Novogradac Journal of Tax Credits - RETC Transfers Boom Throughout 2024, Including Community Solar Portfolio in Virginia

The IRA has fueled clean energy deployment

The Inflation Reduction Act has had a significant impact on clean energy deployment in the U.S., leading to accelerated growth among solar, wind, battery storage, and other clean energy technologies:

• The two-year post-IRA period has seen $89 billion in investment in new, US-based clean energy manufacturing, versus $22B in the two years preceding the IRA (see Figure 1)
• Investment in clean energy production and industrial decarbonization is $161 billion since the passage of the IRA, a 43% increase from the comparable pre-IRA period

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Americans overwhelmingly support clean energy

Clean energy is now a major part of the US economy, employing over 3.5 million workers. Since 2020, the clean energy industry has added 400,000 new jobs, significantly outpacing the rest of the energy sector.

The federal solar investment tax credit was first passed under the George W. Bush administration via the Energy Policy Act of 2005, and for the last 20 years there has been a looming threat that this tax credit will be removed. But it has persisted, because it has been highly effective in driving solar adoption, and solar energy is extraordinarily popular among Americans.

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The IRA has growing, bipartisan support

Similarly, the Inflation Reduction Act has bipartisan support:

• In August 2024, a group of 18 Republican Congress members wrote to a letter to Speaker Mike Johnson saying: “Prematurely repealing energy tax credits, particularly those which were used to justify investments that already broke ground, would undermine private investments and stop development that is already ongoing.” Speaker Johnson responded that when making changes to the IRA, “you’ve got to use a scalpel and not a sledgehammer.”
• The total clean investment of $493 billion in the two-year post-IRA period has flowed into all 50 states, but over half of that has gone to Republican states

We have reason for optimism that the major provisions in the Inflation Reduction Act will persist. It’s unlikely that a majority of Congress will support a significant repeal of a law that is driving new jobs and significant investments in clean energy. Repealing the IRA after it has been in force for over two years will also upend many private businesses, which have made billions in investments under the anticipation that the law will be in force for a decade, if not substantially longer.

Furthermore, the final house race was called December 2nd, landing at 220 Republican seats and 215 Democrat seats. Given that 218 votes are required to form a majority and pass legislation, Republicans have a very thin margin for defections - only two.

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Buyers and sellers remain active in the market for 2025 tax credit and beyond

In the tax credit transfer space, we continue to see a heavy dose of activity that is, in fact, ramping up, particularly from buyers wanting to lock in 2024 and 2025 tax credits before any potential changes.

The team at Reunion remains highly optimistic about a clean energy future and stand ready to support all existing and new customers.

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On October 24, 2024, the Department of Treasury and the Internal Revenue Service (IRS) issued final regulations for the Advanced Manufacturing Production Credit (§45X). The final regulations were published in the Federal Register on October 28, 2024 and are largely consistent with the proposed regulations issued on December 15, 2023.

Noted below are key changes as well as clarifying guidance that were issued in the final regulations. Jump to a section:

• Key changes
• Clarifying guidance
• Key dates
• Appendices

For a primer on 45X credits and due diligence, please refer to our insights here.

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Distinguishing "minor assembly"

The final regulations replace each instance of "mere assembly" with "minor assembly" to clarify what activities meet the substantial transformation threshold required to qualify for §45X tax credits.

The guidance recognizes that certain eligible components such as a solar module or a battery module are produced primarily by assembling other components. In these cases, the assembly required to achieve production of the ultimate eligible component (solar module or battery module) should not generally be viewed as disqualifying “minor assembly.”

Furthermore, eligible components that have completed substantial transformation, are considered “produced by the taxpayer,” and have been produced and sold to a third-party, in which only “minor assembly” remains, does not disqualify the original party from claiming the §45X credit. As a result, the ensuing third-party who performs the “minor assembly” would not be eligible to claim the credit.

