Grain Ecosystem

With the passage of the Inflation Reduction Act in 2022, federal tax credits for clean energy and climate change initiatives were introduced and expanded. Tax credits are financial incentives provided by the U.S. government to encourage specific activities, such as investment in affordable housing or renewable energy. These incentives help reduce the overall tax liability for businesses, making it financially viable to purse projects that align with the government’s priorities. 

The Inflation Reduction Act (IRA) specifically focuses on two types of tax credits: Investment Tax Credits (ITCs) and Production Tax Credits (PTCs). An ITC provides a percentage of the investment cost for renewable energy projects, energy storage systems, and other emerging technologies. Alternatively, PTCs offer a per-kilowatt-hour incentive for electricity generated from eligible technologies. Developers can opt for either an ITC or a PTC depending on their preference. 

Project developers that qualify for tax credits may use them to reduce their own tax liability or transfer them to a buyer for cash. This allows developers to finance their projects with more flexibility and encourages more investment in clean energy projects.  

Unlike tax deductions, which lower taxable income, tax credits provide a dollar-for-dollar reduction in the amount of taxes owed. This financial relief enables developers to allocate more resources towards their projects. 

A key provision of the IRA is the concept of “transferability”, allowing companies to transfer or sell tax credits to other corporations for cash. Traditionally, tax credits could only by used by the entity that owns the eligible asset. Now, if a developer lacks sufficient tax liability to use all their credits, they can sell them to another company or private buyer. The transfer market is still evolving, but pricing at time of writing ranges from $0.88 to $0.97 on the dollar (per credit). Pricing will vary based on the type of credit, its structure, and associated risks. This option provides immediate liquidity, lowering the barriers to market entry. 

Prior to the IRA, tax equity partnership structures were a common way to finance clean technology projects. Through this structure, investors – often large financial institutions – provide capital to these assets, in return receiving a significant portion of the project’s tax benefits, including both tax credits and depreciation benefits. With the introduction of tax credit transferability, developers can monetize tax benefits without forming a complex partnership structure. This also benefits small developers, who historically have had very limited access to capital. 

Increasingly, many tax equity partnerships are now permitting developers to sell transferable tax credits (but not depreciation) to a third party. Tax credits sold out of tax equity partnerships made up about 29% of the overall tax credit market in 2024. 

Tax credits are available to support investment and manufacturing efforts aimed at building the U.S. clean energy economy. There are various technologies that qualify. At Grain, we focus on biochar and waste-to-energy projects, but other examples include renewable energy, energy storage, and advanced manufacturing technologies.  

Some biochar projects may be eligible for Section 45Y and Section 48E tax credits, which are designed for technology-neutral clean electricity projects. If a facility is generating electricity through biogas or waste energy recovery and demonstrates net-zero greenhouse gas emissions, the developer may be able to file with the Internal Revenue Service (IRS) to claim credits. 

Section 48E is an ITC with a base value of 6% of eligible construction costs incurred by the taxpayer for projects with an output of 1MW or greater. For projects less than 1MW, the base value is 30%. To receive additional value, developers must meet the following standards:  

Section 45Y is a PTC that offers a tax credit for each kilowatt-hour of electricity generated and sold to a third party. The credit is earned over a 10-year period at $0.003/kWh (adjusted for inflation), or $0.0105/kWh for facilities that meet prevailing wage and apprenticeship standards. Section 45Y credits are also eligible for the domestic content and low-income community bonuses. 

Developers may opt for either 45Y or 48E – if a clean electricity project is not selling their generated electricity, they are only eligible for Section 48E.  

Selling tax credits can be a strategic way for developers to monetize their projects and generate cash flow. After determining which tax credits a project qualifies for, developers should gather necessary documentation to prove eligibility and value of the tax credits. The deadline to sell tax credits is at least until year end for the year the seller becomes entitled to a tax credit, and the buyer claims the tax credits in its tax year that ends on the same date as the seller’s tax year. 

If a developer is interested in selling their tax credits to another corporate, there is significant diligence required for transaction deals. It is important to consider the different risks: 

The tax credit market is rapidly growing in the U.S. and it is currently a seller’s market. A survey from Crux, a leading digital marketplace for IRA tax credits, found that more than 25 billion dollars of transferable tax credit deals were done in 2024. Pricing averaged $0.925 for ITC deals and $0.95 for PTC deals. Typically, larger deals come at a higher price. 

