Q&A: Leveraging tax credit insurance to drive renewable energy investments

April 2025  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2025 Issue

FW discusses how to leverage tax credit insurance to drive renewable energy investments with Steve Bunson, Barry Sklar, Sheldon Elefant, David Danesh and Brandon Edwards at Birch Risk Advisors.

FW: Could you provide an overview of renewable energy investment by tax equity participants in recent years? How would you characterise recent appetite and activity?

Sklar: To provide some context, before enactment of the Inflation Reduction Act (IRA) in 2022, the only way for developers to monetise their tax credits – assuming they were not taxpayers themselves – was to issue ‘tax equity’ to investors that could utilise those credits. These tax equity investments are typically senior in the capital stack and amortise by passing through 99 percent of the available tax credits and depreciation deductions to the tax equity investors. These investments are highly complex from a tax and generally accepted accounting principles perspective, and typically run up transactional costs, legal and other, into seven figures. Prior to the enactment of the IRA, the tax equity market was a $15-20bn market. Post IRA, the market has grown to approximately $30bn today due to new entrants and the introduction of ‘hybrid tax equity’ in which some of the credits are sold in the direct transfer market.

Bunson: The tax equity market is dominated by a small number of players including the large money centre banks, as well as regional banks. Given its size, the total number of players in the tax equity market is somewhat tapped. And given the very large number of renewable energy projects, particularly in the solar energy space, the direct transfer market introduced by the IRA has had to step in to meet the demands of the marketplace.

“A tax insurance policy is key to bringing investment grade buyers to the table.”
— Sheldon Elefant

FW: How has the enactment of transferability rules in the Inflation Reduction Act (IRA) spurred growth in investments in renewable energy projects? Has it replaced traditional tax equity?

Bunson: Transferability has allowed a much greater number of projects to be financed and move forward given that the tax equity market itself is somewhat capped. The tax equity market itself has also accessed the direct transfer market, which has allowed tax equity to make greater investments than under the traditional tax equity market.

Sklar: Transferability has not replaced traditional tax equity. Instead, it has supplemented the use of tax equity in two ways. First, it has allowed projects that are unable to raise tax equity to monetise their credits. Examples of projects for which tax equity may be unobtainable include projects making use of new technologies, such as renewable natural gas and standalone storage for which credits have only recently become available, projects with a higher risk profile such as solar installations in severe weather locations or with merchant power offtakes, and smaller projects generating less than $10m of credits. Second, it has allowed traditional tax equity providers – typically large banks – to stretch their capacity to provide tax equity over more projects, by allowing them to sell a portion of their credits to third-party buyers in direct transfers rather than absorb these credits through their tax equity investments.

“We expect the tax credit market to accelerate over the next few years as more corporate buyers enter the market and look to offset their liability.”
— David Danesh

FW: In what ways do the IRA’s transferability rules expose tax credit purchasers to liability?

Elefant: The IRA places ‘recapture risk’ associated with the purchase of investment tax credits (ITCs) and the burden of substantiating purchased credits more generally on the tax credit purchaser. A buyer that claims an ITC as a credit against its tax liability may be required to recapture a portion of the credit that previously offset its tax liability if the ITC-eligible property is disposed of or otherwise ceases to be in use – for example, by reason of a storm or other casualty event – before the close of a five-year recapture period. Similar recapture rules apply to the purchase of 45Q carbon sequestration credits. Additionally, if it is determined that there is an ‘excessive credit transfer’ because the buyer is unable to substantiate the amount of the credits that would otherwise have been allowed to the seller of the credits, the buyer will in certain circumstances be responsible for the related tax liabilities.

Danesh: An excessive credit transfer can lead to the buyer of such credits having a tax liability for underpaying its taxes. Excessive credits can occur, for instance, if the transferor incorrectly determines its entitlement to credit enhancement or ‘adders’ such as the ‘domestic content’ and the ‘energy community’ adders, or by reason of claiming a credit amount due to errors in a project’s begun construction date or placed in service date. This can impact both the requirements to meet certain prevailing wage and apprenticeship requirements, as well as the tax year in which the credit can be claimed or transferred. Finally, an excessive credit transfer can also occur if the basis of the energy property upon which the credit is calculated is incorrectly determined.