Production costs expanded for critical minerals and electrode active materials

The final guidance is intended to recognize the value of material costs while addressing concerns regarding multiple-crediting and unintended incentives. The proposed regulations did not specifically allow direct material costs, indirect material costs, or any costs related to the extraction or acquisition of raw materials to be considered as production costs. However, the Treasury Department and the IRS, after consultation with the Department of Energy, have reconsidered the proposed exclusion of all material costs based on comments received and revised the regulations to include extraction costs for raw materials sourced in the U.S. or its territories if incurred by the taxpayer claiming the credit.

Additionally, if a taxpayer acquires extracted raw material as a direct (or indirect) material cost, the material costs may be included as production costs consistent with the rules provided under section 263A regardless of whether the extracted material is domestic or foreign-sourced.

Furthermore, any inclusion of direct and indirect material costs may be included if certain conditions are met, but only if they are not for materials that are already an eligible component at the time of purchase (e.g., applicable critical mineral or electrode active material), and as such, an additional credit cannot be claimed on costs relating to the acquisition and use of other eligible components.

See also "Additional substantiation requirements for critical minerals and electrode active materials."

Additional substantiation requirements for critical minerals and electrode active materials

In order to include direct or indirect materials costs as production costs when calculating a §45X credit for the production and sale of critical minerals or electrode active materials, a taxpayer must include certifications from each supplier, as an attachment to the tax return, and maintain specific books, records, and documentation to substantiate the credit.

The certifications must include the supplier’s employer identification number, be signed under penalties of perjury, and state that the supplier is not claiming a §45X credit for the materials purchased, nor is the supplier aware of any prior supplier claiming a §45X credit in the chain of production for the materials.

The books, records, and documentation requirements include, whether prepared by the taxpayer or (ideally) a third-party:

• An analysis of any constituent elements, materials, or subcomponents that concludes the material did not meet the definition of an eligible component (for example, an applicable critical mineral or electrode active material) at the time of acquisition by the taxpayer
• A list of all direct and indirect material costs and the amount of such costs that were included within the taxpayer’s total production cost for each applicable critical mineral
• A document related to the taxpayer’s production activities with respect to the direct and indirect material costs that establishes the materials were used in the production of the applicable critical mineral

Failure to provide this documentation with the return filing, or failure to provide an “available upon request” statement, would constitute a failure to substantiate the tax credit claim.

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Definition of produced by the taxpayer

‍The final regulations expanded the definition of “produced by the taxpayer” to confirm that taxpayers may produce eligible components using recycled materials (secondary production). The updated definition now reads, “Primary production involves producing an eligible component using non-recycled materials while secondary production involves producing an eligible component using recycled materials.”

Clarification on §45X vs §48C facility

‍The final regulations simplified the definition of a §45X facility, replacing the term “production unit” with “independently functioning tangible property” that is used and necessary for the eligible component to be considered produced by the taxpayer, regardless of physical location. Accordingly, tangible property used to produce a subcomponent which is later integrated, incorporated, or assembled into a distinct and final eligible component may not be part of the section 45X facility.

This clarification allows the use of subcomponents manufactured at a separate §48C facility without tainting the ability to qualify for a §45X credit, as long as the subcomponent is not part of the determination that the taxpayer is the producer of the eligible component.

The final regulations also added a specific rule to address §48C taints in a contract manufacturing arrangement - the tangible property determination for a 45X facility would apply to either party in the transaction, regardless of which party to the contract manufacturing arrangement is claiming the credit.

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Effective date

‍December 27, 2024

Applicability dates

‍As noted in § 1.45X–1(j), §1.45X–2(f), §1.45X–3(g), and §1.45X–4(d), these final regulations apply to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending on or after October 28, 2024.

Taxpayers may choose to apply these regulations to eligible components for which production is completed and sales occur after December 31, 2022, and during taxable years ending before October 28, 2024, provided that taxpayers follow these regulations in their entirety and in a consistent manner.

Additionally, §5.05(2) of Notice 2023–18 and §3 of Notice 2023–44, which relate to the interaction between §45X and §48C, are superseded for eligible components for which production is completed and sales occur after October 28, 2024.

