Since the passage of the Energy Tax Act in 1978, tax credits have helped finance clean energy projects. Traditionally, developers that invested in renewable energy technologies have been eligible for either the investment tax credit (ITC) or the production tax credit (PTC). To monetize those tax credits, developers turned to tax equity partnerships, primarily with large banks.

Since the passage of the Inflation Reduction Act (IRA) in 2022, the availability of tax credits to finance a larger number of clean energy technologies, including manufacturing projects and critical mineral extraction and processing, has expanded significantly. The legislation made the tax credits transferable, enabling clean energy developers and manufacturers to monetize their tax credits by selling them to a third party. Transferability is catalyzing private investment — Crux estimates that every $1 of federal tax incentives drives $5 of private investment.

This guide examines the differences between transferability and traditional tax equity, including the rise of hybrid tax equity structures that utilize elements from both financing structures. 

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Terms to know

• Transferable tax credits: Tax credits that can be sold to a third party for cash without entering a long-term partnership. 
• Investment tax credits (ITCs): Federal incentive that allows eligible clean energy developers to deduct a percentage of their project costs (currently 30%) to defray their own tax liability or, more commonly, to either enter a tax equity partnership or sell clean energy credits to other companies seeking to reduce their tax bill.
• Production tax credits (PTCs): Federal incentive that allows clean energy developers or manufacturers to deduct credits for each kilowatt hour of energy produced or each unit manufactured.  
• Direct transfer: Tax credit transaction in which tax credit buyers pay for tax credits in cash after they are generated, either when the project is placed in service (in the case of ITCs) or when the project produces electricity or manufactures an eligible product (in the case of PTCs).
• Tax equity: Financing structure where investors provide capital to clean energy projects in exchange for the tax benefits provided by clean energy tax credits. Other benefits can include depreciation and a share of project cash flows.
• Hybrid financial structures (T-flips): Investment structure that brings together a sponsor (the project developer or owner) and a tax equity investor in a partnership that allows for the sale of clean energy credits to a third party. 
• Partnership flip (P-flip) structures: Similar to a T-flip, except the structure delivers most of the tax benefits to the investor, along with depreciation and cash.
• Recapture: When a portion of the ITCs must be paid back if a project ceases to meet eligibility requirements during the first five years after it is placed in service. Recapture typically occurs if a project is sold, shut down, or significantly altered.

Understanding tax equity and clean energy credits

Tax equity overview

The ability to monetize clean energy credits has been around since the Energy Tax Act created the ITC in 1978. How the credits can be monetized has changed dramatically, especially since the advent of transferability. 

The ITC and PTC are the tools investors, developers, and manufacturers can use to finance projects. Understanding the features of each tax credit and how they differ can help stakeholders determine which is best for their project and the optimal investment structure to pursue:

• ITCs provide a dollar-for-dollar reduction in income taxes for clean energy developers based on a percentage of the total capital investment in the project. The tax benefit is delivered upfront and is based on a percentage of the project’s eligible costs. Eligible costs include the purchase of clean energy equipment, such as solar panels, inverters, and wind turbines. 
• PTCs provide an ongoing tax credit based on the kilowatt-hours a clean energy project produces, typically over 10 years. The §45X advanced manufacturing PTC is not calculated based on electricity production, but instead on a fixed value per component size or weight, derived per unit of electrical capacity, or as a percentage of the total cost of production. 

ITCs and PTCs are the building blocks of clean energy financing deals. How they are used varies depending on the type of project and the parties involved. In traditional tax equity structures, equity investments are structured as partnerships and the investment is made just prior to a project being placed in service. More specifically, about 20% of a tax equity investment is made when the project reaches the mechanical completion stage, while 80% of the capital is provided at substantial completion.

The investment made in a tax equity partnership (also called a partnership flip, or P-flip) helps substantiate a step-up in a project’s ITC basis to fair market value. In exchange for that investment, the tax equity investor receives 99% of the tax benefits along with a small portion of the project’s cash flow and the depreciation attributable to the project. The allocation of tax benefits usually drops (or “flips”) to 5% after the tax equity investor receives an agreed-upon after-tax return. At that point, the sponsor can purchase the tax equity investor’s interest in the partnership after the flip.

Tax equity has historically driven significant investment in clean energy. The complexity and expense associated with tax equity, however, limit the universe of investors to between 10 and 20 large financial services companies with sufficiently sophisticated operations to navigate clean energy credit monetization and depreciation. Similarly, tax equity financing has traditionally been limited to developers with large project portfolios generating large volumes of tax credits.

