Introducing the Cruxtimate

Introducing the Cruxtimate

Building on the largest dataset in the market — more than ten billion dollars of tax credit transactions, hundreds of platform bids, and over $13 billion in cumulative non-binding bids — Crux is introducing the first modeled market pricing tool for transferable tax credit transactions.

Crux’s authoritative market reports, data platform, and analytics provide an indispensable window into the factors driving pricing, market formation, and commercial alignment on tax credit deals. This market data is used by industry stakeholders to inform their decision-making.

After months of testing and evaluation, we’re excited to launch the Cruxtimate to provide Crux platform users with insight into projected market pricing for specific tax credit transactions. The Cruxtimate takes into account nearly a dozen factors, including technology type, credit type, and deal size, and sets a bespoke credit price for each tax credit deal reflecting current market conditions.

This benefits all stakeholders in the market:

• Sellers are better able to develop pricing targets, and to evaluate bids against comparable projects;
• Buyers have credit-specific projections to inform bidding strategy and understand whether an asking price is within market;
• Advisors and intermediaries will be able to advise clients on market pricing based on objective data.

Our mission is to create a more transparent and efficient market, and our authoritative market data plays a crucial role. We are continuously investing in new data-driven features, including:

• Model improvements: We will continue to test improvements to the model with the goal of improving accuracy and capturing evolutions in the market;
• Added form factors: Many financial services and advisory partners have asked for additional reports and insights into pricing. Building on the success of our market intelligence reports, Crux will be offering additional ways to interact with the data and models that power the Cruxtimate.
• Additional commercial terms: Platform users have also asked for additional data, ranging from benchmarking on legal terms through to market-level forecasts in various categories. We’ll continue developing new models and embedding them directly into the Crux platform.

Using the Cruxtimate as a tax credit seller to set a competitive price

What drives tax credit market pricing?

A note on terminology: Crux analyzes deal pricing on the basis of the gross price — the price paid by the buyer inclusive of any fees or insurance costs, if applicable. Typically, the cost of insurance, transaction fees, and legal due diligence (up to a negotiated cap) are covered by the seller. The price received by the seller after these fees is referred to as the net price. Because the net price can vary materially from one deal to the next, the gross price is more representative of the perceived market value for a given credit.

Market value is a relatively new concept in the tax credit market. Historically, tax credit value in the context of a tax equity transaction would not necessarily have a “traded” value, given how many other factors went into the overall economics of a tax equity transaction. The emergence of transferability as a mechanism for monetizing tax credits has given rise to an increasingly large and liquid market that allows buyers and sellers to compare tax credit transactions in new ways.

Pricing for a tax credit deal reflects both macro factors and micro factors. Macro factors include aggregate supply and demand and market risk perception, and micro factors describe qualities unique to the tax credit deal, including sponsor, credit type, technology, and size.

It can be easy for market participants to become over-reliant on a small number of data points, like publicly announced deals or anecdotal experience, which may not constitute a representative data set. The wide range of transactions in the Crux database allows the Cruxtimate to more precisely measure the factors that influence price and produce the most accurate predicted price for each credit.

Crux has observed that the overwhelming majority of tax credits in the market clear efficiently at or around market pricing levels. More than 90% of 2023 credits that have been listed in Crux have received at least one bid, and 70% of 2024 credits have received a bid year-to-date. Bid speed also continues to accelerate: 71% of credits listed in Q3 receive their first bid within seven days of listing. Bid volume is accelerating, with over $8 billion in bids placed in the third quarter alone. Crux’s research has found that an increasingly large share of the tax credit market is liquid and transparent, meaning that listed credits can expect to receive a bid promptly from a buyer that is ready to transact, and at a predictable price.

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What factors determine the price for a tax credit deal?

Over the preceding year, it has become abundantly clear how important market data and transparency are for participants in the tax credit market. Crux has collected data on hundreds of transactions, which is used to  identify significant factors that demonstrably  influence market pricing. Statistically significant factors include deal size, credit type, technology, tax credit year, and strength of indemnities. The Cruxtimate incorporates all of these factors in order to produce the most accurate estimate of market pricing for a given tax credit transaction. The weight of each factor is determined algorithmically, taking into account the potential for significant covariance between factors (e.g. the influence of credit quality and deal size on price).

