The Exchanges

Q credit buyers, sellers, intermediaries, um, as you said that these parties represent about three and a half billion in transactions last year. Um, was there any difference in what you expected to find versus what you actually found when you started to, to dig in, um, in terms of the vitality of the market, the types of participants, um, what did you expect to find versus what you actually found?

A Yeah, so first I'll talk about some things that, That surprised us. Uh, we did not expect to find 3.5 billion dollars of transactions, or did not expect the data to show quite so authoritatively that the early market was as strong, is as strong as it is. Didn't expect to find as much new technologies in the data set as we ended up finding. There's quite a lot of 45 X in the data, uh, for our survey respondents and deals that we were able To gather data on and the Crux platform, we found that 45 X was the second most broadly, uh, characterized or considered kind of transaction within the data set. And, and to be clear, 45 X's advanced manufacturing credits, uh, did not expect that sellers would articulate quite so much that they were feeling like they were flying blind, particularly with respect to pricing. Uh, and there's a big issue That we identified in the data on market transparency, and frankly, that was one of the reasons why we did this report. At the highest level, we found five big things. One, the rapid growth in the market was achieved really quickly, right? We're talking about August to December, where quite a lot of deals were priced and closed. We found that transferability is leveling the playing field, so the majority of deals in the data set Were less than fifty million, and many were associated with new technologies. We didn't expect, we found that pricing was…

AI assessment note: “we did not expect to find 3.5 billion dollars of transactions”

Q And what can we say about deals that are being executed? Are they, are sellers getting a good deal?

A Yeah, I think in the early market, sellers are getting a good deal. The report finds that, uh, pretty clearly. So the pricing was better than anticipated on most transfer deals. The, the high end of the market, uh, Is 94 to 96 cents, and, and we've seen some very large transactions like the first solar Fiserv deal that priced at 96 cents on 45 X credits, and, and as far as I know, that is the high watermark in the market or around 96 cents. But even for smaller deals, we found that pricing was pretty strong. So at the smallest end of the market, the sub 20, sub ten million dollar Kind of credit sizes. Pricing does fall off a cliff. Like it, it gets a lot worse, but it, it goes down to 89, 88, 87 cents on a gross basis. Uh, and so the sellers who previously were not able to access the tax equity market and would have found that kind of financing to be very expensive, even at larger credit sizes are able to access the transferability market and get reasonably good pricing.

AI assessment note: “Yeah, I think in the early market, sellers are getting a good deal.”

Q Any other policy uncertainty or guidance uncertainty that you're keeping your eyes on?

A Yeah, there's a lot of guidance that still needs to be finalized, including the transferability guidance. The department's working really rapidly on all of that. I, I can't not Point out that this program exists in the context of politics broadly, and there are implications from policy changes to the market. So, for example, this new tax bill that is winding its way through Congress and appears likely to pass has pretty extensive tax credits for R&D to the extent that that is passed and buyers can take benefit of those new retroactive R&D credits that limits demand that could be otherwise allocated to these clean energy tax credits. So, you know, everything that happens in and around the, the policy that defines this early market will have implications to supply and demand.

AI assessment note: “there's a lot of guidance that still needs to be finalized, including the transferability guidance.”

Q And then in terms of sellers, you said that they're worried about price transparency. Um, what sectors, technology types do they represent?

A So sectors and technology types, all of them. We currently on Crux have solar, wind, storage, hydrogen, bioenergy, advanced manufacturing, kind of all the, the types of credits that can be sold for cash. They, they vary, uh, a lot in terms of size. So people are looking to sell credits. In the six digits, they're also looking to sell credits. In the 10 digits, we have both levels of, of sizes offered on the platform. Uh, and sellers, as you said, are, are overwhelmingly concerned with the transparency of the market and price, and, and the certainty by which they can assign whether or not they will be able to clear the credit, sell it, and get the price that they want. And there's a, there was a huge finding in the data that that Lack of transparency is inhibiting confidence, and that they, they basically don't know whether they are getting a good deal or not. And that is particularly a problem when sellers are selling in bilateral kinds of transactions, because you don't really know what the market price is or should be. You're relying on your advisor or whomever is at the table with you telling you that. But you don't have clarity into price discovery in the same way that you may as the market starts to become a little bit more centralized.

AI assessment note: “We currently on Crux have solar, wind, storage, hydrogen, bioenergy, advanced manufacturing”

Q So what are you doing about, uh, transparency?

