The LevelTen Tax Credit Marketplace connects businesses and their advisors with the nation's largest network of clean energy project developers to facilitate efficient federal tax credit purchases. This market is growing fast, with billions of dollars of deals closed in the second half of 2023.
With clean energy tax credits, buyers have a unique opportunity to reduce their tax liabilities and support the energy transition by resolving a key bottleneck in clean energy project development: financing. The monetary benefits of corporate tax credit transactions can even be used to fund other elements of a corporate sustainability program, such as PPA or REC purchases.
Here’s what your organization should know as you develop your tax credit strategy:
The Basics
Who should consider tax credits?
Clean energy tax credits offer benefits for almost any company that pays federal taxes in the U.S. For some, buying tax credits may be a purely financial decision to pursue a low-risk reduction in tax liabilities. Typically, transactions are for at least $10 million in tax credits. For companies with sustainability goals, investing in tax credits also supports the transition towards clean energy; tax credit purchases provide capital that developers need to construct new renewable energy projects. In other words, tax credit purchases deliver additionality by enabling new sources of clean energy to get added to the grid.
What stakeholders are typically involved with tax credit purchasing decisions?
As companies begin to review the opportunity in renewable energy tax credits, it is vital to include the right advisors on the team to ensure the results match expectations. Because tax credits deliver both financial and sustainability benefits, the decision making typically involves multiple departments, including finance, sustainability, and legal. In addition, external advisors play a vital role providing expertise and exposure to the full slate of opportunities in the market.
How is risk mitigated?
While tax credit purchases are low-risk, they are not entirely devoid of risk. Projects may not reach completion or may be delayed in doing so. Once completed, the IRS may disallow credits due to “qualification” (the project not qualifying for the credits it claimed) or “recapture” (the project no longer operating or has changed ownership within five years of its placed in service date).
To mitigate these and other risks, tax investors should pursue high-quality tax credits from experienced developers, conduct thorough due diligence, and secure robust risk protections from tax credit sellers. The type and extent of these protections is a critical negotiation item, and often includes a combination of tax credit insurance and parent guarantees.
Knowledgeable legal, accounting, and transactions advisors can counsel buyers on how best to pick projects and secure adequate protection to mitigate risk.
How are tax credit transfers different from tax equity transactions?
Before the Inflation Reduction Act, tax equity partnerships and leases were the predominant method for clean energy developers to monetize tax credits. In these structures, tax investors receive a disproportionate share of tax credits, depreciation with the owner receiving much of the cashflow. Tax equity arrangements are complex and bespoke; as a result, they have been utilized primarily by a small number of large banks and other financial institutions with limited participation from corporate and other investors.
Purchasing transferable tax credits is comparably much simpler, with no need for bespoke partnership structures or complex accounting. That said, tax equity structures remain prevalent in the market due to financial benefits for the project developer. Increasingly, many of the traditional tax investors are pursuing so-called “hybrid” or “T-flip” structures where they provide a tax equity partnership to the developer and then sell the tax credits through transferability. The experience and leg work done by these syndicators can provide valuable support to the new tax credit buyer as they enter the market.
LevelTen sees ample supply of transferable tax credits to meet this demand in the near term, both from standard tax credit transfers as well as from hybrid structures.
Sustainability & Financial Benefits
What sustainability benefits do tax credits offer?
Our project developer community has made it clear that more tax investment will enable them to deliver more clean energy. Tax credits are critical to financing clean energy projects, typically composing 30-60% of a project’s capital stack. Moreover, corporate investment in tax credits is a critical bottleneck to getting more projects built. By investing in transferable tax credits, buyers are directly enabling more clean energy to be built.
Buyers focused on Scope 2 emissions targets should consider securing PPAs or RECs alongside tax credits. When the two transactions are done in parallel, tax credit transfer proceeds can buoy the economics of a PPA or REC purchase program, offsetting the costs of these purchases with the favorable economics of tax credit transfers. From a sustainability perspective, completing a PPA purchase and tax credit transfer from the same project allows a buyer to fully bring a project into existence.
How can I publicize the climate impact of my tax credit purchases?
While tax credits cannot yet be used to make Scope 2 emissions claims, their sustainability impact is clear. Much like PPAs, tax credits purchases provide “additionality” to the grid by enabling projects to be built that would otherwise not be. Corporate sustainability leaders have already begun announcing tax credit purchases, and we expect public recognition of these investments to continue to increase as the market matures.
How do tax credits impact my financial bottom line?
Tax credits are a low-risk way for purchasers to directly reduce their federal tax liability, and immediately claim tax reductions. Through these transactions, businesses benefit from dollar-for-dollar reductions in tax liability in exchange for their cash investment in the energy transition.
LevelTen’s Tax Credit Marketplace
How does LevelTen’s Tax Credit Marketplace work?
Companies using the LevelTen Tax Credit Marketplace can confidently identify the best projects for their needs, supported by LevelTen’s market data, platform analytics, and expert transactions team. Here’s how we support buyers and advisors:
- Buyers or advisors/brokers considering the purchase of tax credits work with LevelTen to create a request for proposals (RFP) outlining their desired tax credit characteristics. LevelTen distributes this RFP to its network of approximately 600 clean energy developers active in the U.S.
- LevelTen collects standardized proposals and provides market intelligence to help buyers shortlist the tax credits that best meet their needs. For example, LevelTen's Development Maturity Score benchmarks the likelihood of project completion and tax credit delivery.
- LevelTen, alongside legal and accounting partners, supports buyers or advisors/brokers in conducting due diligence and contract negotiations for shortlisted credits. In addition to buyer-issued RFPs, LevelTen will be introducing additional ways to transact on tax credits in the near future.
What makes your platform different from others?
LevelTen has been supporting corporate clients and their advisors in the sustainability space since 2018. We have closed transactions with some of the largest corporations in the world. As a “one-stop-shop” for achieving sustainability goals, the LevelTen Platform gives sustainability teams a holistic view of their market position and long-term strategy. The LevelTen Platform can facilitate multiple types of procurements: For example, combine a tax credit transaction with a PPA or REC transaction. Approximately 600 U.S. developers currently participate in the LevelTen Platform, representing about 90% of the market. Tax credit proposals through the LevelTen Tax Credit Marketplace instantly reach the largest network of clean energy developers in the United States.
How much supply are you seeing right now?
With 90% of North American developers on the LevelTen platform, tax credit buyers and their advisors can connect to a vast supply of tax credits covering a wide array of credit types, technologies, vintages, sizes, and geographies. LevelTen tax credit RFIs/RFPs have surfaced billions of dollars of supply. Our customized, buyer-centric approach is designed to find the tax credits that best meet your needs.
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