• Deal size: Tax credit buyers can achieve economies of scale at larger deal sizes, and pricing tends to reflect that dynamic. Transaction costs are somewhat inelastic and constitute a fixed cost – the legal due diligence as well as the time commitment involved from all sides. Spreading these costs over a larger basis helps ensure that the “juice is worth the squeeze” for the buyer. Additionally, larger deals can be an indication of a larger sponsor and therefore correlate with higher credit quality, experience, and strength of indemnities. Having said that, we do see ceilings emerging in credit pricing as the market can be thinly traded at extremely large credit sizes.
• Tax credit type: Tax credit transactions carry certain risks, and these risks vary between Investment Tax Credits (ITCs) and Production Tax Credits (PTCs). ITC deals convey a risk of recapture to the buyer, as well as some risks associated with the cost basis that determined the value of the ITC. By contrast, PTC deals tend to convey fewer risks, as long as the seller is able to substantiate that production of a good occurred and the item or unit of electricity was sold to a third party. The relative simplicity of a PTC deal helps to explain why PTCs price at a premium to ITCs, controlling for deal size.
• Technology type: A variety of clean energy projects are eligible for clean energy tax credits under the Inflation Reduction Act (IRA), and each technology may be viewed differently from the perspective of a tax credit buyer. For instance, a buyer might view the risk of recapture differently for a renewable natural gas (RNG) facility versus a solar facility. In the case of the latter, ITCs have been in use for decades and most advisors are well versed in the events that would trigger recapture. RNG facilities, on the other hand, are newly eligible for tax credits and advisors may regard the risk of recapture differently.
• Tax credit year: Most tax credit buyers are in the market for the current tax year. Buyers have the clearest visibility into their tax liabilities and the collateral impact of a tax credit purchase on the current year. Some buyers may also be interested in purchasing tax credits generated in the previous year, though this market typically is less liquid. Future year tax credits typically trade at a discount to the current year — and this discount shrinks over the course of a year as the next tax year approaches. This discount helps incentivize the buyer to commit to a future tax credit purchase. In doing so, a buyer takes on risk that their future tax liabilities may not be sufficient to enable them to utilize the tax credits efficiently, so modest price discounts can help compensate them for that risk.
• Strength of indemnities: Buyers indicate that a counterparty’s credit rating is the most significant factor in determining whether to bid on a tax credit, according to Crux’s research on tax credit due diligence and risk mitigation. 73% of buyers and advisors rated this as a top factor. Tax credit transactions are relatively low risk, but they are not completely riskless for the buyer, so the seller’s ability to indemnify the buyer ranks as a dominant issue. Alternatively, buyers are often willing to accept third-party insurance (in fact, many prefer insured deals). Credit quality is positively correlated with deal price, but the correlation between insurance and deal price is less clear.

Factors considered by a buyer when evaluating a tax credit transaction

Source: Crux Due Diligence and Risk Mitigation White Paper, June 2024

The significance of each factor can vary over time. For instance, new guidance from the Internal Revenue Service can put to rest various uncertainties, especially for new tax credit categories. The 45X advanced manufacturing PTC presents a vivid example of how regulatory guidance can influence market pricing. Prior to the release of draft guidance by the IRS in December 2023, the average credit pricing for 45X deals was around 89 cents per dollar of tax credit. After the release of guidance, the average price for a 45X deal increased to 92 cents — narrowing the discount to wind PTCs (average price 95 cents).

45X pricing before and after the release of IRS guidance

Source: Crux 2024 Mid-Year Market Intelligence Report

There are additional nuances that can influence the real market value for a given credit. Some of these nuances are a natural result of variance within a given data field (i.e. the strength of indemnity can vary between different investment grade counterparties). Variance can also be seen as a byproduct of the new market, and the inherent heterogeneity of tax credit supply.

The market is evolving, driven by changing commercial and regulatory factors as well as overall economic conditions. The Cruxtimate relies on real-time market feedback to ensure that pricing data accurately reflects the significance of these factors at a given point in time. In doing so, the Cruxtimate provides important transparency and visibility into the market for a given deal, enabling parties to make better-informed decisions.

Using the Cruxtimate to submit a non-binding bid

How does transparency benefit the market?

Transparency is a critical feature of an efficient market. Transparency builds predictability, ensures legitimacy, and accelerates the pace of transactions. Market participants benefit from transparency in different ways, but at the simplest level, all parties want to ensure that they’re getting a good deal and avoiding pitfalls.

Buyers

The Cruxtimate provides tax credit buyers the opportunity to submit commercially competitive bids and perform an initial screen of the fit a given transaction may have with their purchase preferences. Buyers approach transactions with varying levels of risk tolerance and price preferences. A price sensitive buyer may want to avoid chasing down highly-competitive tax credit deals that are likely to sell at a price level above their price range. Buyers that are less price sensitive and more risk averse can use the Cruxtimate to ensure their bid is competitive, versus submitting a too-low bid that is less likely to be accepted by the seller.

