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Blackstone, Vitol and a film venture involving American football star Travis Kelce are among the investors to have joined a new market for green tax credits as it approaches $50bn in size.
The Inflation Reduction Act, the landmark climate law signed by President Joe Biden in 2022, hinges on tax credits to drive new investment in clean energy and other technologies.
It also opened the door for these credits to be bought and sold freely, enabling energy projects with little to no tax liability to swap them for cash from deep-pocketed investors seeking to offset more substantial tax burdens.
Evercore expects $47bn worth of the credits to come up for sale in 2024, the market’s first full year of operations. The annual supply would surpass $100bn by 2030 under the terms of the law, the investment bank said.
The cash has been welcomed by developers of projects such as solar and wind farms after a bruising period of high interest rates and inflation.
An array of companies are shopping for credits to lower US tax bills. Schneider Electric, the French industrial group, announced a deal on Thursday to purchase manufacturing tax credits from solar-panel maker Silfab Solar. Its purchase follows an $80mn tax credit transfer agreement with French energy company Engie in February.
Blackstone, the private equity group entered what is called a “hybrid” deal. It partnered with renewable energy company Arevon on a $350mn traditional tax equity deal, where the tax credits were sold to investment bank Stifel.
“This really is a game-changer,” said Howard Steinberg, managing director at Houlihan Lokey, an investment bank, which has seen a “frenzy” of interest from businesses. “The purchase of the credits will be a fact of life for corporate taxpayers.”
The US has subsidised solar and wind projects with tax breaks for decades. But until the IRA, the terms required cumbersome partnerships between project developers and a group of financiers, mostly banks.
The IRA loosened constraints in this system by allowing the credits to be transferred to third parties with no direct exposure to a particular project.
“It’s an essential part of the underwriting of the project,” said Chris Taylor, head of GridStor, a battery storage company that sold tax credits to JPMorgan Chase in March.
Among the buyers and sellers have been companies in the oil and gas industry, many of which face big tax bills after high and volatile commodity prices delivered soaring profits. Last year Vitol, the world’s largest independent oil trader, purchased $100mn worth of tax credits from Avangrid in one of the largest deals at the time. Vitol declined to comment.
Law firm Norton Rose Fulbright told the Financial Times it had worked on at least two tax credit transactions with oil majors last year, while a large US bank said that oil and gas companies made up 30 per cent of its tax credit sales.
“The oil majors are like anyone else. They are big corporations. They have large tax liabilities and they’re looking to manage their effective tax rates,” said Keith Martin, co-head of projects at Norton Rose Fulbright.
Drax, the UK-based electric generating company, is planning to build wood-pellet fuelled power plants worth $4bn in the US that will be eligible for tax credits for capturing carbon dioxide emissions. Ross McKenzie of Drax said the ability to sell tax credits was important to foreign investors such as his company, which “don’t currently have a large US tax liability”.
The sale of credits has even reached Hollywood. 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. Two of the films are being co-produced by Kelce, best known for being a professional American football player and the boyfriend of Taylor Swift. A representative for Kelce did not respond to a request for comment.
“It is a very welcome addition because in the industry, with streaming, there’s a lot of changes in the consumption of content. It’s a very challenging environment,” said Ray Maiello of Radiant Media Studios.
While digital markets have emerged to simplify transfers of credits, the process remains complex and often requires a team of lawyers, accountants and insurance firms to complete.
Uncertainty over the viability of projects and some unfinished tax credit rules have also given some buyers pause for thought. Crux, a market platform, expects $15bn-$20bn in transactions this year, up from $7bn-$9bn last year but still far below the market’s almost $50bn in anticipated supply.
