BLOG SERIES: Tax Credit Investment FAQs, Part 3 of 3
In May 2024, 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 previously posted the first installment and the second installment.
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Q: What is the impact on the tax credit buyer’s cash flow? Are there cases where payment for the credits was made after the financial benefit was realized?
A: Payment timing is a key element to be negotiated as part of any Tax Credit Transfer Agreement (TCTA). One way to achieve the result you describe is to "short" your quarterly tax payments.
For example:
A business has a total of $200 million in expected annual tax payments (four quarterly payments of $50 million each). If the business were to commit early in the year to invest $90 million in a renewable project that places in service in Q3 in return for $100 million in tax credits (50% of the liability), the first two quarterly tax payments to the IRS could be reduced from $50 million to $25 million. This ultimately frees up capital throughout the year to invest in other revenue-generating activities. Then, in Q3, the business would pay the tax credit seller $90 million once the project is placed in service. In this simplified scenario, the business receives much of the benefit of the tax credit investment prior to paying for the credits.
Q: Do you see any scenario where a corporation would want/need to get out of their TCT arrangement, and what are the offramps to do so?
A: A key element of Schneider Electric’s tax credit advisory service is to ensure that our clients can benefit from their tax credit investments. We do so by developing custom tax credit sourcing strategies based on each individual client’s sustainability goals, expected tax liability and other key criteria.
If needed, credits can be carried back for up to three tax years, and/or carried forward up to 20.
In the unlikely event a tax credit buyer is not able to claim all the credits it has committed to purchasing, there are assignability provisions included in most TCTAs.
Q: Do TCT deals have to cover 100% of credits? Is there a maximum on the number of TCT deals per project?
A: Tax credit sellers can leverage different tax monetization strategies (transfers, tax equity, etc.) for the same project, as long as each credit is only sold once.
Note: credits must be split “horizontally” and not “vertically.” In other words, a seller could not sell the credits associated with a 10% Energy Communities ITC adder to one buyer and “base” ITCs to another buyer.
There is no maximum limit to the number of TCT deals per project. The limiting factor is simply the cost and complexity associated with multiple transactions, so developers tend to prefer to minimize the number of transactions on each individual project.
Q: What does the IRA say about secondary tax credit sales?
A: The IRA stipulates credits can only be sold once so there will not be a secondary market.
Q: Can a new renewable energy project monetize the value of tax depreciation, in addition to the tax credit, through the TCT market?
A: Depreciation cannot be monetized through a pure TCT deal. Project sponsors would need to use the depreciation themselves, or if they cannot, they may be able to find a "t-flip" structure, which is a hybrid between tax equity and TCT designed to solve this. Schneider Electric has visibility into tax credits available via this structure across a variety of project types, sizes, and geographies.
Q: You refer mostly to utility-scale projects. Does this market exist for commercial-scale systems?
A: Yes, absolutely. Community, behind-the-meter commercial, and even residential clean energy projects are all eligible for IRA-related tax credits. Schneider Electric is actively sourcing opportunities across all these (and many other) categories to identify the right strategic fit for each of our clients’ needs.
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.