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As the clean energy sector continues to grow, the ability to transfer tax credits has become a critical tool for both developers and investors. However, selling smaller transferable clean energy tax credits—particularly those under $5 million—poses several unique challenges that can impact their value and marketability. In this blog, we explore some of the primary hurdles, including lower pricing, high legal fees, lack of insurance, and lower market appeal when compared to larger tax credits.
One of the biggest challenges faced by sellers of smaller transferable clean energy tax credits is that they often fetch lower prices. Buyers tend to value larger credits more because they provide a higher return on investment for roughly the same amount of effort. The transaction costs are relatively fixed, whether a buyer is purchasing $1 million or $50 million in credits. As a result, buyers offer less favorable terms for smaller credits since they require nearly the same amount of due diligence, paperwork, and management but with a smaller payoff. This results in smaller tax credits typically being sold at a discount, reducing their overall value. Typically, small credits sell for significantly less than $0.80 on the dollar since the needed protections for buyers are not available (insurance, etc.).
Despite the smaller dollar amounts involved, the legal fees associated with transferring clean energy tax credits can be substantial. Legal teams need to perform a full analysis of the credits to ensure compliance with tax laws and regulatory requirements, verify the validity of the credits, and manage the complexities of the transfer process. These legal processes are time-consuming and, in many cases, are not scalable to the size of the transaction. This means that smaller transactions end up bearing the same legal costs as larger ones, making the relative cost of selling smaller credits much higher. Use the Atheva Transaction Calculator to see how the figures can break down for a transaction.
Insurance products that protect buyers in clean energy tax credit transactions—such as tax insurance or credit default insurance—are often unavailable or unaffordable for smaller deals. Buyers in the clean energy market typically seek coverage to mitigate risks related to the IRS disallowing credits or other unforeseen issues that could reduce their value. However, the insurance industry is less inclined to offer such products for transactions under $5 million because they are less profitable and harder to justify from a risk perspective. The absence of insurance leaves buyers exposed to higher risks, which can further diminish the appeal of smaller credits.
Larger tax credits attract institutional investors and major corporations with the capacity to absorb significant tax liabilities. These buyers prefer larger transactions that allow them to quickly deploy capital and achieve a more substantial impact on their tax obligations. Smaller transferable clean energy tax credits, by contrast, have a narrower pool of potential buyers. Many of the large players overlook these smaller credits, leaving the sellers to target smaller businesses or high-net-worth individuals (HNWI), who may not have the same level of expertise, appetite for risk, or interest in these opportunities. This reduced market appeal can lead to longer sales cycles and more difficulty finding willing buyers.
In many cases, buyers of smaller tax credits are less experienced and may need more guidance through the purchase process, requiring more back-and-forth negotiation. Additionally, these transactions may be subject to more scrutiny from buyers looking to ensure that the credits will offer them the expected tax relief. The result is a longer and more complex transaction, which can discourage both sellers and buyers from pursuing the deal altogether.
While transferable clean energy tax credits are a valuable financial tool for those in the clean energy sector, selling smaller credits—those under $5 million—comes with a host of unique challenges. Lower pricing, high legal fees, lack of insurance, and reduced market appeal make these transactions less attractive and more complex than larger deals. For sellers of smaller credits, navigating these challenges requires a careful strategy, strong market connections, and sometimes, a willingness to accept less-than-ideal terms to close the deal.
Understanding these hurdles can help both buyers and sellers set realistic expectations, find mutually beneficial solutions, and ultimately contribute to the growth of the clean energy economy, even at a smaller scale.
However, project developers can take steps to make their credit, although small, more attractive to buyers. You can read more about making your credit more appealing here.
