Trouble for the Tax Credit Market?

The Inflation Reduction Act’s fate will soon be decided by a Republican-controlled Congress, and the market the law built up to fund its signature clean energy markets is on edge, even if there’s still brisk business being done.

Before the IRA, to claim a clean energy tax credit essentially required having an actual investment interest in a project. One of the biggest changes of Biden’s climate law, however, was to make those tax credits transferable, meaning that if a developer itself didn’t have a large tax liability, it could transfer — i.e. sell — those credits to someone who did. This fed what quickly became a thriving market connecting developers and owners of clean energy projects with tax equity investors who buy the credits to reduce their own tax bills.

Much of the clean energy business relies on this structure to fund its activities. So when the investment bank Jefferies issued a note late last week on the residential solar company Sunnova — whose share price is down over 80% in the past year and 70% since the 2024 presidential election — arguing that the tax equity market as a whole had “tightened,” and that it expected Sunnova to post below-expectations earnings due to the “increasingly tightening tax equity market that we believe has constrained NOVA’s ability to raise tax equity financing in the near term,” the market reacted. The company’s shares dropped around 7% on Friday, and are down about a fifth since close of trading on Thursday.

The note wasn’t just a ding against Sunnova, though. It also raised a red flag for the tax credit market as a whole. “Our industry conversations increasingly suggest a tightening in the market as usual tax credit buyers/investors pause on transacting in response to growing uncertainty on anything IRA related under the new Trump administration," the Jefferies analysts wrote in the note. “We perceive traditional buyers/investors have moved to the sideline and are awaiting clarity from the Trump administration, resulting in a slow-down in the tax equity capital markets.”

On Monday, the Jefferies analysts appeared to rollback their assertion. “Investors disagreed and referenced a strong/robust market, thereby prompting questions of whether constrained tax equity capital is limited to NOVA or if it's a broader market issue after all. We note that we have not heard any issues with raising tax equity from [Sunrun, the country’s largest residential solar company],” they wrote. “We appreciate [that the] market is intact.”

A Sunnova spokesperson declined to comment on the Jefferies commentary, citing the “quiet period” before the company announces earnings in early March.

Based on market data and conversations with market participants, the industry also seems to see an “intact” market, though perhaps one with weakness or holes in specific sectors (such as residential solar), even if sources I talked to didn’t want to speculate specifically about any one company.

Research by the tax credit marketplace Crux shows that there were $30 billion worth of tax equity deals in 2024, $6 billion of which included some kind of forward commitment — either agreeing to purchase future investment tax credits or a portion of production tax credits that accrue over time.

“With the presence of a forward commitment, it is much easier for the seller, the developer, to procure financing at lower costs because they have a commitment for the tax credit,” Alfred Johnson, the co-founder of Crux, explained to me. “So that is lowering the cost of capital for projects that will be delivered sometime far in the future.”

Johnson told me that these forward commitments were a “really positive dynamic” for areas like geothermal and nuclear, which “require a lot of future investment.”

“It does suggest that people are taking a multi-year view of the importance and viability of the [transferability] program,” Johnson said.

And if there are major changes to the IRA’s tax credit regime — whether Congress decides to scrap it entirely or restrict it to forms of power generation more favored by Republicans and the Trump administration, such as geothermal and nuclear — Johnson notes that “Congress has rarely, if ever, made a retroactive change with an adverse impact to the taxpayer.”

“I think the fact that buyers are engaging quite actively in the market across credit types is indicative of the view that they believe that the market will remain viable and important for this year and for near future years,” Johnson added.

But just because changes to the IRA may not affect current deals doesn’t mean that the industry isn’t nervous. “Grandfathering is a longstanding practice that we expect to continue,” Jack Cargas, head of originations on the tax equity desk at Bank of America, said on a podcast hosted by the law firm Norton Rose Fulbright. “We are cognizant that neither Republicans nor Democrats are going to act in a way that jeopardizes their constituents’ interests or livelihoods, however we expect a slowdown in financing for projects on which construction starts in 2025 until it is clearer what Congress will do.”

There may also be questions about projects that start this year.

“I have not actually seen any deals derailed over change of law concerns, but also everything I'm working on at the moment began construction before the end of the year,” David Burton, a partner at Norton Rose Fulbright, told me.

Burton said his clients are focused on getting deals started and done so that they can be “grandfathered” into any changes of the tax credit system. “We are counseling sponsor clients to begin construction under the tax rules as soon as they can,” Burton said.