Digital marketplaces like Crux as well as advisory firms like Schneider Electric often connect corporate buyers to developers. Most marketplaces and consultants will charge a transaction fee, paid by the seller. It is also possible to find a buyer and transact independently, though this may require additional expertise on both sides of the deal. 

Understanding the types of tax credits available and their transferability can help developers of all sizes to raise funds for their clean technology projects. 

Learn what tax credits are, their role in the capital stack, the criteria for qualifying as a biochar project in the United States of America, and the process to sell them.

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<p></p><p>With the passage of the Inflation Reduction Act in 2022, federal tax credits for clean energy and climate change initiatives were introduced and expanded. Tax credits are financial incentives provided by the U.S. government to encourage specific activities, such as investment in affordable housing or renewable energy. These incentives help reduce the overall tax liability for businesses, making it financially viable to purse projects that align with the government’s priorities. </p><p>The Inflation Reduction Act (IRA) specifically focuses on two types of tax credits: Investment Tax Credits (ITCs) and Production Tax Credits (PTCs). An ITC provides a percentage of the investment cost for renewable energy projects, energy storage systems, and other emerging technologies. Alternatively, PTCs offer a per-kilowatt-hour incentive for electricity generated from eligible technologies. Developers can opt for either an ITC or a PTC depending on their preference. </p><h2>How developers use tax credits </h2><p>Project developers that qualify for tax credits may use them to reduce their own tax liability or transfer them to a buyer for cash. This allows developers to finance their projects with more flexibility and encourages more investment in clean energy projects.  </p><h3>Reducing Tax Liability </h3><p>Unlike tax deductions, which lower taxable income, tax credits provide a dollar-for-dollar reduction in the amount of taxes owed. This financial relief enables developers to allocate more resources towards their projects. </p><h3>Leveraging Transferability </h3><p>A key provision of the IRA is the concept of “transferability”, allowing companies to transfer or sell tax credits to other corporations for cash. Traditionally, tax credits could only by used by the entity that owns the eligible asset. Now, if a developer lacks sufficient tax liability to use all their credits, they can sell them to another company or private buyer. The transfer market is still evolving, but pricing at time of writing ranges from $0.88 to $0.97 on the dollar (per credit). Pricing will vary based on the type of credit, its structure, and associated risks. This option provides immediate liquidity, lowering the barriers to market entry. </p><h3>Hybrid Structures: Tax Equity Options </h3><p>Prior to the IRA, tax equity partnership structures were a common way to finance clean technology projects. Through this structure, investors – often large financial institutions – provide capital to these assets, in return receiving a significant portion of the project’s tax benefits, including both tax credits and depreciation benefits. With the introduction of tax credit transferability, developers can monetize tax benefits without forming a complex partnership structure. This also benefits small developers, who historically have had very limited access to capital. </p><p>Increasingly, many tax equity partnerships are now permitting developers to sell transferable tax credits (but not depreciation) to a third party. Tax credits sold out of tax equity partnerships made up about 29% of the overall tax credit market in 2024. </p><h2>How to qualify for tax credits </h2><p>Tax credits are available to support investment and manufacturing efforts aimed at building the U.S. clean energy economy. There are various technologies that qualify. At Grain, we focus on biochar and waste-to-energy projects, but other examples include renewable energy, energy storage, and advanced manufacturing technologies.  </p><p>Some biochar projects may be eligible for Section 45Y and Section 48E tax credits, which are designed for technology-neutral clean electricity projects. If a facility is generating electricity through biogas or waste energy recovery and demonstrates net-zero greenhouse gas emissions, the developer may be able to file with the Internal Revenue Service (IRS) to claim credits. </p><p>Section 48E is an ITC with a base value of 6% of eligible construction costs incurred by the taxpayer for projects with an output of 1MW or greater. For projects less than 1MW, the base value is 30%. To receive additional value, developers must meet the following standards:  </p><ul class="bullet"><li value=1><strong>Prevailing Wage and Apprenticeship Requirement (Base Value: 30%)</strong> – Laborers and mechanics employed by the developer must be paid no less than applicable prevailing wage rates. Facilities are also required to employ apprentices for a certain number of hours, varying by location and the number of people they employ. <a href="https://www.dol.gov/general/inflation-reduction-act-tax-credit" target="_blank" rel="noopener noreferrer">You can find more information about prevailing wage and apprenticeship requirements here.