By Bastian Stroemsheim | August 6, 2024
Transferability Market Update (2023- 2024)
The IRA allowed for tax credits to be transferred to third-parties effective January 1, 2023. Initial reporting put most sales in the range of 90-93 cents per dollar. The IRS published proposed regulations in June 2023, thus providing the certainty needed for the market to rapidly expand.
Recently, Crux produced a report based on transaction data and surveying 100+ market participants about transactions during the first half of 2024. Here’s a couple of highlights from the state of the tax credit transfer market:
Market size and pricing
The Cost of Capital: 2024 Outlook assessed the 2023 transfer market to a total ~$4 billion, with $2.5 billion publicly-announced transfers and $1.5 billion unannounced transfers. In Crux’s mid-January update, the 2023 market was estimated to be $7-9 billion.
For 2024, Crux estimates the total transfer market to equal $20-25 billion, a rough 3x-4x growth compared to last year. As a comparison, $20-$25 billion comes to the total market size of the traditional tax equity market.
On average, prices for both PTC and ITC have increased slightly when comparing 2023 and 1H 2024:
- ITC: $0.92 → $0.924
- PTC: $0.94 → $0.952
This is in line with Reunion’s 2023 data, pricing current-year PTCs to $0.94 – $0.95 and de-risked ITCs (including insurance or indemnity) to $0.91 – $0.93.
Key drivers for price spreads
Greater price ranges exist within ITC and PTC deals, and are driven by factors such as deal size, insurance/indemnification, type of tax credit and forward commitments.
- Deal size below $5 million: Average price drops to $0.86 (ITC) and $0.925 (PTC). A major factor in the price discrepancy is the difficulty in obtaining insurance for these projects.
- Parent indemnification or insurance: A parent company indemnification, usually an indicator of a strong creditworthy sponsor, will sell at a premium compared to projects with insurance.
- Type of tax credit: Besides inherent project risk attached to tax credits (45V and 45Q for example), another driver is linked to tax credit guidance. For 45X (advanced manufacturing), price averaged $0.89 before guidance was released, then $0.928 after.
- Forward component: Crux reports around 25% of deals (majority ITC) have a forward commitment, and on average these deals are priced 1-3 cents below deals without forward commitments.
Data points outside of price to factor in
Other data points worth noting from the report relate to the speed of closing, spread between buyer/seller factors and tax credit adders.
- From term sheet to signed documents, PTC deals tend to close faster than ITC deals. 44% of PTC deals close within 6 weeks or less, compared to 19% of ITC deals. In 14% of ITC deals, it reportedly takes over 6 months.
- When listing important criteria for transactions, the following responses had the largest difference between buyer and seller:
- “Counterparty credit quality” with a net difference of 32 percentage points. 73% of buyers list this as an important criteria vs 41% for sellers.
- “Overall price” with a net difference of 21 percentage points. 70% of buyers list this as an important criteria vs 91% for sellers.
- “Technology complexity or novelty (for buyers)” with a net difference of 14 percentage points. 23% of buyers list this as an important criteria vs 9% for sellers.
- Tax credit adders:
- 60% of projects rely on safe harbor for PWA, which is connected to the start of construction date. The energy communities adder is reported in 50% of projects, while domestic content in 20% of projects. The Low-Income communities (LIC) credit only makes up 0.5%.
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