Tax credits! Get them while they're hot! IRINA SLAV
Free solar, free EVs, many of us had the suspicion that the transitioners would have to start giving the stuff away to get people to use it.
Tax credits! Get them while they're hot!
MAY 20
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PAID
“Free solar”. The phrase was in a Wall Street Journal headline I saw recently and once it caught my eye it didn’t let go. Not that there was anything surprising about this headline, which, in full, stated Free Solar for Farmers: Climate Law Gives Rich Incentives. If anything, it was entirely predictable. Free solar, free EVs, many of us had the suspicion that the transitioners would have to start giving the stuff away to get people to use i
t.
Upon reading the story below the headline, however, I discovered I’d been wrong. There was, in fact, nothing free about that solar for farmers. It came very much with a price — a price not particularly well hidden, either, for those cursed with either congenital or acquired observation skills. A price, indeed, celebrated as the greatest thing after sliced bread. Or mortgage-backed securities.
The thing in question is tax credits. But not just any tax credits. The greatest thing since sliced bread these days are transferable, meaning tradable, tax credits. It’s a whole new market! Get your taxes down and support a solar farm! Get them while they’re hot! It’s a win-win-win and nothing could go wrong whatsoever. Au contraire — it will help advance the transition and that’s what we are all here on this planet for, anyway. And we’ll get some free stuff! Totally.
Earlier this month, Evercore ISI reported that this year alone, companies active in the energy transition in the United States will generate $47 billion worth of tax credits. This translates into billions of credits up for grabs for any company that wants to reduce its tax load — any company, regardless of business area. Yes, that includes oil and gas producers. By 2030, the market for transferable tax credits could swell to $100 billion — per year.
The scheme is really simple and elegant. Say a company wants to buy a few wind power projects but it doesn’t have the money. Because these are wind power projects, they are eligible for a certain, rather generous, amount of tax credits. But the buyer doesn’t want credits, it wants the project. So it goes and finds a company, perhaps a bank, that wants to pay less in taxes while Doing Good for the Climate. The bank buys the credits, at a discount because the wind project buyer needs the money now, and gets a reduced tax bill.
This is exactly what happened in the first transferable tax credit deal, carried out in August last year by a company called Invenergy, which wanted to buy a portfolio of wind projects but didn’t have the money. So it sold $580 million in tax credits attached to these projects to Bank of America.
Result: Invenergy gets 14 wind installations and BofA gets a $580-million discount on its tax bill — and probably makes a nice profit in the process since, per the WSJ, “Because of the expected discounts, companies could earn an instant profit, paying $90 or $95 for a $100 coupon off their income-tax liability.”
That was last year, when tax credit deals were estimated at some $7-$9 billion. This year, there will be more. Because the market that didn’t exist three years ago is growing, and it’s growing fast. Thanks to government efforts to convince people and businesses to build more wind and solar, which happen to include a cumbersome procedure for the release of incentives.
This procedure, I gather, makes many opt for (presumably advanced) tax credit sales to finance their projects instead of waiting for those incentives. They would still get those — but much later than they need them to build the installations and start profiting from them by saving on electricity bills, if they’re farmers, or by selling more credits, if they’re generators, under the production credit incentive program dedicated to wind and solar generators, and other non-hydrocarbon power plants.
An interesting twist in the tax credit transferability system is that it is also most welcome to energy users and generators who produce power from eligible sources but do not make enough in profits to claim all the tax credits they can claim. So they’re free to sell those extra credits to more profitable businesses. Again, everybody wins — except for the state budget.
Essentially, the money that goes into those transition projects via the tax credit market represents a tax loss for the government, meaning that ultimately, it is yet again the government that pays for these projects, with lower tax income. But it makes everyone else involved in the process happy so that’s all right.
It’s interesting that no one is talking about that, not after 2022, when the Wall Street Journal wrote that “These transferable credits, however, expose a potential dilemma for Democrats. The party aimed to raise corporate tax bills and prevent large, profitable companies from paying too little. But the tax-credit transfers open a new avenue for many of those same companies to pay less. “
Two years on, there is no mention of any potential worries the government may have about the tax credit market. The focus is on these credits being a faster, simpler, all-round neater way to channel money into wind, solar and whatever else is covered by the IRA subsidy provisions. The focus is on how tax credit trade is the solution to the ultimate transition problem, as seen by politicians: a money shortage. And this year, this trade will hit $47 billion.
The market’s spreading, too. It’s not just chicken farmers and wind developers that can claim these credits and sell them. Per the FT, “Four film projects at Radiant Media Studios depend on financing through sales of tax credits associated with solar farms owned by one of the production company’s principals, in deals first reported by Variety magazine.”
Indeed, Variety reported in February that a film called “My Dead Friend Zoe” was financed with the sale of spare tax credits that one of the producers, Mike Field, had on hand thanks to his green energy business. It may be the start of something new and beautiful in filmmaking. Politicians are apparently hoping it would be.
Per the WSJ, “By making it easier for any company to buy credits, government officials hope they can entice businesses beyond banking to reduce their taxes and fund climate investments in the process.” Talk about noble goals. We are going to have that transition if it bankrupts us. A whole new level of “Whatever it takes”.
“We need this market to develop fast,” the head of Bank of America’s sustainable finance told the WSJ last year in comments on that first-ever credit tax transfer deal with Invenergy. Of course you do. There’s so much to be saved in taxes if the project ticks all the right boxes — and there are so many of these boxes, courtesy of the IRA. Everybody loves tax credit trading.
It was therefore with some surprise that I saw this in a recent FT report on the topic. “Uncertainty over the viability of projects and some unfinished tax credit rules have also given some buyers pause for thought (alongside the relative complexity of the deals)”.
Odd, that. From all the heaps of praise everyone ever interviewed by the business press seems to have about tax credit trading it’s easy to assume that every project financed this way will be a massive success and keep the credit tax ball rolling for years as it generates clean and responsible electricity.
But that would be because the one doing the assumption had missed this little morsel of information that I mentioned above and that I also found in one of the WSJ reports: “Renewable-energy companies often don’t make enough profit to absorb all the tax credits they generate. The law lets them sell the credits to other companies to monetize what they can’t use.”
You’ve got to admire the enormous amount of work that the U.S. federal government has done to ensure the transition takes place, even if it has to fund it almost entirely on its own. And even if this year may already see a surplus supply of credits, per one tax credit marketplace, because we now have these as well.
According to that marketplace named Crux, demand for tax credits this year could come in at around $15-$20 billion to that $47 billion in supply, which the above FT report called a market size. Shall we have fun estimating the discounts at which tax credits will be selling with desperate developers looking to secure funds for yet more of their green projects whose actual hue is a bright Paris green?
Thanks Irina for bumming me out. From Bularia to Wisconsin, you have made me wish I hadn’t quit drinking 4 years ago.