</a> </li></ul><ul class="bullet"><li value=1><strong>Domestic Content Bonus Credit (2-10%) </strong>– All structural steel or iron products used must be produced in the U.S. and a threshold percentage of the total costs of manufactured products of the facility need to be mined, produced, or manufactured in the U.S. </li></ul><ul class="bullet"><li value=1><strong>Energy Communities Bonus Credit (2-10%) </strong>– Project must be in an eligible energy community. Energy communities are: (1) Brownfield sites; (2) areas with past fossil fuel related employment or revenue; and (3) census tracts that have experienced the closure of a coal mine or coal-fired power plant in recent years. <a href="https://arcgis.netl.doe.gov/portal/apps/experiencebuilder/experience/?id=a2ce47d4721a477a8701bd0e08495e1d" target="_blank" rel="noopener noreferrer">You can find more information about energy communities here. </a></li></ul><ul class="bullet"><li value=1><strong>Low-Income Communities Bonus Credit (10-20%) </strong>– Project must be in a low-income community, on Indigenous land, or part of an affordable housing development. Developers must separately apply through the Department of Energy before operations begin. <a href="https://eco.energy.gov/licbonus/s/" target="_blank" rel="noopener noreferrer">You can find more information about the Low-Income Communities Bonus Credit Program here.</a> </li></ul><p>Section 45Y is a PTC that offers a tax credit for each kilowatt-hour of electricity generated and sold to a third party. The credit is earned over a 10-year period at $0.003/kWh (adjusted for inflation), or $0.0105/kWh for facilities that meet prevailing wage and apprenticeship standards. Section 45Y credits are also eligible for the domestic content and low-income community bonuses. </p><p>Developers may opt for either 45Y or 48E – if a clean electricity project is not selling their generated electricity, they are only eligible for Section 48E.  </p><h2>How to sell tax credits </h2><p>Selling tax credits can be a strategic way for developers to monetize their projects and generate cash flow. After determining which tax credits a project qualifies for, developers should gather necessary documentation to prove eligibility and value of the tax credits. The deadline to sell tax credits is at least until year end for the year the seller becomes entitled to a tax credit, and the buyer claims the tax credits in its tax year that ends on the same date as the seller’s tax year. </p><h3>Risks to Consider </h3><p>If a developer is interested in selling their tax credits to another corporate, there is significant diligence required for transaction deals. It is important to consider the different risks: </p><ul class="bullet"><li value=1><strong>Qualification Risk </strong>- A portion of the credits transferred are deemed not eligible by the IRS. Ensure that all information submitted to the IRS is accurate and there is evidence to confirm base and bonus credit values. </li></ul><ul class="bullet"><li value=1><strong>Recapture Risk </strong>– There is a 5-year recapture risk on ITCs. As a result, most deals will require proof of ownership, sponsor financials (i.e. evidence of insurance, lender forbearance agreements, financial projections), and operating agreements. </li></ul><ul class="bullet"><li value=1><strong>Execution Risk</strong> - The project does not place in service in the agreed upon tax year. Documentation of an independent engineer report, site control agreement, or any other relevant studies may be necessary. </li></ul><h3>Finding a Buyer </h3><p>The tax credit market is rapidly growing in the U.S. and it is currently a seller’s market. A survey from Crux, a leading digital marketplace for IRA tax credits, found that more than 25 billion dollars of transferable tax credit deals were done in 2024. Pricing averaged $0.925 for ITC deals and $0.95 for PTC deals. Typically, larger deals come at a higher price. </p><p>Digital marketplaces like Crux as well as advisory firms like Schneider Electric often connect corporate buyers to developers. Most marketplaces and consultants will charge a transaction fee, paid by the seller. It is also possible to find a buyer and transact independently, though this may require additional expertise on both sides of the deal. </p><p>Understanding the types of tax credits available and their transferability can help developers of all sizes to raise funds for their clean technology projects. </p><h2>Sources </h2><ul class="bullet"><li value=1><a href="https://www.cruxclimate.com/insights/tech-neutral-tax-credits-48e-45y" target="_blank" rel="noopener noreferrer">Crux Climate</a> </li><li value=2><a href="https://www.irs.gov/instructions/i3468#en_US_2024_publink1000139682" target="_blank" rel="noopener noreferrer">Internal Revenue Service</a> </li><li value=3><a href="https://www.projectfinance.law/publications/2023/june/irs-transferability-guidance/" target="_blank" rel="noopener noreferrer">Norton Rose Fulbright</a> </li><li value=4><a href="https://www.bakertilly.com/insights/final-regulations-released-section-45y-48e" target="_blank" rel="noopener noreferrer">Baker Tilly</a> </li></ul>

What Are Tax Credits? 

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