Tax Credit Transfer Agreements: Impacts on the Clean Energy Transition

Current landscape of tax credit transfer agreements

The current landscape of tax credit transfer agreements is characterized by significant transactions, such as NextEra Energy's $1 billion transfer planned for 2024. These agreements enhance access to tax equity, support extensive renewable projects, and are crucial for economic growth, job creation, and lower energy prices.

"This quarter, we entered into an agreement to transfer approximately $1 billion of tax credits throughout 2024, representing the bulk of our expected transfers for the year." --- (NEE, earning call, 2024/Q1)

"We have multiple capital recycling avenues. We have an A- credit rating at NextEra Energy, ample access to tax equity and the tax transferability." --- (NEE, event transcript, 2024/06/11)

"Today, including our backlog, roughly 50 gigawatts, nearly 500 projects, nearly 200 different customers, on average extremely strong credit quality of A- in addition to tax credits backed by the U.S. Government." --- (NEE, event transcript, 2024/06/11)

"We grow earnings and cash flow primarily by making investments in renewables, storage and transmission that are either rate regulated or long term contracted. At Energy Resources, if you include our backlog, we expect to have 482 power purchase agreements with 194 counterparties that all have an A- counterparty credit average on average." --- (NEE, event transcript, 2024/06/11)

"Otherwise, we're going to slow down and curtail economic growth in our own country and the credits all flow directly to customers in the form of lower power prices. So when you look at all that, why would you cut credits that are creating jobs, create a much needed property tax base in rural America, that flow to customers that result in lower power prices, that attract new investments, and that provide much needed faster deploy resource at a time when demand is accelerated." --- (NEE, earning call, 2024/Q2)

Financial incentives and financing renewable energy projects

Financial incentives, such as attractive financing and government initiatives, are crucial for expanding renewable energy projects. Companies like Amazon, Tesla, and Google are leading investments and long-term agreements in renewable energy, driving demand and economic growth in the sector.

"To get there, we’ve been the largest corp buyer of renewable energy in the world for four years running, according to BloombergNEF, and we’ve invested billions of dollars in more than 500 solar and wind projects worldwide." --- (AMZN, Twitter, 2024/07/10)

"We believe that our awareness activities, paired with attractive financing, will go a long way in expanding our reach and driving demand for our products. Our Energy business continues to make." --- (TSLA, earning call, 2024/Q1)

"In addition, we regularly enter into multi-year, non-cancellable agreements to purchase renewable energy and energy attributes, such as renewable energy certificates." --- (GOOG, sec filing, 2024/Q2)

"renewable energy in power generation and favorable government initiatives are the key drivers for the growth of the global market." --- (NIO, press release, 2024/09/17)

"The company is currently on a path to meet its goal by 2025. As renewable energy commitments are increasingly embraced by corporations, solar projects like Fox Squirrel will help Ohio realize its goal of continuing to attract business and increasing economic growth in the state." --- (AMZN, press release, 2024/05/22)

Impact on renewable energy project financing

Renewable energy project financing is increasingly prioritized, as companies like NextEra Energy and Xcel Energy emphasize capital allocation towards renewables and securing attractive external financing. Investments in electric transmission projects by Con Edison further support this transition, highlighting a collective commitment to enhancing clean energy infrastructure.

"While we may see a few pennies impact again next quarter, we expect gas infrastructure's earnings growth to be effectively flat going forward as we continue to allocate more capital on a relative basis to renewables, storage and transmission. Similar to what we saw this quarter, the increased contributions from new investment driven by the strength of our renewable development program are expected to more than offset any slowing in gas infrastructure growth going forward." --- (NEE, earning call, 2024/Q2)

"At Xcel Energy, meeting our financial commitments is critical to maintaining a competitive cost of capital, which benefits raised almost $3,000,000,000 in external financings at attractive rates to enable the capital investments to deliver the resiliency and the clean energy outcomes." --- (XEL, event transcript, 2024/05/22)

"Generation and marketing produced $0.12 per share, down a penny from last year. Recall that AEP renewables was sold in the third quarter last year, which has two impacts, a negative earnings variance due to the business being sold and removal of the interest costs for financing these assets." --- (AEP, earning call, 2024/Q2)

"Con Edison Transmission, through its subsidiaries, invests in electric transmission projects supporting Con Edison's effort to transition to clean, renewable energy and manages, through joint ventures, both electric and gas assets while seeking to develop electric transmission projects that will bring clean, renewable electricity to customers focusing on New York and the Northeast." --- (ED, sec filing, 2023/Q4)

"We are progressing the development of the proposed PA LNG Phase 2 project, while continuing to evaluate overall opportunities to develop the entirety of the Port Arthur site as well as potential design changes that could reduce GHG emissions, including a facility design utilizing renewable power sourcing and other technological solutions." --- (SRE, sec filing, 2024/Q1)

Challenges in implementing tax credit transfers

Implementing tax credit transfers faces significant challenges, including the need for effective regulation of the Inflation Reduction Act (IRA) to incentivize carbon intensity (XOM), optimizing operational efficiencies to leverage tax credits (DTE), and navigating compliance costs and potential legal hurdles (AEP).

"The challenge is taking the IRA, which I believe rightly focused on carbon intensity and incentivizing carbon intensity, translating that legislation into regulation, and if the regulation reflects the intent of that legislation and writes the rules focused on carbon intensity, that will be enough to justify and to incentivize and give us a return on this investment." --- (XOM, earning call, 2024/Q1)

"To support its goals for customer affordability, DTE Energy is working to implement operational efficiencies and optimize opportunities from the Inflation Reduction Act to generate tax credits relating to renewable energy, nuclear generation, energy storage, and carbon capture and sequestration." --- (DTE, sec filing, 2024/Q1)

"We continue to evaluate the applicability of the rule to current and former plant sites, and have developed preliminary estimates of compliance costs. While we are working with others and looking at potential legal challenges to the revised rules, as appropriate, we do plan to seek cost recovery through new and or existing regulatory mechanisms." --- (AEP, earning call, 2024/Q2)