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Appendix 1 — Additional technology-specific changes

Clarification on tandem cells

‍The final regulations addressed commenters concerns regarding disparate treatment between different types of tandem cells and the resulting capacity and credit amount. The Treasury Department and IRS agreed with commentators, and to prevent potentially incentivizing the development of certain tandem technology, added additional text for cells that are either mechanically stacked or using interconnected layers: “Where that cell is sold to a customer who will use it as the bottom cell in a tandem module, its capacity should be measured with the customer’s intended top cell placed between the bottom cell and the one-sun light source.”

Definition of "polymeric backsheet"

‍The final regulations clarify that the definition is limited to a sheet on the back of solar modules composed, at least in part, of a polymer, that acts as an electric insulator and protects the inner components of such module from the surrounding environment. This added definition for "polymeric" excludes most glass backsheets because they are typically not composed of a polymer, but of soda-lime glass.

Solar grade polysilicon measurement standards

‍The final rules added that satisfaction of the minimum purity requirement will be determined in accordance with the standards provided in SEMI Specification PV17-1012 Category 1. This standard also provides additional clarification by including guidance to distinguish between material and immaterial impurities.

Determining credits from related offshore wind vessels

‍§1.45X-3(c)(4)(ii) was revised to include the application of Federal income tax principles to determine inclusions and exclusions for the sales price used to calculate the §45X credit for offshore wind vessels.

Additional standards allowed to certify rated capacity of completed wind turbines

‍The final regulations revise proposed §1.45X-3(c)(6) to add both AWEA 9.1-2009 and ANSI/ACP 101-1-2021 as acceptable wind turbine certification standards.

Clarification to DC optimized microinverter systems

‍§1.45X-3(d)(5)(iv)(B) requires that the inverter and DC optimizer in the DC optimized inverter system to be produced and sold as a combined end product. The Treasury Department and the IRS retained this rule while also clarifying that the inverter and the DC optimizer do not need to be physically packaged together at sale, and the inverter and DC optimizer do not need to be fully interconnected and assembled at the time of sale.

No separate credit is created solely for a DC optimizer, and no changes were made to the number of inverter units used to compute the available credit amount, as these changes are beyond the authority of the Treasury Department and IRS.

Battery cell energy density requirements refer to volumetric energy density

‍When determining if a battery cell has an energy density of not less than 100 watt-hours per liter, the final regulations clarify that energy density is referring to volumetric energy density in §1.45X-3(e)(3)(i)(B) (e.g., as opposed to gravimetric, mass-based, energy density).

Clarification on modules using battery cells

Many commenters expressed concerns regarding the proposed regulations which would not have permitted a credit for the production of a module that is not the end-use configuration. Other commenters acknowledged that the proposed regulations could create confusion as the definition of battery module could potentially include items that are referred to in the industry as “battery packs.”

To address this confusion, §1.45X-3(e)(4)(i)(A) of the final regulations:

• Redefine an end-use configuration as “the product that ultimately serves a specified end use combines cells into a module such that any subsequent manufacturing is done to the module rather than to the cells individually”
• Clarify that “where multiple points in a supply chain may be eligible under this section, the first module produced and sold that meets the requirements of this section and the kilowatt-hour requirement in paragraph (e)(4)(i) of this section will be the only module eligible”

Clarification on modules not using battery cells for thermal and thermochemical battery technology

‍Taxpayers producing thermal and thermochemical battery modules with no battery cells must convert the energy storage to a kilowatt-hour basis, provide both the methodology and testing regarding this conversion, and maintain this testing as part of its books and records.

Additionally, the kilowatt-hour conversion cannot exceed the direct conversion of the total nameplate capacity of the thermal battery module to kilowatt-hours (the capacity that is sold to the consumer), and the taxpayer claiming the §45X credit must use the same methodology consistently, subject to any updated standard of the same methodology and testing, for all battery modules (with or without cells) sold in the taxpayer’s trade or business. The final regulations incorporate these clarifications in §1.45X-3(e)(4)(ii).

Additional guidance forthcoming for aluminum

‍As noted in the Summary of Comments and Explanation of Revisions, a number of comments were received regarding additional clarification for the definition of aluminum, and the Treasury Department and the IRS have determined that additional consideration is necessary prior to finalizing proposed §1.45X-(b)(1) with respect to this definition.

