Akshat Kasliwal and Jesse Gilbert are renewable energy experts at PA Consulting. Vy Manthripragada is an energy transition expert at PA Consulting.
On the plains of Texas, wind turbines are producing more than just clean power. They’re also generating tax credits for companies that have nothing to do with the energy business. This is the result of the Inflation Reduction Act, the biggest clean energy legislation in the nation’s history, which allows any company in any industry to purchase tax credits — at a discount — from developers of clean energy projects. It’s a provision of the IRA that can generate much-needed financing for wind, solar and other clean energy projects, while helping companies achieve their sustainability targets. But sadly, not enough companies are taking advantage of the opportunity.
Corporations across the nation set well-intentioned goals for reducing their carbon footprints, some committing to net-zero targets to completely phase out their use of fossil fuels. Making good on those pledges, though, is proving difficult; progress is not keeping pace with aspiration. By engaging in the clean energy tax credit market, companies can rapidly advance their decarbonization records as they support the country’s shift to a greener energy mix.
Making tax credits transferable is a smart strategy because most renewable energy companies don’t have the sizeable tax liability that is necessary to monetize federal clean energy tax subsidies. Transferability of tax credits also has the potential to vastly expand the pool of funding for green energy, far beyond the industry’s predominant mechanism of “tax equity” financing in which investors — primarily major banks and insurance companies — become partial owners of a project, allowing them to take advantage of its tax benefits.
Tax credit transfers in 2023 totaled roughly $4 billion, which may sound like a substantial amount, but last year it was less than 1/5 of the volume of traditional tax equity financing for U.S. renewable energy projects. Moreover, most of the tax credit purchases to date have involved financial institutions. If the IRA is to reach its full potential in incentivizing clean energy, there must be more players and they must come from a broader spectrum of industries. Traditional tax equity partners cannot supply the massive scale of investment needed to bend the trajectory of greenhouse gas emissions from the power sector. Moreover, they are focused only on conventional clean energy generation rather than novel decarbonization pathways, such as green hydrogen and carbon capture that need financing for their development.
Transferring tax credits for the public good has a demonstrated track record. Low-income housing tax credits have been transferred for years, helping to fund the annual construction of about 100,000 affordable housing units, although this market too has been dominated by banks.
In return for receiving tax credits at discounts of about 10%, companies must be willing to assume some risk. After all, there is always the chance that a developer fails to complete a project or does not appropriately follow the regulatory guidance needed to retain the tax credits. But the demand for renewable energy is practically unlimited, particularly given the nation’s aggressive clean energy targets: reducing U.S. greenhouse gas emissions in 2030 by at least 50% below 2005 levels; achieving 100% carbon pollution-free electricity by 2035; and creating a net-zero emissions economy by 2050. The Department of Energy forecasts solar and wind will account for 40%-62% of U.S. electricity output by 2030 as a direct result of IRA incentives and funding.
If the U.S. has any chance of meeting these decarbonization goals, more companies must help support development of alternative power production by taking advantage of the opportunity to buy clean energy tax credits at a discount. In fact, the upcoming presidential election only makes this more pressing because a change in administration could potentially lead to the throttling of these incentives within the IRA. Washington is offering a gift that could be worth billions to corporate America. It is time for executives to seize the opportunity and make good on their promises of being corporate and societal stewards.
