Catalyst with Shayle Kann - Frontier Forum: How tax credit transfers are reshaping energy finance

Episode Date: March 21, 2025

In 2023, the U.S. market for transferable clean energy tax credits was just getting started. One year later, that market has tripled in size, with credits diversifying beyond wind and solar into nuclear, manufacturing, and other technologies. "The statistics on just how much it grew over that period are really impressive — indicating the transparency, efficiency, liquidity, and growing nature of the market," explains Alfred Johnson, CEO of Crux, which operates a debt and tax credit platform for clean energy. When new rules allowed clean energy tax credits to be sold for cash, it suddenly opened up a dynamic new market. Now, instead of only large banks with a tax appetite being able to finance projects, any corporate buyer with tax liability can participate — and they're rushing in. In this episode, recorded during a live Frontier Forum, Latitude Media's Maeve Allsup moderates a conversation with Crux's Alfred Johnson, Stephanie Deterding, Crux's managing director of markets and transactions, and Timmi Kloster, senior vice president of tax credit syndications at US Bank Corp. The panelists discuss six key findings from Crux's recent market report: the market grew and diversified; pricing improved; smaller credits saw the greatest price improvements; hybrid transactions enabled tax equity market growth; tax insurance became more prominent; and forward commitments grew significantly. "What surprised me the most is just how quickly investors entered the market and were willing to transact," explains Timmi Kloster of US Bank. "We saw three times the amount of new investors enter the space through transferability that we would have seen in a typical, pre-IRA traditional tax equity partnership market." Despite post-election policy uncertainty, the market remains robust. "In the weeks following the November election, bidding activity was the highest we have seen yet," says Johnson, noting that 90% of projects benefiting from the credits are in Republican districts. This is a partner episode, brought to you by Crux. It was recorded live as part of Latitude Media's Frontier Forum series. Watch the full video to hear more details about the booming tax credit market. Or read the Crux report.

This is a Frontier Forum, brought to you by Latitude Studios. One year ago, I sat down with Alfred Johnson, the CEO of Crux, to talk about the newly formed market for transferable clean energy tax credits. It's funny to think back on that, because it seemed like we knew a lot about the market a year ago, but the market was five months old in terms of actual transactions. We just had so much more data than we did at that time. And in mid-February, we got an up to.

date. The market for U.S. tax credits that includes solar, storage, manufacturing plants, nuclear, bioenergy, geothermal, and carbon capture tripled in 2024. So just an enormous amount of growth, I think the single thing that surprises me the most is the pace with which we achieve the maturity that the market currently has. Tax credits have long been a driving force for clean energy in the U.S., but only a small number of banks with tax appetite can take advantage of them. When the Inflation Reduction Act created rules allowing the credits to be sold for cash. It suddenly opened up a dynamic new market, and buyers and sellers rushed in. So tax equity is a really valuable tool that is still a significant and important part of the capitalization of these projects,

but is only available to a subset of the market, which again is why transferability is so important, particularly for these new credit categories that do not have history in the tax equity market. as solar wind do. Crux operates a platform for transacting these credits, and the company closely tracks the overall growth of the market in a yearly report. A few weeks ago, Alfred joined Latitude Media Reporter Maeve Alsup for a conversation on what drove growth in 2024 and what it means for the health of the industry.

What do we need to know about the state of the market last year? Six key findings from the report. One, the market for tax credits diversified and grew in 2024. Two, pricing on tax credit deals remains strong. We saw it improved from 23 to 24, and it improved from the first half to the second half of 2024. Three, smaller credits, which make up more than 50% of the deal sample, saw the greatest improvement in pricing as a result of more competition in the market and more buyers that

are coming into the market and looking to participate in it. hybrid transactions enable tax equity market growth. This is the fourth takeaway. Basically, we are seeing a coherence and convergence of the traditional tax equity market with the transfer market. Five, tax insurance is a really important piece of the market. It is prominent, particularly in ITC, investment tax credit deals. And then six, people that are committing to purchase future year tax credits, the volume of forwards in the market, grew significantly in 2024 versus 2023. The statistics on just how much it grew over that period are really impressive,

again, indicating that both transparency, efficiency, liquidity, and growing nature of the market. In this episode, a deep dive into the dynamic U.S. tax credit market. In February, Latitude Media's May Valsup moderated a live Frontier Forum. It featured Crux's Alfred Johnson, Crux's managing director of markets and transactions, And Timmy Closter, senior vice president of tax credit syndications at U.S. Bank Corp. And this week, we're bringing you an edited version of that live discussion on how tax credit transfers are reshaping U.S. energy finance. Timmy, maybe we can start with you. What surprised you the most about how the market evolved in 2024?