A So one big place that we started was this report, right? We wanted to give buyers, sellers, intermediaries as much information as possible on the early market. The market's about six months old, so having data on pricing, on market sentiment, on deal sizing is very helpful, we find, to the market. We also, by virtue of what we do, which is to provide software For transactions in a marketplace where buyers, sellers, and intermediaries can transact, the platform delivers more real-time price discovery. So we, we found that credits that are listed on Crux in 37% of cases where a credit received a bid, they received multiple bids. And we saw a big impact on price for credits that received multiple bids. And, and effectively what you are finding there as the seller is the market price because multiple Buyers may be looking to transact on your credit, and that leads to a more real-time discovery of what a fair price in the market is for that credit at that time.

AI assessment note: “one big place that we started was this report, right?”

Q What are the, what are the biggest factors that you think will impact, um, deal sizes and, and, and pricing?

A I think the question of where hybrid deals are performed and, and how is one of those factors. So, you know, are, are people doing partnerships at just a hundred million dollar, uh, checks and above? Are they doing them somewhat smaller? I think that it will impact deal sizes here. I think there's a lot that has to do with the supply that comes to the market and how quickly, how quickly projects can be placed into service, how quickly they can be turned on. I think there is also an interesting dynamic here where, in one sense, you've got one market where there are 12 credits that can be sold for cash, but there are lots of, there are 12 different markets that underlie that, right? So the 45 X market is, in some sense, a A different product than the storage ITC market. And in that sense, if you see a lot of supply of 45 X come into the market, then there will be an implication to market pricing on that. And, and though we're seeing some convergence, there is, we are seeing some sign that buyers are more comfortable with the existing technologies that That they have seen in the past, like wind and solar, than they may be with some of the new technology types, and, and the supply side of the market will influence how the market forms on some of those new technology types.

AI assessment note: “I think the question of where hybrid deals are performed and, and how is one of those factors.”

Q sellers a little bit more. Uh, we'll talk about buyers first. Is there a new class of buyer emerging, and what are their motivations and concerns? Um, many of them are, you know, working through intermediaries. They're concerned about diligence, insurance, uh, the time and cost of diligence. Break that down a little bit for me. What are their concerns, and, and how do you characterize this class of participants?

A So there absolutely is a new class of buyers that are coming into the market. When you consider the baseline of traditional tax equity, the most of that capital is coming from 10 institutions, 10 of the largest banks. In the new market, we're seeing buyers that are more broadly distributed. So seeing people from all kinds of different industries, seeing companies of various sizes, it is the Fortune 50, but it's also the Russell 3000. We see private companies that are looking to participate. But of course, when you have new buyers that are coming to the market, they come with a lot of questions. It's a new product. Many have not participated historically in tax equities. Some have not participated in markets like state tax credits or low income housing tax credits before. And so those buyers need a lot of education. They need to understand the risks that are at play In these deals, they are often advised by tax advisors, and in all cases, lawyers, and, and those intermediaries are playing a really critical role in buyers coming up the curve here. And, and I think there was a dynamic, we found there was a dynamic where a lot of buyers were testing the water in 20, 23. So many people were looking to do a pilot transaction In order to grow their strategy going into 2024, and I think we'll start to see the market stabilize and more buyers come in, in 24, now that some deals have bee…

AI assessment note: “there absolutely is a new class of buyers that are coming into the market.”

Q Can you explain a little bit more about how those deals will work or how you foresee them working?

A Yeah. So the credits can only be sold once, uh, but by virtue of the structure of tax equity, when a tax equity partnership is It is interpreted to be the first owner of the credits, and, and as a result of that, the tax equity partnership can be a mechanism by which the credit basis is stepped up. It is the mechanism by which depreciation is monetized, in part because depreciation cannot be sold, or, or because depreciation cannot be sold, and it also internalizes the credits. But the, the credits can then be sold Buy the partnership into the market, and we saw quite a lot of that in 2023, and, and I think we're going to see a lot more of it in 2024, because it, it's just a good product, right? On the sell side, it allows you to monetize the depreciation, and if it's appropriate, step up the basis. On the buy side, you're buying a credit that has been underwritten by somebody, and, and so I think for the, the largest deals, you're going to see that dynamic in the market, and, and that is one thing that Crux accommodates. We work quite closely with banks on both the buy and the sell side, and banks will use Crux to manage transactions, and that supports that kind of dynamic where a bank may be performing a tax equity partnership, putting one in place, and then looking to sell credits into the market.

AI assessment note: “the tax equity partnership can be a mechanism by which the credit basis is stepped up”

Q So you say that for 20, 24, you think there will be a reset. What's a reset? What does that look like?

