Surveying the risk landscape of an emerging solar sector

First Solar manufacturing plant
First Solar has been quick out of the blocks in taking advantage of the tax credit transfer freedoms offered to PV manufacturers under the IRA. Image: First Solar

The first full year of the Inflation Reduction Act (IRA) in the US has seen a flurry of transactions completed as solar developers and now manufacturers take advantage. Jonathan Tourino Jacobo looks at some of the emerging trends and future prospects in this lucrative new market

Last year marked the first full year the IRA was in force, while the US Department of Treasury and the Internal Revenue Service (IRS) released several pieces of guidance during 2023 setting out how solar projects and PV manufacturing can make use of tax credit transferability freedoms set out in the legislation.

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During the first part of the year, barely any transactions – for solar projects – were made, due to the draft guidance only being published in June. But a recent report from Crux – an ecosystem for developers, tax credit buyers, and financial institutions to transact and manage transferable tax credits – estimated that, with the key guidance now in the public domain, transaction volume in 2023 tax credits will roar to US$7-9 billion. This will lift total investment in clean energy tax attributes to US$30 billion, on top of an estimated US$23 billion in traditional tax equity.

“That is an enormous feat for a market that has been transactable for fewer than six months,” the report said. “This isn’t just good news for project developers trying to sell their credits, or corporate taxpayers who want to manage their tax liabilities. An efficient tax credit marketplace is a critical tool for driving new investment in the US economy.”

A new player in town

The ability for solar projects to transfer tax credits, on top of the investment tax credit (ITC) or the production tax credit (PTC), will enable developers in the US the ability to sell all or a portion of the credits to third parties.

“We are seeing a slew of new participants in the tax credit market, many of which are large corporates, insurance companies, or bespoke brokerage services, because this creates another avenue for monetising these tax credits, and we are also seeing the existing players shift their models to accommodate for the changes,” says Carl Fleming, a Washington DC-based partner at law firm McDermott Will & Emery.

Numbers for 2023 showed the increasing appetite for the tax credit market, and with guidance on Section 45X – which provides a credit for the domestic production and sale of certain eligible components such as cells, wafers and modules among others – published late in December, it is certainly going to attract more interest in the entire solar industry, both at upstream and downstream levels. “Now that the guidance [for Section 45X] is out, that tends to get investors off the sidelines,” says Anne C. Loomis, a partner at law firm Troutman Pepper.

The appetite for clean energy credit transferability in 2024 is more than likely to increase not just in numbers but also in size, with the majority of respondents (67%) to Crux’s survey expecting deal sizes to rise this year. Figures from Switzerland-headquartered financing entity Credit Suisse estimate investment in clean energy tax credits and other project tax attributes to reach US$83 billion by 2031.

Under the IRA, there is the baseline PTC and ITC as well as a new standalone ITC for storage. On top of this, however, one can stack on various adders (bonus credits) based on incentives for projects being built in certain areas, such as those with old coal mines, or using certain pieces of domestically sourced equipment.

This “game changer” has opened a whole new environment, says Fleming. With this new playbook for optimising projects, developers are ultimately trying to capture as much additional value as possible from one project. The question of how to monetise these credits is key, and it’s not just developers, but private equity and banks that are taking interest because it opens up new pools of people to do business with.

The IRA includes adders for clean energy projects developed in energy communities, which had previously relied heavily on fossil fuel production or may face challenges associated with the energy transition. Fleming says energy communities is an area where the legislation is already clear enough, with adequate certainty on whether a project meets the requirements.

One of the findings from Crux’s report is that the attitude of buyers and sellers of tax credits in 2023 was differed considerably, with buyers more focused on risk. “They’re more likely than either sellers or intermediaries to describe themselves as still ‘learning about the market’, and all of those who said they’re not planning a transaction indicated that a clearer understanding of risk would help change that,” says Crux.

Sellers, on the other hand, are evidently all in, with 93% saying they were planning to pursue a tax credit deal or already have. The biggest challenge for sellers is price transparency and knowing if they are getting the best price for their credits.