Transferable tax credits overview

Tax credit transferability has enabled the direct sale of clean energy credits from project owners to buyers seeking to reduce their tax liability. Buyers pay cash for these credits after they are generated. In the case of ITCs, this occurs when the project is placed in service. For PTCs, this happens when a project begins producing electricity or when a manufacturer produces an eligible product.

The streamlined transaction processes in transferability have enabled small and mid-sized developers to monetize clean energy credits and have widened the pool of eligible tax credit buyers. 

In direct transfers, the project’s owner is the seller. The project development company is often a pass-through entity, so buyers usually seek indemnities and assurances from the parent company to ensure the tax credits are eligible to be sold. In this structure, no investment is required in the project. However, the project developer may secure a forward tax credit purchase commitment with a tax credit buyer, which can be used to obtain a bridge loan at relatively lower cost of capital compared to equity financing.  

How tax equity and transferability compare

There are several notable differences in tax equity and tax credit transferability transactions. Because tax equity partnerships are complex, their transaction costs often run into the millions of dollars — primarily due to legal fees. 

Transferability does not require the same transaction costs as tax equity deals, though some additional costs are incurred to obtain insurance and to complete due diligence. 

How are tax equity and transferable tax credit financing similar and different? 

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Tax equity:

• Traditional clean energy financing structure.
• High barrier to entry and used primarily by banks, insurance companies, and corporations.
• Transactions can take many months to complete.
• Investors assume some project risk, including recapture.
• More structured financing through partnership models.
• Allow for monetization of depreciation and step-up project basis.

Transferable tax credits:

• Newer mechanism (2022), with transactions beginning in 2023.
• Faster transaction time (around three months).
• Lower barrier to entry with a larger pool of buyers and sellers.
• Investors don’t take on project risk.
• Developers retain control over projects.
• No value from accelerated depreciation.

What tax equity and transferable credit have in common:

• Vehicle to monetize clean energy tax credits.
• Provide capital for clean energy and manufacturing projects.
• Reduce tax liability. 
• Used for an increasing variety of clean energy projects, including solar, wind, energy storage, hydrogen, carbon capture, critical minerals, and manufacturing.
• Require Internal Revenue Service (IRS) oversight.

Though well established, tax equity can be accessed only by a limited number of investors and developers due to its expense and complexity. Due to its simplicity relative to tax equity, transferability drives new investment into diverse energy. The two structures are complementary, providing developers flexibility to fund their projects. 

For more information, check out the guide to transferable tax credits.

Constructing hybrid tax equity financing 

Because the availability of tax equity has been a constraint on project finance for clean energy, many tax equity partnerships are now structured to incorporate elements of transferability. 

What is hybrid financing?

Hybrid tax equity financing gives investors and developers the flexibility to leverage the most attractive monetization features of both transferability and traditional tax equity partnerships. These structures, also known as T-flips, maintain the partnership structure of traditional tax equity deals. The T-flip name comes from the fact that the partnership also facilitates transferability — it is structured to permit the sale of transferable tax credits to a third party in a separate transaction. Depreciation benefits stay with the tax equity investor.

This financial structure is favored by investors who seek depreciation but can’t take full advantage of the tax credits. It also unlocks more capital via credits that are sold in the transfer market, expanding available funding from tax equity. This is a particularly important development for utility-scale projects with substantial tax equity needs.

Why use a hybrid model?

Sales of clean energy credits from a tax equity partnership accounted for nearly 30% of the 2024 transferable tax credit market. This popularity is due to the benefits of the structure:

• Increased flexibility: Hybrid structures allow project developers to leverage both the tax equity partnership and monetize their transferable tax credits. Tax equity investors can monetize depreciation and secure a basis step-up while providing flexibility to generate cash via transferability.
• Accelerated deal closure: Transferability typically provides needed liquidity more rapidly than traditional tax equity partnerships, accelerating the speed of both the transaction and project completion.

Best practices for leveraging tax equity for clean energy

Developers and manufacturers need to understand their options and ask themselves a series of questions to identify the tax credit investment structure that best suits their project.

Steps to leverage tax equity for clean energy tax credits

1. Understand your eligibility and options 

Clean energy developers and manufacturers can take advantage of the ITC or the PTC. Deciding which to use means understanding both the project’s characteristics and the specific requirements to access the credits.

Capital-intensive projects such as utility-scale solar may benefit most from the upfront incentive provided by the ITC. Projects with high capacity factors that will produce significant amounts of electricity over a long period may do better utilizing the PTC. Eligibility to receive the ITC or PTC also depends on meeting construction-start and placed-in-service deadlines, which vary by technology.

