Publish Date
Feb 27, 2025
Expertise
As the political landscape shifts under the Trump administration, renewable energy investors anxiously await decisions about energy tax credits that could affect key tax incentives and common financing structures. With significant uncertainty for investors, the challenge lies in identifying and mitigating risks while adapting strategies for future clean energy investment opportunities. In this alert, Alvarez & Marsal (A&M) tax experts discuss critical considerations for investors, focusing on the investment tax credit (ITC) and production tax credit (PTC) for wind, solar and battery storage projects, as modified and expanded by the Inflation Reduction Act of 2022 (IRA).[1]
With the start of President Trump’s second term, supported by a Republican majority in both the House and Senate, uncertainty around the future of the IRA, including the ITC and PTC, has intensified. The lack of clarity on whether future projects will receive the same level of tax incentives creates a challenging environment for securing investment and financing. These credits have been instrumental in driving investment in renewable energy projects, providing significant financial incentives that have spurred growth in the sector, but many Republicans have long opposed the credits and seem set on curtailing the incentives through the upcoming budget reconciliation process.
However, with a narrow Republican majority, lawmakers from red states benefiting from the ITC and PTC — with the creation of jobs and economic development — may be able to influence the negotiation process. Options that could be considered range from retaining the existing credits, to shortening benefit terms, to decreasing the value of the credits, to altering their structure, and even full repeal. Each of these options carries different implications for the renewable energy sector.
The legislators will need to balance these options with economic and political realities, including the potential impact on jobs and economic development in states that have benefited from renewable energy investments. The Solar Energy Industries Association, among others, has been actively lobbying to defend the American clean energy tax credits, emphasizing their importance in sustaining job creation and economic growth.[2]
This advocacy effort underscores the broader “all of the above” approach to U.S. energy growth. An inclusive approach to energy policy is seen as a pragmatic way to address the nation’s energy needs while also advancing environmental and economic objectives. It remains to be seen how lawmakers will balance the interests of various stakeholders on critical energy policy decisions.
Tax equity financing plays a vital role in the funding of renewable energy projects, offering investors a blend of tax credits, depreciation benefits and cash distributions. These benefits make tax equity an appealing investment vehicle, delivering stable returns and substantial tax advantages. Historically, tax equity investments have averaged around $20 billion annually, with a handful of large investors providing the majority of traditional tax equity capital.[3]
The current uncertainty surrounding the ITC and PTC introduces new challenges for developers who depend on tax equity to finance their projects and typically bear the risk of legislative changes. This potential risk exposure could create a natural inflection point in the tax equity market that could materially reduce (or eliminate) tax equity financing from a developer’s capital stack.
The IRA has significantly transformed the sustainable energy finance market by permitting the trading of tax credits, providing project sponsors with greater flexibility and efficiency and attracting a much wider range of participants. The ability to sell tax credits to third parties at rates typically ranging from $0.89 to $0.95 per $1.00 of tax credit has spurred rapid growth in the tax credit market, with total deal volume exceeding $30 billion in 2024.[4] Tax credit transfers, a $30 billion market, provide avenues for raising capital for projects of all sizes as well as access to financing for small and mid-sized projects. This mechanism not only provides additional avenues for raising capital but also democratizes access to financing for smaller and mid-sized projects that previously struggled to secure tax equity investments.
In addition, the tax credit transfer market has become more liquid and transparent, with standardized investment and deal structures emerging. As a result, project developers can more efficiently secure bridge loans, forward commitments and minority equity investments. However, potential legislative changes could impact the emerging market for future-year purchase commitments, which are critical for project finance.
Bridge loans that provide short-term financing to cover the gap between project initiation and the receipt of tax equity financing or tax credit sale proceeds help ensure that projects continue without delays due to funding gaps. However, potential legislative changes to the ITC and PTC introduce significant risk to the collateral (the value of the tax credits) backing the bridge loans. As a result, lenders may be more cautious, knowing that a reduction or repeal of the ITC or PTC would diminish the expected cash flows. To mitigate the legislative risk, some lenders may require additional protection, such as letters of credit to serve as a guarantee of payment from a financial institution, or cash sweeps, where a portion of the project’s revenue is set aside for loan repayment. These measures provide lenders with a higher level of security, increasing the likelihood that they can recover their funds even if the legislative environment changes unfavorably.
Investors and the market generally view renewable energy projects that began construction in 2024, which are subject to safe harbor rules, as being insulated from the risks associated with the potential repeal of the ITC and PTC. Under the “begin construction” safe harbor rules, projects that have met specific milestones are expected to be protected from retroactive changes in tax incentives, ensuring that the financial assumptions made at a project’s inception remain valid, which is a critical factor in securing financing and maintaining investor confidence. In contrast, projects that have not yet commenced construction or are in the early stages face greater uncertainty and potential financial instability due to the looming threat of legislative changes.