Another important aspect of Crux’s report was the importance of intermediaries to help close the gap between buyers’ and sellers’ market expectations. “A common theme emerged throughout the research, and it bears repeating: over and over again we observed the importance of intermediaries (banks, brokers, tax advisors, technology platforms, and others) to build trust and transparency in this new market,” the report said.

One positive aspect of these tax credits is that smaller deals have been made in 2023 when before the IRA smaller players might have not been able to realise tax benefits for their projects. “A large number of smaller deals — too small for a tax equity deal — took place in 2023. Many of these developers would not have been able to monetise their tax benefits pre-IRA,” explains Crux. The majority of the transactions (80%) – this includes all technologies and not just solar PV – for which the company received data were credit sales of US$50 million or less.

“2023 was also a unique year — most large wind and solar projects with credits to sell in 2023 received committed funding from tax equity partners before the year began and may not have had credits to sell,” explains Crux.

The average deal size, based on ITC, on Crux’s dataset for solar PV was US$18.32 million – including commercial and industrial (C&I) – or US$50 million for utility-scale projects only, whereas the average credit price reached 90.7 cents per dollar – including C&I – and 92 cents per dollar for utility-scale solar only.

Manufacturing boon

This is not just the case for the downstream part of the solar industry as the upstream will also be able to take advantage of tax credit transferability. A case in point is thin-film module manufacturer First Solar. At the end of 2023, the Arizona-based company entered into two separate tax credit transfer agreements (TCTAs) to sell US$500 million and up to US$200 million of advanced manufacturing production tax credits to finance tech company Fiserv. This was only days after the US Department of Treasury and the IRS released a proposed guidance on Section 45X credits on advanced manufacturing production credits.

First Solar’s transferability deal is one of several options for the solar manufacturing industry to consider, says Troutman Pepper’s Loomis, as they could also opt for a typical construction loan with the idea they will pay off the loan with the direct payment under 45X, once they have received it from the US government. “That will be a combination of traditional debt, and then tax credit via the direct payment,” she says.

Another possibility that might arise in the coming months and years is for a solar manufacturer to sign a tax equity partnership around the ownership of a facility that produces products – from polysilicon to modules and other solar components – which earn the 45X credit, adds Loomis.

One of the key advantages of First Solar securing a deal so early is that the company already has production going in the US. “They have some manufacturing that generated actual tax credits in 2023. They’ve got credit they can sell right now. Whereas a new manufacturer trying to establish a factory, they don’t have anything yet produced and sold. They’re probably going to need to take on that debt in order to get their facility in place,” explains Loomis.

Furthermore, the fact that First Solar is more vertically integrated than most of the solar manufacturers that have announced new or increased capacity so far allowed the company to stack on different 45X credits, adds Loomis. “They’re getting a little more bang for their buck when they sell the product in terms of the tax credit.”

One issue highlighted last year by the advisory body Clean Energy Associates (CEA) in a blog post on PV Tech was the looming imbalance between module capacity announced and the rest of the upstream supply chain. Indeed, only a few companies have so far announced capacity for at least modules and cell capacity to be built in the US, with Korean-owned solar PV manufacturer Qcells among the few to build from ingots to modules.

With the guidance now published and being “straightforward”, Loomis expects it will make manufacturers more comfortable that “they’re going to be able to generate incentives under the IRA in a certain amount”.

If First Solar was the kickstart for the solar manufacturing industry to sign deals around 45X, this year and 2025 are expected to see more similar ones, though not for the same amount due to the reasons mentioned above – capacity already in production and more vertically integrated than most companies in the US.

Finally, the 45X credit guidance released last December will give a much-needed boost to the solar manufacturing industry in the US to build domestic capacity. Not only that but as plants become operational, developers will also benefit from it thanks to the adder for domestic content – which would give access to a 10% bonus ITC.

However, if the upcoming disparity between module capacity versus cell capacity continues and manufacturers still have to rely on imported solar cells, this might make it much more complicated for a solar project to get access to that extra 10%.

The biggest challenge at present is navigating the complexity of the inputs in the IRA, Fleming says, adding: “It’s a challenge and an opportunity because this is so complex and so lucrative. It presents an opportunity to rethink almost every developer’s business model.”

Additional reporting by Tom Kenning

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