Developers and manufacturers can increase the value of both the ITC and PTC by meeting requirements for bonus clean energy credits. These include credits for: 

• Using domestic content.
• Building projects in communities where coal mines or coal power plants have closed, 
• Building in a low-income or tribal community. 
• Meeting prevailing wage and apprenticeship requirements.

In the past, partnerships were the only way to use tax equity to finance clean energy. With the advent of transferability and the emergence of hybrid financing structures, developers and manufacturers must now assess which structure is most beneficial to their project. For smaller projects that need capital quickly, transferability is the obvious choice. But larger projects can still benefit from partnership with big banks and corporations. 

2. Comply with IRS regulations

The IRS has detailed requirements for receiving clean energy credits. Project developers and investors need to be aware of: 

• Filing requirements and deadlines, including pre-filing registration for transferable tax credits. Tax equity investors must follow IRS guidance in reporting their share of credits. 
• Common compliance pitfalls, such as risk of recapture for projects claiming the ITC. If a project has received the ITC and is either sold or taken out of service, part of the ITC must be repaid. Those claiming the PTC for energy production must track and report their electricity generation annually. 
• Documentation requirements needed to respond to an audit. Documentation can include equipment purchase orders and contracts or permits to prove construction starts and utility meter readings and invoices for electricity sold. 
• Changes in tax law and the need to adjust when rules evolve.

3. Optimize tax credit monetization strategies

The best strategies to monetize tax credits depend on the investment structure and stakeholders. 

For traditional tax equity deals

Not all tax equity investors are the right fit for individual projects or portfolios of projects. Partners should have sufficient tax appetite and experience in both clean energy development and, ideally, the investment structure that works best for a project.

Tax equity structure options include:

• A P-flip structure provides an efficient capital structure that is attractive to developers that ultimately want to retain control of their project. In exchange for providing upfront project capital to the sponsor, the tax equity investor owns 99% of the project, the upfront tax benefits, depreciation, and some cash flow. After receiving an agreed-upon return, the tax equity investor flips ownership to the sponsor, usually six years into the project. 
• Sales-leasebacks is when a clean energy developer sells a finished project to a tax equity investor, who then leases it back to the developer to operate. In this hybrid structure, the sponsor retains operational control and revenues of a project and recoups any upfront capital used to finance and develop it. Sales-leasebacks are a less complex option than a tax equity partnership and sometimes include an option for the sponsor to purchase the project when the lease expires. 
• An inverted lease, which is also known as a lease pass-through structure, is when a tax equity investor leases a project from the sponsor. The lease enables the tax equity investor to monetize the tax credits and allows the sponsor to retain ownership and receive lease payments from the investor. The developer also doesn’t need to buy the tax equity investor out at the end of the lease and retains revenue from the electricity sold. 

The most efficient and effective tax equity partnerships develop over time as investors and developers gain confidence and familiarity with how each organization functions and the strength and expertise both provide. This shared experience helps in choosing a mutually beneficial deal structure and executing it effectively. Tax equity partnerships are complex, so it’s important to be realistic about the months necessary to complete transactions. As those transactions proceed, keep in mind the documentation necessary to comply with IRS regulations and respond to an audit.

For hybrid structures

Market activity in 2024 demonstrated the demand for hybrid structures that combine traditional tax equity partnerships with transferability. In a T-flip structure, allocating the clean energy credits between transferability and tax equity often depends on the tax equity investor’s tax appetite. If the investor doesn’t need to monetize all the credits to meet their tax liabilities, transferability can raise cash and enhance project economics. If a partnership transfers a meaningful amount of clean energy credits, the tax equity investor may require a larger share of depreciation or cash flow. 

In a hybrid structure, developers must find the right investors and negotiate a deal that delivers value to both sides. Once the deal is finalized, it’s important to pay close attention to IRS compliance obligations, including the requirement to sell transferable credits in the year they are generated. 

4. Identify a buyer for clean energy tax credits

Transferability has greatly expanded the availability of clean energy credits to fund a wide array of technologies and project sizes. That accessibility is largely a function of the simplicity of transferability. Instead of being limited to large financial institutions and developers with the experience, project portfolio, and expertise to forge complex tax equity partnerships, transferability incentivizes the sale and purchase of clean energy credits by a much wider universe of parties.

Crux brings together the largest network of tax credit buyers and sellers in a single, tech-enabled platform. Our market-validated standards and purpose-built tools help developers and manufacturers transact with efficiency and transparency. Contact us to start using the Crux platform.