Inflation-reduction Act-created tax-credit transfer marketplaces are supporting renewable energy in hard-to-crack markets, such as rooftop solar on multifamily housing.
This month, Black Bear Energy, a developer of renewable energy, and Evergrow, a clean energy finance company, announced a series of solar projects designed to maximise the tax credit windfall provided by the climate law.
Owned by real estate investment company Equity Residential, the solar investment totals 556 kilowatts spread over multiple multifamily properties in California and Washington, D.C.
However, according to Evergrow CEO James Richards, it’s a very big thing as a first-of-its-kind application of the new tax-credit transferability regulations of the Inflation Reduction Act. His business oversaw the selling of Equity Residential’s solar project tax credits to businesses looking to lower their tax obligations.
It’s especially helpful as a case study for REITs, or real estate investment trusts, which together own $4 trillion worth of real estate in the United States yet pay little to no federal income tax. This is due to the fact that REITs distribute to their shareholders as dividends at least 90% of the income from the properties they control. It is not REITs that pay taxes, but those stockholders.)
For the past year and a half, Richards told Canary Media, “we’ve been working with Black Bear to figure out how we could monetize their tax credits for their clients, and the real estate community more broadly.”
The future projects will be able to come together more quickly and at a lower cost now that these initial ones are finished, according to Black Bear Energy’s senior vice president of client operations, Victoria Stulgis. Her company, a division of Legence, a real estate efficiency and sustainability contractor owned by Blackstone, the world’s largest private equity firm, specialises in creating clean energy projects for owners of commercial real estate.
Legence’s clients own or manage more than 5 billion square feet of real estate, which presents a vast array of potential for renewable energy. Black Bear Energy has more than a gigawatt of on-site solar projects in the works.
Without the money from the sale of the tax credits, Stulgis said, “new solar projects would never have been considered, let alone approved at investment committees.”
According to Richards, this might spur growth in the commercial solar business, which has historically lagged considerably behind utility-scale and residential rooftop solar.
According to him, “commercial real estate owners want to decarbonise their buildings because their customers want them to go green and because they’re paying high electricity bills.” However, previously, paying for solar and other improvements proved difficult for real estate owners.
Now that’s changing, all thanks to the IRA.
Transferability of tax credits: a radical shift in financing for sustainable energy
The main federal incentive for investments in clean energy is tax credits, which can pay for up to three-quarters of the cost of qualified projects. They are essential to enabling developers to profit economically from sustainable energy projects.
However, tax credits are only beneficial to businesses that file taxes; any credits that these businesses receive in excess of their annual tax obligations are of no value to them. For developers of sustainable energy, this is a problem because they can’t build as many projects as their tax responsibility can support.
Clean energy financiers have circumvented this up until recently by arranging special tax equity partnerships and leases with banks and investment firms that have significant tax obligations. Due to the intricacy and expense of these deals, tax-equity financing is only available for the biggest projects and the most experienced banks and developers, with an annual cap of about $20 billion.
All that changed with the passage of the Inflation Reduction Act’s tax-credit transferability regulations, which let project developers to sell the corresponding tax credits to businesses, investment groups, and other purchasers seeking to reduce their tax obligations. Experts in sustainable energy and tax equity financing predict that using this much simpler approach to monetize these government incentives would result in a significant rise in their utilisation.
Crux Climate, one of several companies specialising in this new sector, revealed figures this week estimating that tax-credit transfer transactions have been conducted for $10 billion in the past year. Crux predicts that by the end of 2024, the transactions might total between $20 billion and $25 billion.
According to Crux CEO Alfred Johnson, the kind of money represents a small portion of the company’s potential. He said to Canary Media, “There are a few factors that influence buyers’ perception of credits, and therefore willingness to pay, which influences the price.” That is “the relative complexity of the deal and their perception of risk.”