And then we can pass to Stephanie and then Alfred. A couple things I think stood out for me and U.S. Bank in terms of what we were seeing as the market, up in 2024. I'd say just one, how quickly investors entered the market and were willing to transact. US Bank is a long time tax equity investor in this space. We've been doing these traditional partnerships pre-IRA since 2008. So we've really been a player in the space for a long time. And so just to see how quickly the market pivoted to transfers from 2023 to 24 and all the new entrance, you know, I think was quite remarkable. And just to put some numbers behind it, I think we saw three times the amount of new investors enter the space through transferability that we

would have seen in a typical pre-IRA traditional tax equity partnership market. So a lot of new entrance flooding the market, I think was one surprising observation. And then just how quickly they were, folks were willing to commit. You know, I think we had a lot of conversations very early in 2024. And so we got to commitments with our volume first part of the year. And then we were able to really start to focus on closing out those transactions as we moved into the second part of the year. So I'd say getting to commitments early was another, you know, observation from our end. And then also a pivot from traditional tax equity investors to transferability. You know, they are comfortable with the partnership. It's a little bit of a different economic profile. But I think

they really saw also the ease of execution, the simplification of accounting and diligence. And so we also saw a shift from our traditional tax equity investors over to transferability too, which was interesting, but makes a lot of sense for all the reasons, as I mentioned. So maybe one last thing is just the size of commitments that investors were willing to make to, even new players. You know, they were coming out at the gate saying we want to do 200, 300 million of capacity. this year. So they weren't dipping their toe. They were willing to dive into the market, which I think really is reflected in some of the gross numbers with the report. Yeah, I echo kind of all of those

things as what surprised me. The market scaled so quickly in 2024. And I think this was really the first time in my career that I can recall investors or buyers actually reaching out with interest in transfer credits and wanting to enter the market, I think, in the past for traditional tax equity. I was traditionally in a seat of going, educating, reaching out to groups who maybe had never even heard of tax equity. So that was an interesting thing to see play out. Obviously, we saw a lot of new technologies be able to transact in the later half of 24. And so that helped us obviously get to this large scale of transactions done. And I was also thinking, like, what else played into the scale that was achieved in 24?

And I think the two other things that I would mention are just how insurance in traditional tax equity, I don't think we saw the amount of insurance that has come into these transactions to help mitigate risk to add or bolster a seller's indemnity. And I think that really helped get transactions. And then lastly, I would just say speed of closing. In our 3Q 2024 report, we talked about how quickly transfer credit deals are able to move. And I think that that also contributes to the volume that we saw last year. It's only been a couple of months post-election, but how is federal policy change being reflected in the market? How are you seeing participants handling

policy uncertainty and just that shift overall? Yeah. So federal policy policy. policy touches so many parts of the market for clean energy broadly. The tax credits that we're talking about here are provided by legislation, and it requires an act of Congress to change those tax credits. That is different from other kinds of federal policy like grants and loans, where the executive branch has more direct authority on their ability to dispense cash that is appropriated or maybe part of a program. The law provides that a developer, manufacturer, miner of critical minerals, a rare earth that performs some function, builds the project, produces the thing, is able to access tax credits in some volume, and that corporate buyers or individuals of passive tax liability

are able to take advantage of that and purchase those credits. And so because it's current and existing law, you're seeing the market remain quite active. In the weeks following the November election, bidding activity was the highest we have seen yet. We saw really strong liquidity and demand to supply coverage in the market. We see that continue into the first quarter of this year where a significant volume of deals are continuing to close

and buyers are continuing to very actively come to the market, bid on credits, and progress through deals. So currently, the policy implications of the market are not being directly felt outside of, you know, people having a close eye on what may happen legislatively and politically. There's certainly other downstream implications of executive branch policy and potential legislative policy. So for the executive, when Trump came into office, he signed a series of executive orders and actions. One of those executive orders, for example, related to the permitting of offshore wind. And the extent to which the government is providing or not providing permits would play into the future market for tax credits because if projects aren't permitted, they won't be built and you won't see them in the tax credit market. So that's an example of a way that federal policy out of the executive may have a direct impact.

