Tax Credits: Financing the Renewable Energy Transition

Julia Wu
6 min readMar 3, 2023
Photo by Casey Horner on Unsplash

The topic of (clean) energy has been receiving unprecedented attention lately. There are a few factors that make it all the more relevant today:

  1. The war: The Russian invasion of Ukraine triggered a supply shock and spike in energy prices, especially in the EU
  2. The Biden administration’s Inflation Reduction Act (passed in 2022): A generational legislation to fund clean energy deployment
  3. Climate change keeps getting worse: Global average temperatures continue to rise, and extreme weather conditions are upon us
  4. Clean electricity generation is getting cheaper and more efficient. Over 60% of new energy being fed into the US grid comes from renewables

According to Reuters, climate research suggests that to limit global temperature rises to 1.5 degrees Celsius above the pre-industrial average, the world needs to be investing $4 in renewable energy for every $1 invested in fossil fuels by 2030. We are currently at $0.8–0.9 for every $1.

Financial and economic incentives play an instrumental role in our path toward an electrified, clean, and abundant energy future. Let’s take a closer look at tax credits and the structure of the funding that goes into renewable energy plants (project financing).

Source: Visual Capitalist

The Inflation Reduction Act

The Inflation Reduction Act was signed into federal law in 2022 by president Joe Biden and aims to curb inflation through:

  • $238 billion earmarked for deficit reduction
  • Lowering prescription drug prices: Affordable Care Act subsidies and prescription drug reform
  • $391 billion in spending on energy and climate change

As the largest investment into addressing climate change in US history, the law is projected to reduce 2030 U.S. greenhouse gas emissions to 40% below 2005 levels. A major component in this massive “spending” is a collaboration with the Internal Revenue Service (IRS) to provide massive tax breaks to incentivize and democratize clean energy projects in the country.

What are Tax Credits?

Tax Credits are incentives offered by governments to encourage the use of clean energy.

A relevant headline from early March 2023: The Nevada Governor’s Office of Economic Development approved a $330M tax break for Tesla, thanks to its $3.6B investment in Giga Nevada.

There are 2 types of tax credits: The Investment Tax Credit and the Production Tax Credit.

  • The Investment Tax credit (ITC) reduces federal income tax liability for a percentage of the cost of a solar system installed during the tax year. It is calculated based on the cost of building the system.
  • The Production Tax Credit (PTC) is a per-kWh tax credit for electricity generated by solar, wind, and other qualifying technologies for the first 10 years of the system’s operation. It is calculated based on electricity produced by a system.

Solar systems that are placed in service in 2022 or later and begin construction before 2033 are eligible for a 30% ITC or a 2.6 ¢/kWh PTC if they meet labor requirements issued by the Treasury Department or are under 1 megawatt (MW) in size.

There are also bonus “adders” or additional credits that get applied to projects that meet a set of criteria:

  • Domestic content bonus: All steel or iron used for the project must be produced in the US. Eligible for a 10% point increase in the value of the ITC (e.g. additional 10% for a 30% ITC = 40%)
  • Energy community bonus: Projects developed in a brownfield site — a location used for processing/transport/storage of coal, oil, or natural gas — are eligible for a 10% increase
  • Low-income bonus: Additional 10% ITC for being located in a low-income community, or an additional 20% for being classified as a “qualified low-income residential building project”

These tax credits won’t be around forever, though. The phase-out starts either in 2023, or the year that the treasury secretary determines there’s a 75% or more reduction in greenhouse gas emissions compared to 2022. Whichever is later.

Source: Energy Futures Initiative

The Market for Tax Credits

Many solar/wind projects aren’t able to directly leverage the massive amounts of tax credits they’re eligible for. This is where tax equity financing becomes relevant.

Essentially, it’s for a project to exchange tax credits for financing. “You give me cash to build this project, I give you the tax breaks.”

A tax equity investor tends to be a financial institution, pension fund, or a larger organization with tax liabilities.

What about tax-exempt organizations?

  • Direct pay (just get paid in $$$): tax-exempt organizations like nonprofits, states, and municipalities can receive a refund from IRS for projects placed in service after 2022. Just like we get our tax returns in the mail.
  • Transfer of credit: Sell all or a portion of tax credits of a given year to unrelated, eligible taxpayers. Payments must be made in cash to the payee, and are not considered gross income for federal purposes (no federal taxes).

There are a few startups (ie., Evergrow) capitalizing on tax credit transferability, and offering marketplaces for customers to purchase those credits.

Historically, tax credits have been claimed by larger financial institutions.

For example, Fifth Third bank has a Renewable Energy Finance arm, focused on domestic renewable projects including large-scale utility solar projects, distributed generation, as well as community solar. Goldman Sachs’s Renewable Power business also sponsored over 800 solar projects across 27 states, totaling over 2 GW capacity.

JP Morgan Chase is targeting over 2.5 trillion over the next 10 years to advance climate action.

Thanks to transferability, developers of some clean energy projects can make a one-time sale of tax credits to an unrelated party in exchange for cash — starting in 2023. The cash earned from the sale is federally tax-exempt, and the purchaser cannot resell the tax credits.

Transferability opens up the opportunity for smaller project developers and those with little clean energy finance experience to access financing that is otherwise limited to low-risk, large-scale projects. Corporate entities can also purchase credits to reduce their tax liability and achieve ambitious ESG goals without performing the due diligence necessary in traditional tax equity deals.

Source: Credit Suisse

An Overview of Renewable Energy Project Financing

During a lecture at Dartmouth, Josh Pearson (an executive at EDF Renewables) shared that there are several macro drivers for renewables in the United States, including but not limited to:

  1. Renewable Portfolio Standards (RPS): State-level standards that mandate a certain percentage of electricity generated to be from clean energy sources
  2. Federal tax credits (the focus of this post)
  3. Commercial and Industrial Purchase Power Agreements
  4. Lower cost and increased efficiency in wind turbines and solar PV cells
  5. Investments in transmission infrastructure
  6. Trade policy and tariff effects
  7. Growth of distributed energy resources: EV adoption, offshore wind, community solar, microgrids, etc

Is it lucrative to build a solar project?

Solar developers can make money by:

  • Selling energy through offtake agreements (PPA) or energy credits paid by residential/commercial customers
  • Monetizing federal tax credits
  • Monetizing renewable energy certificates (RECs)
  • Getting state tax credits and rebates

According to S&P Global, the expected amount of tax equity financing for renewable energy projects in 2023 is $20–21 billion.

As potential beneficiaries of this bill, we can find out how much funding we can get as individuals to rewire our homes.

At a more elevated level, there is a meaningful opportunity for project developers, financiers, and entrepreneurs to consider how to leverage this enormous budget to accelerate the energy transition.



Julia Wu

Building something new. Prev. eng at Brex, Apple, MSFT. More at