“The IRA has made the renewable energy tax credit a tradeable asset, and tax credit insurance is very important in enabling a trade.”
— Brandon Edwards

FW: What role does tax credit insurance play in transferability? Are all tax credit transactions insurable? Could you provide some examples of hard to insure situations?

Edwards: The IRA has made the renewable energy tax credit a tradeable asset, and tax credit insurance is very important in enabling a trade. The vast majority of transferable tax credit buyers are tax departments within publicly traded corporations. Unlike tax equity investors, these buyers are not willing or able to underwrite the risks of recapture or disallowance. They are looking for a transaction that is virtually riskless. A tax insurance policy can help accomplish this goal. A developer will raise traditional equity or debt to develop their project, leveraging insurance to enable the monetisation of the tax credit.

Danesh: Tax credit insurance plays a critical role by covering buyers of credits against recapture risk, tax basis risk, prevailing wage and apprenticeship compliance risk, and availability of credit adders. A tax insurance policy will also cover – subject to a reasonable deductible – an insured’s out of pocket expenses to support the availability of the transferred tax credit in case of an audit. Tax insurance is available for most tax credit transfers where there is sufficient information and support to underwrite coverage. Tax insurance cannot be obtained in cases where a seller has failed to meet a particular requirement to claim a credit or if the project is located in a high-risk jurisdiction and does not otherwise have sufficient underlying property & casualty insurance coverage, or where the basis of the property is not supported by an appraisal or cost segregation study.

FW: What role can tax credit insurance play in securing funding for renewable energy projects?

Edwards: In the context of a tax credit transfer transaction, securing a creditworthy buyer in advance and borrowing against the purchase commitment provides a high loan-to-value rate and a low cost of capital to the developer. Tax credit insurance is usually coupled with the purchase contract to protect the buyer and helps enable this financing structure.

Elefant: Tax credit insurance is being used by sophisticated developers to facilitate tax credit transfer bridge loans, production tax credit sale bridge loans, reduce overall borrowing costs and increase the value of their overall transferable credits. The key to achieving these results is to secure an investment grade tax credit buyer early in the process so that the developer can leverage the financial strength of the tax credit buyer when obtaining financing. A tax insurance policy is key to bringing investment grade buyers to the table.

“Post IRA, the market has grown to approximately $30bn today due to new entrants and the introduction of ‘hybrid tax equity’.”
— Barry Sklar

FW: In what circumstances do renewable energy developers typically utilise tax credit insurance? Is insurance needed when the developer is providing an indemnity? At what point in a project’s lifecycle is tax credit insurance typically obtained?

Danesh: Tax insurance is generally attractive when there is no investment-grade indemnity back-stopping the credits. In cases where a non-investment grade indemnity is being offered, tax insurance provides the certainty of an A-rated insurer and can be structured to sit ahead of or behind the indemnity, subject to commercial negotiation. Tax insurance policies are typically bound at the execution of a tax credit transfer agreement or financing arrangement, but it is advisable to involve a tax insurance broker to explore tax insurance as early as possible ahead of a purchase and sale agreement for a smoother process.

Elefant: Tax insurance is utilised by renewable energy developers when they are not investment grade or cannot commit a parent guarantee from an investment grade entity. We have seen some developers opt for insurance in lieu of putting up a parent guarantee. We have also seen buyers self-insure where insurance is not otherwise available. We typically recommend developers engage as early as possible in the lifecycle of a project to navigate alternative tax insurance products that may assist them in obtaining attractive financing and investment grade corporate buyers.

FW: Can tax credit insurance policies be obtained up front for multiple projects that are expected to be completed over an extended period of time?

Danesh: Part of the job of the tax credit insurance broker is to structure a cost-efficient policy with the insurance markets using a partial premium or deposit-based structure that enables payment to be deferred until a specific project is placed in service.

Elefant: Insurance programmes that have the flexibility to cover multiple projects can be structured and placed in service over an extended period of time. These policies create efficiencies for both the developer and buyer of the credits.

“Transferability has allowed a much greater number of projects to be financed and move forward given that the tax equity market itself is somewhat capped.”
— Steve Bunson

FW: What are your predictions for the evolution of the tax credit market and tax credit insurance in the years ahead? What developments have the scope to encourage or dissuade uptake?

