Tax Rules to Kick Off New Clean-Energy Market

The Treasury Department on Wednesday proposed rules explaining how clean-energy developers can sell the credits. The government also issued related rules so that state and local governments, nonprofits and universities, and tribes can claim tax credits, even though they don’t pay income taxes.

Many companies that generate clean energy don’t make enough profit to use all of the tax credits they could claim. So under the new rules, which are part of last year’s Inflation Reduction Act, a utility-scale solar installation could sell its tax credits to a tech company that had no involvement in the project but was looking for a lower tax bill. A school district, meanwhile, could get a direct cash payment in place of tax credits for buying electric vehicles. 

“Today marks a big milestone toward our clean energy future,” said John Podesta, the White House climate adviser. 

The previous path to monetizing otherwise unusable tax credits was a relatively clunky system known as tax-equity financing. It requires significant transaction costs and mostly attracted interest from banks and insurance companies. 

Market participants have been negotiating simpler tax-credit transfers since the passage of the new climate law, but they have been waiting for the government’s rules to finish those deals. The proposed rules spell out how projects will be reported to the government and how the credits must be sold. 

Credits can be transferred only once, and generally, the recipient bears the legal risk of audits. Lawyers and deal makers expect tax credits to sell at a discount, with prices varying based on the record of the project developer and other factors. Many expect prices to exceed 90 cents on the dollar, so that a large company might pay more than $90 million for $100 million of tax credits.

“This market will ramp up quickly,” said Keith Martin, co-head of U.S. projects at law firm Norton Rose Fulbright, who focuses on tax credits and project finance. Three transfer deals the firm has worked on are essentially done pending Treasury guidance and about 17 others are in various stages of development, he said.

Existing tax-equity investors such as JPMorgan Chase and Bank of America are looking at ways they could take advantage of the transferable tax credits, while companies that are new to these types of investments might take longer to get comfortable with the new market, he said. 

There are still uncertainties. Some buyers may purchase insurance policies in case the Internal Revenue Service determines that certain projects weren’t actually eligible for tax credits. And new international tax rules could limit U.S. companies’ ability to use transferred credits to lower their tax bills. 

The Inflation Reduction Act’s clean-energy credits have been more popular than projected and are likely to cost hundreds of billions of dollars more than previously forecast, according to recent public and private-sector estimates. 

Republicans in Congress say many of the credits excessively benefit corporations and want to get rid of them. The House voted earlier this year to repeal many of the new and expanded credits, and the Ways and Means Committee voted Tuesday to pull back a smaller set of them. Biden and the Democratic-led Senate will likely block those efforts. 

“It’s obvious which party is bailing out the wealthy,” said Rep.

Jason Smith (R., Mo.), the committee’s chairman. 

—Amrith Ramkumar contributed to this article.