But otherwise, there's a lot of focus on what may happen legislatively. The reality is that the market is watching very thin margins that Republicans have in the House particularly and thinking about what the implications of various reconciliation strategies by the Republicans could have on the market. that is something people are watching quite closely. But the realities, again, there are that there's pretty longstanding practice where safe harbor is provided to developers who begin construction or invest a certain amount in their projects during a year where the tax credits are available to them. So there is that that gives the market some amount of confidence.

And there's a general view observation that Congress has rarely, if ever, made adverse changes to the tax code that have a direct negative consequence to the taxpayer. They're typically made prospectively with some amount of phase-in period. But again, people are looking at 90% of projects that are benefiting from the credits being in districts that are represented by Republicans. They're looking at the market that is 72% associated with geothermal, nuclear, advanced manufacturing, critical minerals, biofuels, hydro. all of these categories that are, if not directly supported by the new administration, supported by Republicans in Congress who have been quite vocal about their support for at least

some amount of the credits. So I think from a market perspective, what we see is a healthy market continuing, and I anticipate that to remain the case for 2025. Timmy, I want to hand it over to you for the U.S. Bank perspective, and you sort of teed this up in your introduction, but U.S. Bank has been a long-time leader in traditional tax equity, billions of dollars in deals for wind and solar. Can you walk us through a bit about how your strategy has evolved with the emergence of the transferable credit market? And I'm also curious to get your take on the impact of this diversification of the market that Alfred just laid out over the second half of last year. Yeah, made. Great question. So happy to dive in. And Alford, thanks for all the data. I will just say what crux has been able to do with the data and sort of compiling that and sort of bringing transparency to the market has been really instrumental, I think, to all this growth as well.

And it's very validating, I think, as a player in this space to see some of the trends that your data sort of reflects. So kudos to you guys. But for U.S. Bank and sort of our policy in terms of how we've been approaching growth in this space, I mean, it's really been business as usual in a lot of respect. You know, we definitely play into that part of the market, which utilizes the hybrid structure that Alfred touched upon where we're still creating tax equity structures with our sponsors, but creating that optionality to sort of transfer those credits out of that structure to a third-party buyer. And that's really beneficial to both sponsors and buyers for a number of reasons. For sponsors, they want the benefit of an upfront, you know, tax equity commitment. they want the benefit of the step-up and basis. They want to monetize the depreciation.

And for buyers, they like the idea of working with an intermediary, like U.S. Bank, who's underwriting these transactions for our own book. And so we're able to sort of assist with the underwriting efforts and diligence that goes into buying these tax credits. And there's an alignment there of interest, right, since we're looking and investing in these projects ourselves. So it's sort of a win-win for the market. And as Alfred touched upon, there's demand for tax equity that's not being met.

So by utilizing the structure, what we've been able to see with our growth is it has allowed us just to do more of the same. So we're just able to go to market and do more tax equity commitments with our sponsors, knowing that there is sort of a runway here with new market entrance. that we can bring liquidity and capital into the space. And we have time to do that now with transferability. With traditional tax equity, you know, there was a limited amount of time in terms of when you had to bring an investor into the structure for at-risk purposes. Here we have until the extended tax return filing date to transfer the credits out of these

structures. So we have more time and there's more interest and market buyers to be able to sort of bring them along. So all of that has allowed us to grow our platform. And part of that too has been, and maybe this will come through with other areas of the discussion. But with all this growth, you need human resources, right, to be able to ramp up these efforts.