Bunson: One question on everyone’s mind is whether the IRA will be amended in some form either by Congress or in the form of updated guidance by the Treasury department. It is possible that any such changes will favour even greater domestic manufacturing and content requirements and could also shorten the period of time that projects are eligible for tax credits. This could have the impact of accelerating project timelines which is already taking place in anticipation of such changes. Many developers are seeking to begin construction on their projects prior to the enactment of any new legislation with the hope that projects for which construction is already underway would be grandfathered under the older, more lenient requirements. This might actually increase tax credit activity over the next two years or so.

Sklar: The greater availability of financing of tax credit commitments could have the impact of reducing the financing costs and make pricing more competitive for developers able to access this market. Also, there is likely going to be more consolidation of developers to access lower costs of capital. The biggest risk to the tax insurance market is the inability of insurers’ risk capacity to keep up with the increasing market demands for tax credit insurance, something we are already witnessing in first half of 2025. This could be potentially alleviated over time by having more insurers enter the market.

Elefant: Tax insurance plays a vital role in facilitating the direct credit transfer market. Carriers are continually adding new talent to their tax underwriting bench to meet the demand for the product. We predict that the tax insurance market will expand coverage to newer technology types as more guidance is provided by the Treasury, especially in relation to the 45Z Clean Fuel Production Credit.

Edwards: We are seeing a substantial increase year over year in the number of players, number of projects and the size of projects. The advent of transferability has helped provide optionality for developers and financiers that has spurred a tremendous increase in investment. Given that transferability is a new construct, we are seeing and expect to continue to see increased sophistication in financing structures to further enhance returns for these stakeholders. Assuming no major legislative changes that limit the supply of projects, we expect the market to continue to grow and tax credit insurance along with it.

Danesh: We expect the tax credit market to accelerate over the next few years as more corporate buyers enter the market and look to offset their liability. We believe the tax insurance product, together with innovative financing solutions, will encourage more transfers on both the buyer and seller end.

 

Steve Bunson is an advisory director at Birch Risk Advisors, with particular expertise on structuring and global tax risks. Prior to Birch, he was a partner at Goldman Sachs where he served as global head of tax from 2000 until 2020. He holds a BA in economics from Brandeis University, and an MBA in finance and accounting from the Johnson School of Management at Cornell University. He can be contacted on +1 (212) 930 5826 or by email: steve.bunson@birchrisk.com.

Barry Sklar is a partner at Birch Risk Advisors, with a focus on advising clients on structured transactions and renewable energy risks. Prior to Birch, he was a managing director at Goldman Sachs, serving as US head of structured investing from 2007 until 2023. He received a BA in economics and mathematics from Columbia University, a JD from Columbia Law School, and an LLM in tax from New York University Law School. He can be contacted on +1 (212) 930 8604 or by email: barry.sklar@birchrisk.com.

Sheldon Elefant is a partner at Birch Risk Advisors, where he develops and executes specialty insurance structures for unique transactional risks. Prior to Birch, he served as US head of tax insurance at Willis Towers Watson. He received a BS in accounting from Touro University, a JD from Brooklyn Law School and an LLM in tax from New York University Law School. He can be contacted on +1 (212) 930 5825 or by email: sheldon.elefant@birchrisk.com.

David Danesh is a partner at Birch Risk Advisors, where he sources, negotiates and structures specialty insurance solutions globally. Before Birch, he was a lead tax attorney-broker at Alliant Insurance, and practiced as a federal and state tax attorney at Goldman Sachs, McDermott Will & Emery and TD Bank. He holds a BS in business management from Yeshiva University, Sy Syms School of Business, and a JD from Yeshiva University, Benjamin N. Cardozo School of Law. He can be contacted on +1 (212) 930 8154 or by email: david.danesh@birchrisk.com.

Brandon Edwards is a partner at Birch Risk Advisors, where he leads the team that facilitates renewable energy tax credit transfer transactions. Prior to joining Birch, he spent two decades providing solutions for corporate tax departments as chief executive of Tax Credit Co, which was acquired by Experian plc in 2021.  He received his BA in economics from the University of California, Los Angeles. He can be contacted on +1 (310) 587 9111 or by email: brandon.edwards@birchrisk.com.

© Financier Worldwide

©2001-2025 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.