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‘Whole Fortune 500’ looking at tax credits now, but new entrants means risks like fraud – Foss & Company

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Transferability and the Inflation Reduction Act (IRA) have opened up tax equity financing to the wider corporate world, but significant risks remain with so many new entrants, tax credits specialist Foss & Company told Energy-Storage.news.

The firm this week announced a US$100 million tax credit deal for developer-operator Plus Power’s 200MW/400MWh Anemoi battery energy storage system (BESS) in Texas, US. Foss & Company managing director Bryen Alperin discussed the firm’s ‘hybrid’ tax equity deal structure, and his views on the wider clean energy tax equity space.

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Developers still prefer traditional tax equity partnerships

Foss & Company’s tax equity investment in Anemoi, which went online in June, used what the firm calls a ‘t-flip’ structure, which Alperin explained combines traditional tax equity financing and newer transferability transactions.

Transferability was brought by the IRA to make it easier to buy and sell the tax credits associated with clean energy projects in the US, including the investment tax credit (ITC) for downstream projects and various production tax credits (PTC) for both manufacturing and the clean energy produced by renewable projects. The ultimate aim was to get more capital into the industry.

Traditional tax equity investments, on the other hand, require setting up complicated tax equity partnership investment structures, but developers still prefer that approach, he said, and Anemoi combined both.

Alperin: “Our approach is a deal that looks like traditional partnership tax equity flip that they are accustomed to, while in the background we sell the tax credits to one party while another gets the depreciation and amortisation benefits. A straight sale of the tax credits of a project means the developer is left with the depreciation and amortisation, and they may not be able to utilise it. Our approach allows us to put more capital into the market.”

That is because if you directly invest in a project with equity, which traditional tax equity effectively does, you get the depreciation and amortisation tax benefits of the project. If you just buy tax credits via transferability, you do not, and most developers are not big enough to take advantage of those benefits, which potentially means money left on the table.

The CFO of Goldman Sachs-backed US battery storage developer-operator GridStor discussed tax credit transfer deals from the perspective of the seller in an interview with Energy-Storage.news in April, also touching on depreciation and recapture risk.

Hybrid structures versus just transferability, and recapture risk

A transferability deal is nonetheless much easier to get your head around as a newer entrant to the market. Whether the market moves more to straight transferability or hybrid structures like Foss & Company’s depends on the type of deal.

“We are seeing more of these (our) kind of hybrid transactions in the market. That’s not to say there is no place for the straight transfer deals, there will be some, but developers’ preference is for traditional tax equity, which is becoming harder to get. Transferability will often be a backup option for if they run out of time towards the end of the tax year,” Alperin said.

For the 45X manufacturing PTC, which pays US$35 per kWh of batteries produced for example, Alperin said that will be all transferability since there are no depreciation and amortisation aspects of it to try and take advantage of. This was borne out by data from tax credit intelligence and ecosystem platform Crux, as covered by our colleagues at PV Tech this week.

“The 45X area seems to be ramping up with lots of manufacturing projects being built. We don’t know how large that market could get but it could become billions a year. That market will basically be straight transferability. 45x PTCs also have no recapture risk,” Alperin said.

Recapture risk refers to the possibility of tax benefits of the ITC being withdrawn within the first five years of a project’s operation if the project fails or turns out to not be compliant with the conditions of the tax credit associated with it. The amount that can be ‘recaptured’ by the government falls 20% annually.

Tax insurance is typically bought as part of tax credit deals to cover this, and the chance of a solar or energy storage project completely failing is obviously very low. However, it’s been an interesting debate when it comes to the 10% domestic content ITC adder, as the extent to which something can comply with the adder’s definitions of domestic manufacturing is still a debate.

This has, developers tell us, meant legal teams refusing to sign off on domestic content portions of a tax equity or tax credits transfer deal because of the lack of certainty that the equipment manufacturing process – which is still ramping up in the US – will meet the ITC adders’ conditions.

Tax equity being opened up beyond traditional investors, but comes with risks

As mentioned earlier, transferability was brought in to increase the pool of capital investing in the US’ clean energy industry. Some speculated at the time that it would mean all big corporations would start investing in clean energy tax credits, and Alperin said this is starting to be the case.

“Pre-IRA, there were maybe 50 or 60 companies involved in tax credits at high volumes. Now, I would say the entire Fortune 500 is either actively participating or is starting to. That’s partially down to transferability but also the IRA as a whole creating awareness of these tax credits.”

“We’ve seen with the IRA many new corporations getting involved but many want to start with just buying tax credits.”

However, with so many new companies coming into the space that does mean the risk of things like fraud, and the reputational risk to clean energy tax credit financing that a big scandal would entail, will grow.

Alperin: “There is so much new capital flowing in and many first time buyers doing it directly without much advisory help. We worry about fraud, or at least these buyers not knowing what they’ve signed up for, and taking on more risk than they realise. If there was a big fraud case, it would put a damper on the enthusiasm of other new companies entering the space.”

Energy storage tax credits priced most highly?

Crux’ data also found last year that energy storage tax credits were priced the highest of any other clean energy tax credit under the IRA. Crux CEO Alfred Johnson said it was more down to deal size than the technology itself, which Alperin concurred with, saying other factors influence it more.

“I wouldn’t say energy storage tax credits have a higher price because of the technology. Other factors like size of project, strength of the guarantor, amount of tax insurance affect the price more. A big factor is timing in the year, where the price goes up towards the end of the year as buyers become more desperate to buy tax credits in time of that financial year. That seasonality might smooth out in later years, but it’s currently significant.”

Foss & Company is an investment and investment services firm which specialises in tax credit deals, and announced its plans to enter the energy storage space last year.

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