You need folks to close the deals. You need lawyers to help more project finance teams, people to build these projects. So I think that's as this market grows, I think that's something that we're keeping an eye on is just sort of how do we, from a human resource perspective, like keep up with this growth. So we're certainly, you know, staffing up and ramping up our resources to be able to keep up with all this volume. You know, I'd say other observations and ways that have fueled this growth

deals continue to get larger, it seems, and that can be due to a number of factors. You know, there are numerous adders now with domestic content, low-income community. energy community that are allowing more capitalization brought to these deals. There's a longer runway for folks with the IRA. And so, you know, bigger projects are getting built. The technology is maturing. And so by having opportunities to invest in larger transactions, it allows for efficiencies for us in terms of being able to do more volume. In terms of technology, to your question made, a little bit about diversification, you know, we've definitely been, playing in those more mature technologies with solar, standalone storage, best, some wind,

you know, standalone storage, obviously being newly qualified for ITC. We're definitely seeing some, you know, ramping up there. But we're primarily playing in those spaces and continue to focus there. But we are also, you know, watching and getting into the 45X market. So I think all of what Alfred shared there, and I think we'll talk about this more. I would co-sign on that in terms of all the opportunities there. So we're starting to look at new tax credit types ourselves just to keep evolving and diversifying. Perfect. Stephanie, can you add on to that and share a little bit about what we have seen in terms of buyer trends? And we're already getting a couple of questions in the chat to dig into more on seasonality and the types of

credits that are garnering more interest. So the buyer trends have been interesting, especially if you have the tax equity experience and just to see how all these new entrants are transacting in the market. And I think a couple of things have played out and then I expect further evolution in 2025. So, you know, most of the buyers transacting in 2024 were likely first-time buyers. And so with that, I think a lot of them wanted to start with either a PTC, so, you know, low or risk. And so, you know, lower risk profile and I think to the data, a lot of those transactions are larger in size, so you can do a large volume of those deals, offset your tax liability with maybe a single transaction. And also, I think with the tax equity or the T-flip structures, a lot of buyers find

comfort in purchasing credits that have been due diligence or where there's another investor who has some skin in the game, if you will, when they are purchasing an investment tax credit. What's been interesting already in 2025 and to have discussions is now when we're looking at repeat buyers, I think they're trying to figure out maybe where they can either get some efficiencies, whether that's from doing a repeat transaction. So maybe not spending as much internal time on a transaction because they can rinse and repeat. They already have a relationship. maybe lower cost for a developer because same legal counsel, it's not going to be a full negotiation. But I've also already been having discussions about we did a PTC, we paid this amount

for that credit, would love to learn more about an investment tax credit, and if I can get, you know, a similar risk profile, but more of a discount. And so I think that as buyers become more educated in this market, I expect that we will continue to see a diversification around the types of credits and the underlying technology that they're willing or interested in purchasing. I'll pause there. Alfred Timmy, I don't know if there's anything else you would add. Otherwise, I was going to hit on seasonality. Do you seasonality? Okay. Yeah. So I think seasonality is very interesting. And one of the things I would note is that at the beginning of 2024,

you'll likely recall that a lot of buyers were trying to figure out what was going to happen with the R&D credit. And so they were trying to figure out their tax liability. You have buyers at the beginning of the year sometimes actually finalizing prior year tax credit transactions. And then if it's a calendar year buyer, they're also likely wrapping up their calendar year in for financial reporting purposes. And so I do think that it's typical to see maybe the, the bidding or the kind of activity for new transactions in the early part of a calendar year lower than maybe what you see play out in the later year. And I feel like we probably have some of that happening right now in Q1 of 2025. But then what happens is buyers get a line

of sight on their tax liability and you really see activity pick up in the later half of the year. And that is going to impact pricing, right? Because supply in a given year is relatively fixed based on production and placed in service date for the investment tax credit. And so once you have a fixed supply, as more buyers enter the market later in the year, we really saw competition grow up. And I think in the third quarter of 24, we had bid activity of more than $10 billion in that quarter. So I would encourage buyers, if you are planning on transacting in 25 and you do have a line of sight on your tax liability right now, you're going to have less competition if you're willing to enter the market.