The lack of clarity on whether future projects will receive the same level of tax incentives creates a challenging environment for securing investment and financing. This dichotomy in risk assessment underscores the importance of timing and regulatory certainty in the renewable energy investment landscape.
Tax insurance is designed to protect against the financial consequences of tax-related risks, including the potential disallowance of tax credits by the IRS. This is particularly relevant for renewable energy projects because the financial projections and expected returns often rely heavily on the availability and stability of the tax credits. Notably, tax insurers are willing to take on legislative risk for any retroactive changes that would impact the tax credits for projects that began construction in 2024, providing an additional layer of security for developers and investors.
While tax insurance can provide significant protection against various risks associated with tax credit transactions, it does not safeguard a buyer from a reduction in their own cash tax liability that could result from an economic downturn or the enactment of other tax benefits. This limitation is particularly relevant for forward-purchase commitments (2026 and beyond), as a buyer’s future tax appetite may be adversely affected by such changes, potentially impacting the anticipated benefits of the forward purchase. However, it is worth noting that forward commitments are, at least in some cases, transferable. This means that if a buyer’s tax situation changes, they may have the option to assign their commitment to another buyer, thereby mitigating some of the risks associated with fluctuating tax liabilities.
The potential changes to the ITC and PTC pose significant risks to the renewable energy sector. These tax attributes are a material portion of a project’s capital stack, and their potential repeal or reduction would necessitate finding alternative sources of capital. This could be achieved through higher power prices, which may not be feasible in all markets; pushbacks on supply pricing, which could strain relationships with suppliers; or lower equity returns, which might deter investors. Other options could include increased reliance on debt financing or innovative financial structures to bridge the gap left by the loss of tax credits. Investors must navigate increased project costs, market uncertainty and potential shifts in investment attractiveness.
The market has shown resilience and adaptability in the past and it can adjust to a phasedown in credits, without material disruption, if changes are implemented gradually and transparently. For example, the ITC for solar projects was set to phase down to 10 percent prior to the IRA.[5] Despite these planned reductions, the renewable energy market continued to grow,[6] showcasing its ability to adapt to changing financial landscapes.
A sudden and complete repeal of these credits would likely cause severe disruptions, increasing project costs and market instability, especially with a retroactive component. Conversely, a well-communicated and phased approach to reducing these incentives would allow stakeholders to plan and adapt their strategies accordingly, ensuring continued investments and the ongoing transition to a sustainable energy future.
Assessing potential legislative developments and the implications for bridge lending, tax equity financing and tax credit transfers will be crucial for making informed investment decisions in this evolving landscape.
A&M has a team of experts to assist clients in navigating challenges of the renewable energy market and addressing the potential effects of legislative changes. Our advisory services include strategic planning to optimize your capital stack, including exploring alternative financing options and structuring deals to mitigate risks. We also provide detailed financial modeling to assess the implications of higher power prices, supply pricing adjustments and changes in equity returns. By leveraging deep industry knowledge and experience, our A&M team can help you develop robust strategies to maintain project viability and achieve your investment goals in the face of changing energy policies and tax reform. Please feel free to reach out to Kyle Seipert or Steve Schmoll to discuss how the potential effects of legislative changes to the ITC and PTC could affect your renewable energy strategies, plans and projects.
[1] Solar and wind projects generally are eligible for either the ITC or PTC; battery storage projects are limited to the ITC.
[2] Solar Energy Industries Association, Letter to Congress, February 5, 2025, https://seia.org/wp-content/uploads/2025/02/Feb-5_Letter-to-Congress-1.pdf.
[3] “Tax Equity: Enabling Clean Energy and Growing the American Economy,” American Council on Renewable Energy, March 19, 2024, https://acore.org/resources/tax-equity-enabling-clean-energy-and-growing-the-american-economy/.
[4] “6 takeaways from the 2024 transferable tax credit market,” Crux Climate, February 10, 2025, https://www.cruxclimate.com/insights/2024-transferable-tax-credit-market-key-takeaways.
[5]See “Renewable Energy Tax Incentives: Production and Investment Tax Credits Structure & Diligence Considerations,” Alvarez & Marsal, Tax Alert, February 24, 2021, https://www.alvarezandmarsal.com/insights/renewable-energy-tax-incentives-production-and-investment-tax-credits-structure-diligence
[6] Renewable Energy – United States: Statista market forecast. Statista. https://www.statista.com/outlook/io/energy/renewable-energy/united-states