Appendix 2 — Additional contract manufacturing and relation person election changes

Additional critical minerals use case for contract manufacturing

‍The final regulations also added an additional contract manufacturing example to demonstrate a way to structure and claim a tax credit on initial extracting and refining activities that do not meet the minimum purity levels required for an eligible component until the initial materials are later purchased, completed, and sold.

Anti-abuse rule measured at point of sale for Related Person Election

‍The final regulations added a clarification regarding defects with regard to a related person election. If an eligible component is not defective at the time of sale, defects arising after the point of sale may occur in the ordinary course of a business and do not generally raise the improper claim concerns regarding defective components.

Appendix 3 — Select items upheld in final regulations

Confirmation of the scope for domestic production and use

‍The final regulations adopted the proposed rules that require eligible components to be produced within the United States, whereas constituent elements, materials, and subcomponents used in the production of the eligible components are not subject to a domestic production requirement.

In addition, the eligible components do not ultimately have to be used in the United States for §45X eligibility.

Production efforts required to stack or claim additional credits for integral components that are also eligible components

‍The final regulations upheld the temporary regulations perspective that a taxpayer must produce (rather than merely purchase or acquire) an eligible component that it then integrates, incorporates, or assembles into another eligible component that is then sold to an unrelated person in order to claim credits on both components.

No additional credits for defective units that are subsequently replaced

‍A commenter proposed that eligible components that were used to replace defective units pursuant to a contractual obligation do not appear to violate proposed anti-abuse provisions. However, the final regulations confirmed the replacement of a defective unit does not represent a new sale to an unrelated person, and §45X does not incentivize the production of two eligible components related to a single sales transaction.

Rejection to expand eligible components and applicable critical minerals

‍Commenters requested to expand the list of eligible components and applicable critical minerals, but the Treasury Department and the IRS declined, citing the lack of statutory authority to expand the list.

Rejection of proposed safe harbor for contract manufacturing arrangements

‍The Treasury Department and the IRS declined a commenter’s request to establish a safe harbor for contract manufacturing agreements in place before the applicability date of the proposed regulations.

However, a taxpayer may still elect to apply the special rule (§1.45X-1(c)(3)(iii)), which allows the parties of a contract manufacturing arrangement to agree on which party to the contract will claim the credit.

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Drawing on over $10B of verified transactions, our report takes a deep dive on the Section 48 investment tax credit, Section 45 production tax credit, and Section 45X advanced manufacturing production credit. We also examine emerging market trends and deal dynamics.

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Transferable tax credit pricing has increased in the latter half of 2024, particularly for large, "clean" ITCs

The increase in pricing reflects a seasonal supply-demand imbalance caused by the following:

• Corporate taxpayers have a firm and clear estimate of their 2024 tax liability, and many new tax credit buyers have stepped into the market. They are now scrambling to find credits to offset that liability
• The supply of 2024 credits, particularly large credit volumes, have dwindled given the amount of transaction activity throughout the year

We expect pricing for 2024 credits to remain inflated through the end of the year and into 2025. This intra year supply-demand imbalance was also observed in 2023.

While pricing has increased across all credit types, the most marked increase has been with large, straightforward ITC projects. For most of the year, these opportunities traded in the $0.92 to $0.93 range, but as of Q3 we are seeing buyers bid $0.94 or even $0.95. The spread between ITCs and production credits (§45 PTCs and §45X AMPCs) has narrowed considerably.

Sellers have started marketing high quality 2025 tax credit opportunities and are actively seeking buyer commitments. We believe that buyers that are willing to shop now for 2025 credits will be able to access a wide range of credit opportunities, with less competition.

We have also observed sellers running competitive RFP processes, and are receiving multiple bids – in some cases, upwards of ten qualified bids. Examples of projects that have received multiple bids with high valuations:

• $130M solar ITC from an investment grade seller, exempt from prevailing wage requirements
• $150M solar and storage ITC from a reputable seller with a very strong balance sheet. No step-up in cost basis and exempt from PWA requirements

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Corporate buyers should develop their 2025 tax credit acquisition strategy now to avoid the late-year credit frenzy

Reunion is seeing an increasing number of high quality sellers marketing their 2025 projects now and placing tight deadlines on accepting bids. Even though pricing may not be optimal due to a lower number of buyers ready to look at 2025 credits, these sellers want to put a tax credit purchase agreement in place so they can obtain a bridge loan against their tax credit commitments.