Stephanie, I love that you made the point about the R&D tax credit dynamics in the first quarter of last year, because I think in a lot of ways that's a bit of an analog to what we may be observing with policy right now, to the extent that there are buyers that may be waiting to see what happens in the legislative picture, that may be playing out a bit, but might look a lot like the seasonality effect that we observed in 2024. And I think your point is spot on where there's deals to be had in the market in the first and second quarter where sellers are looking to sell. And for buyers that are able to be prospective about what your liability is going to be in this tax, year and come into the market. There's a lot of really great inventory to access in the market right now.

I would echo all of that. And we observed similar trends last year with a lot of activity and commitments, you know, first half of the year. And then, you know, as we moved into the later half of the year, we really had to shift conversations to forward commitments, Alfred, to some of the data, just because if you don't transact early, you really can miss the opportunity. to secure, you know, secure, you know, large deals or the more attractive volume based on what a buyer's sensitivities and needs are. So I would echo all of that.

Timi, you guys have such great product that buyers are always knocking down your door. And I know that you didn't have as much inventory in 2024 as appetite that you had in 2024. What do you think the dynamics are going to be like in 2025 on that point? Do you think the calendar will look similar? or do you think it'll look different? Yeah, good question.

I agree with your observation around, I mean, we're still moving forward with transactions. I think there might be some sort of wait and see a little bit on capacity. So maybe folks aren't going full throttle with what their potential needs are. They might want to start a little smaller with some of those commitments. But, you know, we're definitely having a lot of active conversations right now for 2025. We secured a lot of 2025 commitments in the latter half of 2024, so we're already sort of off to the races with our transactions. But because we are increasing our volume this year, based on the demand we're seeing in the market,

we're hoping that we're able to service more of the market this year. And so, you know, we're able to sort of bring that liquidity to the space because we're certainly seeing the demand with all the conversations that we're having with investors. We've got a question from Gary Dunt, who says my focus is data center finance. Can energy tax credits help meet the growing energy demands of data centers? I don't know who wants to jump in on this one first. I'm happy to start there. So this is such an interesting dynamic in the market. There has been a lot of growth in the consumption of energy from data centers with the rise of cloud computing, the electrification.

of everything, that has really started to inflect in 2023, 2024, particularly with the observation that AI is more compute-intensive than other categories. So there's a lot of growth in energy demand that is going to come from data centers. The reality, though, is that there's growth coming from everywhere. So all of these themes, the electrification of everything, the growth of American industry and reshoring of manufacturing, data centers, all of that is contributing to energy demand that is increasing for the first time in two decades. And that's a really material impact to the market, where we are going from a reality where demand was pretty stable since the financial crisis to a world where demand is increasing.

And with demand increasing, there's a real need for new investment. infrastructure as quickly as we can build it. And about 95% of the current interconnection queue is associated with clean energy of various kinds. And so that I think highlights the reality that transferable credits are already bringing to market more energy and power to meet the needs now that are coming from data centers and other categories of energy demand. And that's a really critical theme that we continue to make a reality, need to make a reality, as we continue to meet the needs that are growing in the market. That's a good segue. Stephanie, before we kind of start to wrap up here, I want to ask you about some of the considerations when it comes to newer

credit types. What are the considerations that these new credit types are posing? Maybe we could touch particularly on nuclear. And then also, Timmy, I know you touched on 45X if we want to touch on those too, that would be great. Yeah, sure. So nuclear PTCs became popular in the later half of 2024. I think we had about 12% of the market was supplied by nuclear PTCs. There is still guidance forthcoming on the exact calculation of those nuclear PTCs. However, the sellers that are able to transact, I think, are just taking a conservative approach and assuming the most negative outcome under the guidance and then selling the nuclear PTCs that they feel competent would still be available. Because it is a production tax credit, it has a pretty straightforward risk profile.