A So I think first, just holistically on pricing, I think there is a assumption in the market to assume that pricing is monolithic and it won't be. There will be a large number of factors. I talked about the tax law a moment ago. There are also factors like the supply of projects in the market. Interest rates. Macroeconomic factors. So a, a recession that impacts the taxable income of U.S. corporates would impair the tax base and, and therefore the demand side of the market. And, and so all of those factors are playing out in real time. The economy is still quite strong. We are coming off of a very strong, twenty-twenty-three early market in the transferable credit sales. The, the market shows a lot of health. But we're, we no longer have the same time pressure on twenty-twenty-four credits as we did and do on twenty-twenty-three credits, and that is leading the market behavior, the bidding behavior on 24 credits to extend a bit longer. It may lead to pricing adjusting somewhat here, because if you just think about it in a pure supply-demand sense, there was only so much twenty-twenty-three credit volume That was available, right? If you trust our numbers, then it's something like seven to nine billion that will transact, but it's capped. And, and there was more demand than supply. There is still more demand than supply on those 23 credits. But as you look towards 24, the market …

AI assessment note: “you may see a bit of a reset on pricing as we go into”

Q So, um, just let's talk about pricing a little bit more, uh, what technologies and credits are priced the highest, um, what are the lowest, and how do you think pricing is going to change over time?

A So the biggest deals price the best. We, like, found this decisively in the data. The mega deals, call it the hundred million dollar plus kinds of deals, are, are transacting at 94, 95, 96 cents, and, and the trend of size impacting price is true across credit types. So it may be that the 45 X credit does not trade As a rule, as high as wind production tax credits do, but larger 45 X credits price better than smaller 45 X credits, just like larger wind production tax credits price better than smaller wind production tax credits. In general, we find that the new technology types are not transacting at, at quite as high of prices as the more established ones. We are also finding, and I haven't talked about this dynamic yet, but it's important, that there's often this, ah, this desire in the market to segment entirely traditional tax equity from the transferability market. That is not borne out by reality. We are seeing an increasing amount of so-called hybrid deals where a tax equity partnership is formed, and then credits are sold Out of that partnership. And, and we are seeing, we do see some evidence that pricing on those kinds of deals where a bank is at risk, a bank or somebody else is at risk in the transaction in the tax equity, that kind of credit is attractive to the buy side of the market.

AI assessment note: “new technology types are not transacting at, at quite as high of prices”

Q I'm curious about your thoughts on the bonus tax credits and how they're being monetized, so you have Bonuses for prevailing, prevailing wages, for energy communities, for low-income communities. I mean, how many participants are claiming eligibility for these credits? Can you just explain what the, these bonuses are and how they might evolve with more clarity on, on rules and as, uh, more of them are monetized?

A Yeah, so this is a, a moving target and has evolved over the course of twenty-twenty-three. The Treasury has been putting out an IRS guidance on bonus credits and, and how they work. Buyers have been working to get their heads around the implication to the credit sizes. Uh, to, as far as I know, we have not seen a deal yet that has moved forward without the prevailing wage and apprenticeship adder. So the, the adder that gets you to roughly 30% as a base baseline or exactly 30% as a baseline on ITCs. We are seeing some deals negotiated such that the seller is making representation That they have the adders or qualify for the adders, and the buyer is looking for opinions from legal counsel, tax advisors to say, in fact, they do have them, and there's some deals that will progress where a part of the credit will transact, the base part of the credit will transact first, and then if, if the parties get comfortable that the, uh, that the adders are met, Then the adder piece of it will transact as well. But we found in the, in the data set that there were still a lot of questions around how adders will work, and, and there was some pretty meaningful guidance that has been put out, uh, towards the end of last year by the department.

AI assessment note: “we have not seen a deal yet that has moved forward without the prevailing wage”

Q So let's talk a little bit about, um, deal sizes and types. How are current deals different from traditional tax equity in size and project type?

A So traditional tax equity tended to be, uh, transactions that, 50 or a hundred million dollars or above. It, it just really didn't make sense to go through the legal, uh, work necessary and the transaction structuring to do tax equity deals at, at less than those amounts. And the providers of tax equity have been the largest banks that are looking to, for the most part, participate in transactions that are much larger. We found in our data set that smaller deals, so fifty million and below, Represented the majority of deals in the data set. And that is really encouraging because what that suggests is that transferability is leveling the playing field and that those kinds of sellers are able to sell directly into the market without necessarily having to go through tax equity structures. And, and that's beneficial because on the margin, then that brings in more incremental demand to the market. And, and we have found that tax equity has been Limited in its ability to expand and somewhat vulnerable to market shocks. I, I started my career, Stephen, at the Treasury Department, uh, in 2009, working in part on the Recovery Act, which included some incentives for clean energy, a grants program, uh, called the 16 oh three grants program, when the market froze around tax equity, around the financial crisis. So it has shown that it is vulnerable to shock. And finding ourselves in, in a m…

AI assessment note: “smaller deals, so fifty million and below, Represented the majority of deals”