Buyers who are able to commit to 2025 credits now will get access to a wider selection of project opportunities, and potentially better pricing, as only a subset of buyers have enough visibility into 2025 tax liabilities to be able to commit early. They’ll also avoid “chasing credits” in the latter-half of 2025.

Buyers who are able to execute tax credit transfer agreements now have a significant advantage

For buyers with uncertainty around their tax liability, one option is to initially target a purchase volume that is significantly lower (e.g., 50%) than projected tax liability. The buyer can purchase additional tranches of credits later in 2025 as their tax position becomes more clear. (We previously discussed the strategy of topping up on credits.) Purchasing tranches of credits to “top up” also carry the benefit of less competition for smaller credits, resulting in potentially better pricing.

Buyers who are willing to go slightly out of pocket will also be in an advantageous position

A majority of corporate tax credit buyers do not want to go “out of pocket” to acquire clean energy tax credits, preferring to align tax credit purchases with their quarterly estimated tax payments. Typically, the internal approval process for a cost savings effort (e.g., paying a clean energy developer $95M in lieu of paying $100M to the IRS, at approximately the same time) is easier than requesting an out-of-pocket investment to buy credits that generate tax savings in the future. 

Buyers who are willing to go slightly “out of pocket” — for example, willingness to pay for an ITC in Q1, Q2, or even Q3 — will enjoy a less competition, and a larger discount to compensate for timing of payment. These out-of-pocket investments can present attractive economics to buyers, with IRRs over 20%. 

We can see this in a sample $100M ITC purchase from a project that will be placed in service in Q1 2024. Let’s assume a buyer and seller execute a tax credit transfer agreement in Q4 2024 (11/15/2024) for a utility-scale solar project that is expected to be placed in service in Q1 2024 (3/15/2024). If the buyer agrees to pay for the credits as soon as the project is placed in service, they could reasonably expect to pay $0.93, as they will essentially be “pre-paying” their taxes in Q1 and will get the benefit of the tax offset during their quarterly estimated tax payment dates.

Even though the buyer goes out of pocket in this scenario, the investment generates an attractive 20.3% IRR and $7.0M tax savings.

Consider smaller projects for better economics 

Buyers and sellers want as few counterparties as possible. If a buyer has a $160M tax credit appetite, they want to find one project as close to a $160M as possible.  

Focusing on a single, large transaction, however, can present challenging economics because as we noted, there are many large taxpayers that all want to find a large, straightforward transaction.

Simply moving from a single transaction of $100M to three transactions of $30M can meaningfully improve deal economics without necessarily adding undue risk or complexity. Through Q3 2024, for example, smaller 45X AMPCs deals priced approximately a cent below larger 45X AMPCs deals.

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Set expectations with internal stakeholders on pricing dynamics for 2024 credits

Companies looking to pursue sizable 2024 ITC opportunities should expect credits to trade at a premium. Buyers should set expectations to bid $0.94, $0.95, or even slightly higher to win the most coveted opportunities. 

Additional 2024 credit opportunities will arise as the year draws to a close, and we also predict that additional opportunities will arise shortly after January 1. What we observed last year is that a number of tax credit sellers were not sure if their ITCs would be placed in service in the current year or the subsequent year, so they waited until they had certainty on the tax credit year (i.e., after January 1) to market their credits. That said, we predict that a large number of tax credit buyers will continue to compete over these 2024 credits, particularly for larger opportunities.

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Companies should start evaluating 2025 clean energy tax credit investments now

Corporations who are comfortable with their 2025 tax liability and are willing to go a bit out of pocket should begin shifting their attention to 2025. Q4 2024 is a good time to lock in some of the most attractive 2025 deals, particularly for larger ITC, PTC, and AMPC opportunities.

Our transactions team would be happy to assemble indicative cashflow scenarios. Contact us today.

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