is Tax Credit Transferability only shown here as being paired with RECs and not paired with a PPA or VPPA? Is that also a viable option?
It is! This presentation focuses on the opportunity created by the IRA to leverage tax expense as a mechanism to procure RECs without taking on electricity price risk (or as an alternative), but it is also possible to take on the electricity + RECs + tax credits in a transaction.
Any estimate on the cost of tax credit purchases per MW of installed capacity?
This would depend significantly on the type of tax credit, PTC vs ITC, and what level of tax credit the project is eligible for. For example, some projects might get a 30% ITC (so, as an illustrative example say a $100mm project at $1m/MW would get $30mm of tax credits), but there are many more variables that would result in a wide range.
What does this mean for the future of VPPAs?
Traditional tax equity financing will still be robustly used in the market, and so PPAs/VPPAs will still be an important part of the equation for many projects.
How many RECs/$ paid the buyer will get?
This will be a wide range depending on your usable tax liability, the projects available, timelines desired, available RECs, tax credit type, structure, etc. Reach out to Schneider Electric to learn more about what this solution might mean for your company.
Does Schneider have a sense of the size of deals that are typically available (both cash commitment and REC needs) in these kinds of deals? Similar to PPAs, there are MW size thresholds. Curious if there's something similar in Schneider's tax credit transfer.
It depends, but please reach out to Schneider Electric to learn more about what this solution might mean for your organization.
The whole purpose of a VPPA is for the developer to hedge the project and guarantee a revenue stream, so they use the REC/VPPA combo to do that. Why would the developer want to bundle the REC with the tax credit and have no “carrot” to guarantee their revenue from sale of power?
There are a variety of structures where RECs are available alongside TCI- reach out to the Schneider Electric team to learn more about the opportunity and our approach to market.
With the TCT Schneider approach example, how much will the buyer end up paying per a REC?
This will depend on a variety of factors from size of investment, desire for project RECs, the market the development sits within, and the developer business strategy, but ultimately the Schneider Electric TCT opportunity typically results in a net cost savings per REC.
Schneider Electric created a new structure that allows corporates to procure tax credits alongside a long-term REC position. This enables corporates to advance their renewable energy, decarbonization and sustainability goals, while simultaneously lowering their organization’s tax liability.
Other benefits of this emerging structure may include:
- Additionality claims and long-term REC stream
- Cost-effective method to meeting REC procurement targets in short-, long-term
- Tax savings (i.e., bottom-line accretive financial results)
- Streamlined process and lower financial risk versus other long-term RE procurement options
- Prominent positioning as a sustainability leader