Thomas Byrne, CEO at CleanCapital.
Over the past decade, top U.S. corporations have announced ever-more-ambitious sustainability goals. Apple’s commitment to be carbon neutral by 2030, GM’s pledge to source 100% renewable energy globally by 2035, and Walmart’s commitment to power 100% of global operations with renewable sources of energy by 2035 were announced with much fanfare and have helped propel the country toward a greener future.
But with those deadlines fast approaching, many corporations are finding themselves in a race against time to fulfill their promises. With 92% of global GDP dedicated to some form of net-zero commitment, businesses are now under pressure to show results.
After several years in clean energy finance as a lawyer and investor, I formed CleanCapital with fellow clean energy leaders in 2015 to bring more investment into renewable energy. Over time, I recognized the influence that needed to happen in the market and the importance of accelerating investments into solar and storage projects across the U.S.
A Changing Landscape
The clean energy industry has made remarkable progress over the last few years. The passage of the Inflation Reduction Act (IRA) provided an accelerant to the energy transition and established the long-term policy certainty necessary for many corporations and institutional investors to make substantial investments in clean energy.
Global investments in the transition shattered records last year, with $141 billion invested in the U.S. alone. The combined corporate procurement of solar and wind also hit a record high.
But still, many corporations are struggling to achieve their targets within the next few years, with many opting to stay silent on their progress or lack thereof. So, the industry has been waiting for guidance on an important piece of the puzzle: the transferability tax credit.
On June 14, 2023, the U.S. Treasury released its first round of guidance to the tax credit transferability mechanisms established by last year’s IRA. With this guidance now available, corporations aiming to achieve their sustainability targets in the next few years can seize the opportunity to incorporate the new tax credit into their financing and sustainability strategies.
Pathways To The Clean Energy Transition
The investment tax credit (ITC) and production tax credit (PTC) have long been the key federal incentives for solar and wind, and as a result, tax equity is a key ingredient in the capital stack that funds clean energy project development.
Tax equity investors often contribute a significant portion of the capital required for project construction and, in return, receive the tax credits provided for by the ITC along with a small dividend. These tax credits provide a crucial element of project’s financing needs but require the inclusion of a third-party investor to “monetize” the credits.
There’s now a new way to finance these tax credit projects that should open the flood gates in the capital markets. The IRA’s transferability tax credit provision allows for the transfer of tax credits from project owners to taxpayers seeking to offset profit.
Transferability opens new opportunities for financing renewable energy projects, allowing stakeholders to invest and receive tax benefits without direct project ownership. Prior to this provision, the tax credit could only be used by the project owner or a limited set of investors with a stake in the project. The recent IRS guidance helps corporations understand the requirements to qualify for these benefits, reducing uncertainty and encouraging clean energy investments.
With many corporations nearing the goal dates they set for themselves, leaders may want to consider incorporating tax equity investments in clean energy into their strategies. A holistic approach can help companies in achieving decarbonization goals and supporting the transition to a net-zero economy.
How Companies Can Take A Holistic Approach
To date, many companies have focused their sustainability efforts on the procurement of energy from renewable sources, mostly via traditional power purchase agreements (PPAs). Yet despite increased demand from corporations, the growth of the commercial and industrial (C&I) segment of the solar market has stagnated.
Some of that stagnation is driven by market forces, including interconnection delays and supply chain constraints. These will remain outside of our collective control, though I think the recent resolution of the Auxin Solar tariff case and ever-more-frequent announcements of domestic content production should ease the supply issue over the next few years.
I recommend corporate sustainability officers, business owners and entrepreneurs engage with partners in the renewable energy industry who can offer them a suite of options. When evaluating a renewable energy partner, it is important that both companies find alignment in their mission towards sustainability.
Look for a partner with strong knowledge and reputation in the industry, as well as a track record of success. This could include proof of financial backing, successful execution on project development and construction and effective asset management that maximizes energy production. Additionally, the right team will have a bench of market understanding and a drive to want to further the clean energy transition. With a clear understanding and effective execution, the right partner will offer a range of renewable energy options to help meet larger sustainability goals.
Businesses looking to directly invest in projects via tax credit transferability will need to understand the inherent risks of early-stage project development—including delays in permits and approvals, supply chain and labor challenges—and plan accordingly with diversified interests in several projects. A good strategy, if not already doing so, would also tap into traditional options like PPAs.
Corporations will also need to develop an understanding of renewable energy market dynamics. The project economics of solar and energy storage are still largely dependent upon state programs and, as such, are challenging to build and operate in states that do not offer incentives for the C&I-scale projects that serve most businesses.
Challenges notwithstanding, tremendous opportunities exist for businesses to invest in this fast-growing segment. And the capital invested by corporations will be tied directly to new projects coming online and a corresponding decrease in carbon emissions and reliance on fossil fuels. As we move toward energy independence, this mechanism will open the door for new partnerships and increased investment in the clean energy sector.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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