Tax Equity Market Dynamics: Insights From The Solar + Wind Summit – Tax Authorities

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 handmay 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.