Sellers

Sellers of tax credits indicate that they prioritize overall price above all other factors. Sellers know their projects best, and their estimates of target credit pricing are important data points for a buyer to be aware of. For the seller, the Cruxtimate can provide a window into market dynamics that may be outside their area of expertise, and serve as a gut-check on expected credit pricing. It is important for sellers not to overestimate buyers’ risk appetites — unknowns that might seem minor to the seller often weigh heavily for buyers, many of whom are very new to the tax credit market.

Sellers may have a variety of stakeholders in the tax credit transaction, including financiers, sponsors, and/or partners. Visibility into market conditions is a critical data point for these parties to ensure that a tax credit transaction is feasible and beneficial for the seller. The Cruxtimate can be a neutral data point that allows stakeholders to align on realistic expectations for market value and move ahead confidently with the right buyer.

Intermediaries

Intermediaries, including syndicators, tax advisors, and other representatives of the transacting parties, often deal with a large number of clients engaged in the tax credit market. Managing client expectations around transaction timing and price are important. Visibility into market pricing is essential to ensuring that an intermediary’s clients are well positioned and driving towards a successful transaction. The tax credit market has become increasingly competitive since the market became transactable in June 2023. Intermediaries are desirable counterparties — knowledgeable and experienced in the market — and the Cruxtimate can provide them with the means to submit competitive bids that allow their clients to stand out.

Banks and investors

Tax credit monetization is driving a massive uptick in investment in clean energy projects and manufacturers. Traditionally, investors expected project developers to lock in a tax equity (TE) partner in order to access a bridge loan against the TE commitment. Now, it is increasingly common for financial institutions to advance capital against a transfer forward commitment — a far simpler agreement to negotiate than a TE investment. Additionally, lenders are exploring advancing a smaller proportion of the future tax credit transfer on an uncommitted basis for well-qualified developers. In either case, one of the most important questions for the lender is what price the tax credit might command in the transfer market. The Cruxtimate can provide a highly valuable and detailed comparable for lending activities.

The Cruxtimate represents an important step forward for the transferable tax credit market — supporting transparency and liquidity for all participants. The market for clean energy and manufacturing tax credits is growing rapidly, bringing in a wide range of stakeholders who may be purchasing tax credits for the first time. Price predictability and transparency are critical tools to ensure the efficient functioning of the new market, and develop confidence among both buyers and sellers that they are getting the best deal.

To learn more about the Cruxtimate, and get a sense of how specific credits will likely price, get started on Crux today.

Frequently asked questions about the Cruxtimate

How exactly does Crux determine the Cruxtimate for a given deal?

For each tax credit deal listed on Crux, the Cruxtimate methodology selects the appropriate market pricing curve (reflecting tax credit type, technology type, tax credit year, among other factors) and plots the deal on the curve.

Why is it a range?

A range of values reflects the confidence interval for a given tax credit transaction. The tax credit market is increasingly liquid, but each deal remains a relatively bespoke financial transaction. A singular value would not accurately reflect the complexities that are inherent in any given deal.

How accurate is it?

The Cruxtimate algorithm has been tested over hundreds of listed tax credits and more than $13 billion dollars of commercial bids. The Cruxtimate effectively estimated deal prices within a penny of the Cruxtimate range in 85% of the transactions that Crux has observed both on and off the platform — indicating that it reasonably approximates market value for the majority of tax credit transactions.

The Cruxtimate is most accurate within the most liquid parts of the market where there is the most data. Novel technologies or credits and smaller deals (deals under $5 million) are typically less liquid and the model’s accuracy is somewhat reduced. We regularly update the Cruxtimate with new data points. Its projections for more novel technologies and smaller deals will continue to increase in accuracy as more of them transact.

How does the Cruxtimate handle PTC strips?

A single Cruxitmate for multi-year PTC strips reflects the weighted average of the annual PTC values inclusive of all years for which the PTC is available.

Do I have to bid inside the Cruxtimate range?

No. Buyers can submit bids above or below the range. The Cruxtimate is meant to inform buyers of whether their bid is likely to be viewed competitively by the seller. Sellers are also able to enter a target price for their credits, which can serve as another signal of a bid that is likely to be accepted.

What if I disagree with the Cruxtimate range?

Sellers who feel that the Cruxtimate range is not accurate for their credit listing are welcome to contact the Markets and Transactions team to provide feedback. Sellers are encouraged to enter a target credit price. The Cruxtimate is determined separately based on the project and sponsor characteristics.

What other information does a buyer have besides the Cruxtimate?

The credit listing includes a wealth of anonymous information about a listing beyond the Cruxtimate, and sellers are encouraged to provide as much information as possible. Buyers and intermediaries generally weigh a wide range of factors when submitting a bid.