Avangrid lights US green energy tax credit transfer market with $100m 'landmark' transaction

Avangrid will sell an estimated $100m of 2023 wind production tax credits (PTCs) to energy and commodities giant Vitol, among the largest publicly announced early mover deals for single year as-generated credit transfers made possible by the landmark 2022 federal climate law.

The companies did not disclose the purchase price, which under the partisan Inflation Reduction Act (IRA), must be paid for in cash. Iberdrola-controlled Avangrid will treat the proceeds as federal tax-exempt income. It described the transfer deal as "landmark."

Project owners incentivise buyers to purchase the tax credits by offering them for less than 100 cents on the dollar.

The tax credits are from eight onshore wind farms totaling 1.13GW nameplate capacity: Baffin Bay, Deerfield, Desert Wind, Klondike II, La Joya, Tule, Trimont, and Twin Buttes II.

“The IRA offers an unprecedented stable framework, enhancing the attractiveness of renewables,” said Pedro Azagra, CEO of Avangrid, the number three owner of wind power capacity in the US with about 8GW after NextEra Energy and Berkshire Hathaway Energy.

Azagra said the climate law created a streamlined tax credit transfer process and removes the “bottleneck that existed with the tax equity investment structure.” As buyer, Vitol cannot resell the credits.

The transfer of PTCs “ensures that we receive greater value from our renewable energy projects, and it will allow us to pay down debt and make further capital investments to benefit our customers,” he added.

The IRA’s transferability feature creates a market-based system whereby renewable energy owners such as Avangrid who qualify for tax credits, but are unable to use them, can immediately sell them to an unrelated third-party investor, such as Vitol.

Prior to the IRA, this was only possible through a tax equity partnership, which requires a lengthy diligence and negotiation process as well as significant transaction costs. Buying and selling federal tax credits generated by renewable energy projects was illegal.

President Joe Biden who last August signed the climate law passed by Democrats in Congress, expects the transferability feature will create a vastly larger universe of taxpayers to take advantage of the credits.

Greater taxpayers’ involvement will establish a more liquid marketplace where players are able to raise and employ capital at less cost to accelerate the energy transition and its associated supply chain development, according to his aides.

“This new tax credit transfer mechanism promises to unlock significant pools of new capital to support investment in renewable resources,” said Vitol CFO Rick Evans.

If a project meets prevailing wage and apprenticeship requirements, PTCs are worth $27.50/MWh for electricity generated and sent to the grid during its first decade of operation. This value is adjusted for inflation annually over 10 years.

It can also be eligible for 10% energy community and domestic content bonuses of $2.75/MWh each. These can elevate total PTC value to $33.00/MWh.

In June, the Department of Treasury and Internal Revenue Service, its tax collection arm that also regulates the federal tax code, proposed regulations explaining how taxpayers can monetise the credits through transferability.

For PTCs, the preliminary rules require buyers to pay year-by-year as the credits are claimed over a multi-year period, unlike investment tax credits favoured by offshore wind projects, that are claimed in the year a project enters commercial operation.

Credits need to be sold for cash before respective federal income tax returns are filed by the seller and buyer for the calendar year in which the tax credits accrued.

The tax equity market is about $18-19bn last year with about 60% wind and 40% solar, according to law firm Norton Rose Fulbright.

It is dominated by large financial institutions led by Bank of America and JP Morgan Chase with a combined 50% share of deal volume. Other players include insurance companies and billionaire Warren Buffett’s Berkshire Hathaway conglomerate.

While expensive and unwieldy and sometimes unavailable for smaller clean energy developers, larger ones will still seek tax equity investors depending on the project.

One reason is that the benefits of accelerated depreciation given to wind and solar projects are not available for transferability. This leaves project sponsors having to monetise those benefits on their own, even though they are not as valuable versus PTCs.

This means some will look to capture the benefits by seeking an investor who monetise depreciation.