The Outlook for Renewable Energy Investment in 2024 and Beyond

The Inflation Reduction Act (“IRA”) has provided huge incentives to invest in a broad spectrum of renewable energy projects.  On the heels of these attractive incentives, the U.S. Congressional Budget Office estimates that the IRA energy and climate provisions will cost about $391 billion between 2022 and 2031.  Further, a Goldman Sachs report expects the cost to be more like $1.2 trillion, and that the Act will spur about $3 trillion of investment in renewable energy projects.   Below is a table from Goldman Sachs that indicates the amount of credits expected to  be generated in excess of the government’s estimate. 

However, despite the expected robust inflows into renewable energy projects, investors need to be aware of some headwinds that might deter investment including a slowing of the growth in demand for electric vehicles and occurrences such as Ørsted’s decision to abandon projects off the coast of New Jersey.  In addition, high inflation and interest rates could also hinder growth, although signs point to a levelling-off here.  Yet despite these considerations, the incentives offered through the IRA are extremely attractive. Two of the new incentives are discussed below.

Monetization Provisions Allow for Direct Refund & Sale of Tax Credits

First, the IRA enacted in 2022 has extended and expanded the credits available for investment in renewable energy assets.  One of the IRA’s provisions that has garnered attention is the monetization rules that allow for both 1) the direct refund or 2) sale of the tax credits, which are aimed at the expanding pool of renewable energy investors. 

Direct Pay

The IRA allows for the direct refund of certain renewable energy credits to tax-exempt entities, state and local governments, the Tennessee Valley Authority, and certain rural electric corporations.  This provision is commonly referred to as direct pay. 

Sale of Credit Provision

This IRA provision allows for the sale of certain renewable energy credits to unrelated parties.  The buyer would then use the full amount of the credit against its own federal income tax liability.  While the market is in its infancy, prices currently being discussed are in the 92-cents-on-the-dollar range.  The transaction is federally tax-free for both the buyer and seller; however, it’s important to understand that not all states will treat the transaction as such. 

Previously, the renewable energy market was dominated by tax equity structures that forced the investors to be tied to the project for many years.  While the sale provisions relieve the investor of being a long-term investor in the project, they will still have concerns about the project after the sale is complete.  This is because the credit recapture provisions fall on the purchaser of the credit.  The transfer of the project within the first five years of it being placed in service or failure to meet the wage and apprenticeship requirements can cause a claw-back of the credit. A healthy dose of due diligence and possibly insurance will need to be considered before making an investment.

Credit Kickers

Another key component of the IRA that has fostered attractive renewable energy incentives are the credit kickers. The Investment Tax Credit (“ITC”) provides for a relatively low base credit rate. Many types of property like solar and small wind start with a base rate of 6%.  This base rate is increased five-fold if the wage and apprenticeship requirements are met.  Some of the other kickers include:

• A 10% bonus for projects that meet the domestic content rule. Generally, 40% for qualified facilities the construction of which begins before 2025 and increases to 55% for construction that begins after 2026.
• A 10% bonus for property placed in service in an “Energy Community.”

The incentives offered under the ITC could potentially spawn investment in renewable energy projects far in excess of what was originally estimated. 

Ultimately, the combination of the lucrative benefits and the monetization enhancements will make many projects economically feasible.  However, investors must also consider the risks involved in investing in the space (including consumer sentiment and others) and are encouraged to consult with their advisor.   

Catalyst - Our Current Issue: Q1 2024

• 2024 Trends in the Life Sciences Industry
• An Outlook for Technology Trends in 2024 
• The Outlook for Renewable Energy Investment in 2024 and Beyond