And we do find that a lot of buyers, including first-time buyers, have an interest in those credits. They are also generally large in size. So you can buy a large amount of those and offset almost all of your tax liability. And then lastly, a lot of those sellers have a very strong balance sheet or creditworthiness. So just an all-around attractive credit. Happy to talk about 45X unless Timmy you'd like to kind of jump in on what you see. Yeah, no, happy to. So we're really excited about all the opportunity we're seeing in the 45X advanced manufacturing space. And for a number of reasons and Alford touched on some of this, but I mean, it really checks a lot of boxes in terms of promoting domestic manufacturing efforts, shoring up our supply chain domestically, creating more

jobs. And it also gives us an opportunity to offer more diverse set of tax credit transfer opportunities to our buyers. So we closed on our first 45X transaction last year and proud to say, you know, the result of that was, you know, new facilities were opened. With our manufacturer client, we were able to bring more jobs to the U.S. So I think there's just a lot of, you know, momentum behind this credit and support for this in the industry. And, you know, we're actively working on ramping up that volume here in 2025. Some of the challenges, I think, that we've observed with this market is just the optionality,

I think, that the manufacturers have. There is the ability for them to go the direct pay route, as opposed to transferability. So they have sort of choices in terms of, you know, what makes the most sense from them from an economic perspective. And so I will say with this tax credit type, the amount of price per credit and the timing of payment is really important to these manufacturers.

The sooner they can get their transfer proceeds and the higher the price, the more it makes sense for them to take, you know, sort of pennies on the dollar as opposed to waiting to collect a check. from the IRS if they were to go the elective pay route. So I think how that's translating into deal volume and flow is just this is a quicker moving train in terms of these tax credit types. Our manufacturers that we're talking with want to get to closing quickly. So it might be a little more challenging for maybe a first-time buyer who's still kind of wrapping their arms around, you know, the transfer market and the pace that this credit moves. So I would highlight all of that.

But again, we're really excited about all the growth in this space. And I think the crux data is reflective of that. Yeah. And the only other thing I would add there is you are right to me is that I think the 45X does move quickly. And one thing we've found that buyers like is actually the diligence process for 45X. It tends to be lighter. And I think, you know, now that a lot of the sellers have transacted in 2024, they've fleshed out their due diligence process and their deliverables,

generally what a buyer would be expecting to receive, whether that's a legal memo or a report from a big four. And so I actually expect that in 2025, we may see these transactions move even more quickly just because of that. There's also so much 45X coming. So there were something like 170 investments that have been announced in manufacturing and mining facilities of various kinds across 37 states, totaling billions of dollars, hundreds of billions of dollars. And so that means a lot of those credits that are associated with manufacturing batteries or mining and refining critical minerals are coming to market in 25, 26, 27. What are each of you going to be watching for in 2025? And Stephanie, we can start with you. And then we'll go over to Timmy and Alfred. Yeah. So I think what I'm going to be watching for is really what the sophisticated group, specifically sophisticated buyers are doing. I think where other buyers maybe.

have some uncertainty around their tax liability or what credits they want to purchase. I'm very interested to watch and see what the sophisticated buyers are doing in the market, how they are entering the market, what credits they're purchasing, because I think it will be telling, and I think other buyers will end up following them. So I expect that we are going to start seeing those groups transacting soon to kind of get an advantage on pricing and the deals that they're they're saying. So what I'll be watching for in 2025, I think we've covered a lot of ground to date in terms of the standardization of documents and diligence, but I still think there's a ways to go and probably more so for some of these newer tax credit types. So I would just say more standardization

to drive more efficiencies into the market and also kind of watching for maybe more creative structures to evolve as we look to drive more and more volume into the space. I'm also excited to see what happens with 45X. I'm super excited to see the market continue to grow and develop, but one thing we haven't talked about here that I'm excited to watch is the extent to which the transferable credits and developments in that market changed the way that the rest of the project capital forms. We are already seeing some pretty considerable impacts as the volume of the forward commitment

market increases, we're seeing the volume of the bridge lending market against forward commitments improve and increase. And I think that as we start to get more maturity in all of those different kinds of capital categories, there will be even more opportunities for us to build more efficient capital stacks for these projects that we really need to build, given where we are in the energy picture of the country. This conversation was recorded live as part of Latitude Media's frontier forum with Crux. And this was only half of the interview. We spent another 30 minutes taking questions from some of the hundreds of participants. So if you want to watch the full video and hear even more details on the makeup of

the market, head on over to latitudemedia.com slash events and just click watch recording. And if you want to read the full Crux report that we talked about, head on over to cruxclimate.com and you'll also find a link in the show notes.