Tax Equity Market Dynamics: Insights from the Solar + Wind Summit

The Infocast Solar + Wind Finance & Investment Summit, held on March 12, 2024, featured a distinguished panel, moderated by Linklaters' tax partner Michael Rodgers, to discuss the current trends and future outlook of the tax equity market. The panel included Jack Cargas of Bank of America, Bryan Didier of Monarch Private Capital, Ben Jacoby of Paragon Energy Capital, Rubiao Song of JP Morgan, and Colin Witherspoon of US Bank.

Here are the key insights from the session:

  1. 2023 Market Overview: In 2023, tax equity investments rose significantly to $20-21 billion, marking a pivotal year for the market. Following the release of Internal Revenue Service’s (IRS) guidance on tax credit transferability under the Inflation Reduction Act of 2022 (IRA) in June 2023, the market saw a significant increase in tax credit transfer transactions, with total estimated value between $5 billion to $9 billion. This surge reflects the transferability market's effectiveness in addressing the increased demand for tax equity investments prompted by the expanded tax credit framework, and with total traditional tax equity investment expected to increase at a moderate pace, the surge is expected to continue well into the future, with recent projections showing a demand that could top out at over $80 billion within the next 8 years, with tax credit transfer transactions emerging as the primary means of effecting such market expansion. 
  2. Transferability's Role: The ability to transfer tax credits has been transformative, broadening the tax equity market and reducing barriers to entry. Panelists noted that nearly all recent tax equity transactions incorporate direct transfer or transferability of tax credits in some manner. With the IRS set to audit 2023 transactions, there is anticipation around how these developments might influence future regulations on transferability.
  3. Hybrid Tax Equity Structures: 'T-flip' and other hybrid structures are gaining ground as adaptable alternatives to the traditional tax equity model, aligning with both investment tax credit (ITC) and production tax credit (PTC) incentives. While the demand for standard partnership structures remains robust, developers are urged to deliberate on the suitability and financial implications of adopting hybrid structures, which on the one hand may expand the market of potential buyers but on the other hand may also tend to introduce additional complexities such as minority investor rights and heightened diligence requirements.
  4. Looking Ahead: The tax equity market is poised for an era of innovation and expansion. Initiatives like Bank of America's launch of a tax credit transfer desk in 2023 exemplify the shifting dynamics within tax equity transactions. The introduction of 'adders' for IRA tax credits is also reshaping the investment landscape, subject to meeting challenges relating to implementation and the ability of sponsors to fulfill eligibility criteria. As the industry anticipates more detailed guidance regarding the IRA, the potential for leveraging the IRA’s full capacity remains high.

The discussion underscored the tax equity market's progressive transformation, with evolving strategies and structures anticipated to drive the future of energy investments. Linklaters remains dedicated to offering strategic guidance to our clients through this dynamic evolution of the market.