July 2023: state of the TTC market

State of the market July 2023: New guidance, increased clarity, and more demand for ‘23 TTCs

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Please note: the information below does not constitute legal, tax, or accounting advice.

State of the market takeaways:

The market for transferable tax credits (TTCs) is evolving rapidly, and we aim to publish semi-regular market updates containing the latest summaries of trends and pricing informed by our team’s daily engagements with buyers, sellers, and syndicators of TTCs. 

Toplines:

• The market is reacting favorably to new guidance from both the US Treasury Department and the Organization for Economic Cooperation and Development (OECD). Buyers who were cautious of the TTC market as recently as early June have seen many of their concerns abate. At present, we’ve seen the market start to shift towards near-equilibrium, with enough buyers to consume credits from projects being placed in service in 2023. 
• Market pricing is strong: we are seeing deals done at $0.88-$0.91 net of insurance and transaction costs, with potential for slightly higher premium pricing for developers that can offer guarantees (in place of insurance). We also are seeing somewhat higher pricing for spot sales of PTCs, or in cases where counterparties are able to work quickly through legal processes. 
• Deal timelines are compressing: the first deals will take a few months, but we anticipate this shortening to less than two months, especially as standard transaction documents emerge. 
• The market is currently fragmented, with buyers, sellers, and intermediaries eager to get a full view of active players and opportunities. We expect the market to continue to grow rapidly, facilitated by improving deal liquidity, information transparency, and a more competitive market to drive credit pricing. Technology like Crux will be central to building this ecosystem.

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This summer, two important pieces of guidance on the use and implications of TTCs for buyers and sellers have helped build confidence in the market. 

In June 2023, the Treasury Department released guidance on TTCs based on over 200 comments from the renewables and finance industry. The guidance outlined new pre-registration and filing mechanics, and confirmed expectations around risk, divisibility, the role of partnerships and intermediaries, and more. In brief, Treasury’s guidance makes transfers easier and greases the wheels of the credit transfer market by providing more certainty for buyers, giving them comfort to participate. 

In July 2023, the OECD clarified that the use of TTCs by either the buyer or seller under the global corporate 15% minimum tax regime will receive favorable treatment. For buyers of TTCs, only the discount paid for the tax credits (the face value less the purchase price) will be deemed a reduction in taxes paid for the purpose of calculating the effective tax rate paid by the buyer. For the seller, the realized value of the tax credit (either the face value or the proceeds from the sale) will be recognized as income instead of a reduction in the taxes paid. 

Demand has spiked and deals are closing faster

With supportive guidance from the Treasury and the OECD, the market for TTCs is rapidly taking shape. Buyers of tax credits are entering the market directly or are actively engaged with advisers in preparing their tax strategies for both 2023 and 2024. For deals that are being done today, we are seeing shortened deal timelines — around 2 months. As transactions become more commonplace and as tools like Crux streamline information sharing and due diligence and help buyers and sellers converge on standard documents, we expect this timeline to compress further.

Pricing for ITCs is generally trending up towards net $0.88-$0.91 after insurance and transaction costs. Developer quality is a dominant driver of higher pricing, particularly as buyers new to the TTC market endeavor to get comfortable with project risks (such as project timing or risk of tax credit recapture), and enlist insurance to indemnify against such risks. While ITCs represent the majority of TTCs, spot sales of PTCs, where an existing project seeks to true-up sales of PTCs to reflect a facility’s actual power generation, can command a market premium. Long-term PTC strips are also transacting, at moderate discounts to the spot price. 

The market has yet to adopt a uniform deal process, but  there are a few form documents that are becoming standard use (including Crux’s documents). While most terms are standard commercial items that are easy enough to negotiate (eg. what flavor of insurance, buyer legal expense caps, price per credit), some deals are being delayed due to negotiations over parent guarantees, payment timelines, or other terms that are hold-overs from tax equity. These may not be particularly relevant or required for a transferable tax credit transaction in the future. 

Developers should expect additional buyers to enter the market later in the year, seeking to make premium value commitments as close to their tax filing date as possible. While potentially disconcerting for developers seeking commitments earlier in their project development lifecycle, they should anticipate upwards trends in demand in the latter half of each year. We are also seeing financial products like TTC bridge loans and forward contracts begin to come to market to bridge the gap between developer and buyer desired timelines.

However, buyers are wasting no time acclimating to the market, identifying partners, and exploring deals. We are hearing directly from CFOs and tax executives engaging their tax advisors internally with company leadership and boards to develop strategies. The unique benefits of transferable credits also stand out: buyers are able to test the waters by pursuing smaller deals and develop a diversified portfolio of tax credits subject to their individual needs and preferences. 

A technology-powered ecosystem is driving market liquidity, transparency, and competitive pricing

Amidst such rapid growth in supply and demand, inefficiencies in matching up buyers and sellers is a particular constraint. Supply of TTCs remains relatively disaggregated and diverse. Credit buyers and sellers today have the option to connect directly to known counterparties or seek opportunities through intermediaries, banks, and brokers. Intermediaries and advisors will continue to play a critical role in transactions—we hear consistently from them that they need solutions to scale syndication in this rapidly growing and fragmenting market. Crux’s ecosystem enables participants to see the entirety of the market, not fragments thereof, driving more liquidity, transparency, and efficiency.

A rapidly increasing number of buyers are coming onto Crux, as well as intermediaries who represent buyers and developers. Developers can tap into the Crux ecosystem to easily find these buyers and maximize the value of their tax credits. Crux’s tools and support team streamline transactions with diligence management, contract templates, platform integrations, and post-sale reporting workflows. 

With demand rising daily and deal timelines consolidating, there is still time to sell 2023 tax credits and start to find buyers for 2024. If you’re ready to get started, get in touch today.