Latest / Clean Power Hour / Monetizing Solar Tax Credits: Opportunities in the DG Space with John Carson |EP228

Transcript

Monetizing Solar Tax Credits: Opportunities in the DG Space with John Carson |EP228 · Clean Power Hour

• 0:50
  John Carson: But what I would say, more than anything, for your fire STEM is don't assume just because you're not 100 megawatt facility, utility scale solar, don't assume there's not a avenue for monetizing your credits, because we're here serving specifically that DG space, which, again, like I said, I believe it's underserved, but we're here to help.
• 1:12
  intro: Are you speeding the energy transition here at the Clean Power Hour, our hosts, Tim Montague and John Weaver bring you the best in solar, batteries and clean technologies every week. Want to go deeper into decarbonization. We do too.
• 1:26
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• 1:40
  Tim Montague: Today on the Clean Power Hour, tax credit finance for distributed generation. I'm Tim Montague, your host, welcome to the Clean Power Hour. Check out all of our content at cleanpowerhour.com. Please tell a friend about the show. Give us a rating and a review on Apple and Spotify and subscribe to our YouTube channel today. My guest is John Carson. He is the managing partner at Armagh Capital, in the Atlanta area.
• 2:05
  Tim Montague: Welcome to the show, John,
• 2:07
  John Carson: thank you. Tim, thanks for having me. Great to be here.
• 2:09
  Tim Montague: It was great to meet you at the CCSA event.
• 2:11
  Tim Montague: Shout out to CCSA. That was a lovely event in Denver. Looking forward to getting more involved with CCSA and the community.
• 2:20
  Tim Montague: Solar industry in the United States is booming, but you're involved in tax credit finance for a bunch of industries within the energy transition. So we're going to talk about all that, but we'll give our listeners, a little bit of your background and how you got interested in clean energy, finance,
• 2:37
  John Carson: sure. Again, thanks for having me. It's pleasure to be here to talk to your audience and have this conversation about this definitely growing industry. I'm a CPA based here in Atlanta. I've been in the tax credit space for about nine years, eventually, originally started in more of a public policy role, slash business development role, and and obviously here in Georgia, we did a quite a bit of the film credits. The film credits are very big here in Georgia, and that's how I got to know the the transferable tax credit market.
• 3:08
  John Carson: And been doing that film credits almost exclusively the past four years. And then I had, it's kind of funny, I had someone call me, asking me for Ira credits, and this is a couple years ago.
• 3:19
  John Carson: Yeah, I had no idea what they were. And fast forward, I found that Armagh capital, because I saw so much market demand for the credits, but also need for tax credit, finance for these distributed generation projects.
• 3:31
  John Carson: So Well, it's been fantastic, and I'm looking forward to
• 3:35
  Tim Montague: more. Yeah, indeed, we, you know, we have a, I like to say we have a 30 year run in the energy transition related to solar, wind, battery storage, electrification of the built environment, that includes transportation, heavy industry, HVAC, etc. So it's we have a long runway, and we have a long way to go. We we have to clean the grid. We have to net zero the economy and beyond. As my listeners know, I'm fond of referring to the trillion tons of pollution, CO two, pollution that have accumulated in the atmosphere, and we also have to address those. So tell us in in in a few sentences, though, John, what is, what is Armagh Capital lane? And, okay, you're, you're doing tax credit finance, of a bunch of different things, but related to the energy transition, what are the sweet spots?
• 4:30
  John Carson: Sure, so we're really doing tax credit finance for what, again, what I would call distributed generation.
• 4:36
  John Carson: That's anywhere from, I would guess, about half a megawatt solar project to about 3035, maybe 40 megawatt solar project.
• 4:46
  John Carson: And I believe this is just an area of renewable energy that is underserved with tax credit finance, and we're just here to serve that. In addition to that, we're also working on tax credits from EV charging infrastructure and the 30 C credit. We're working on hydrogen, and we're all working also on advanced manufacturing credits and bringing our taxpayers those value as well as producing a competitive yield to people, to sponsors, creating those credits.
• 5:16
  Tim Montague: Okay? And so for those of us who are not finance experts, walk us through a typical DG project, from initial contact to to closure,
• 5:31
  John Carson: absolutely so I will. I have a number of clients that are coming to me with their customers and say, look, I've got this customer. He's going to put in a five megawatt facility in this location. What can you do for him on the tax credit finance? And what we would say is, okay, about a five megawatt, you're probably talking about ten million of capital cost.
• 5:49
  John Carson: That's going to cost. Qualify for 30 or 40% of credit. So let's just say it's 40% 40% times 10 million of capital costs. That's 4 million credits they're going to qualify for.
• 6:00
  John Carson: Well, let's say that's let's say that someone in agriculture or someone in a business where they don't owe a lot of tax, but they and they'd rather monetize those credits and pay down their facilities, have extra cash flow, pay down a loan and what have you. We can take those 4 million credits for which they qualify, show them the process of registering with the IRS, going through the Cost Segregation slash due diligence, report qualifying for those credits, taking them to market and actually returning cash for them, for credits that they probably would not have used in not, definitely not in the near term. And we take the those credits, we transfer them to a taxpayer that would want to have those sustainability recognition, they want to have a discount on their taxes. And it's a win win for everybody, really.
• 6:46
  Tim Montague: Yeah, and give us an example of a typical client then that is looking for these tax credits, sure,
• 6:54
  John Carson: a typical client, well, the Treasury has said that the clients for these credits, the taxpayers for these credits, need to be basically a C corporation or somebody that has passive income tax liabilities.
• 7:06
  John Carson: So I would think of one that I've sold a number of credits to just recently. It's actually a US subsidiary Tim of a foreign corporation. And there's lots of these, those examples, those are typically gonna be a C corporation, and they had a tax liability of a right at a million dollars. So what they did is say, Look, we're gonna purchase 750,000 credits for such and such tax year, and we want to transfer those from a development to this taxpayer that my particular client, my taxpayer on the buyer side, they're very pleased because they get a say, you know, fair sized discount on their tax bill. They get sustainability or ESG recognition, the seller, they get cash immediately for those tax credits, rather than sitting on tax returns for the next several years, and they are able to use those cash flows to pay down their facilities, or what have, pay down loans, or what have you, and it's just a win for everybody.
• 8:08
  Tim Montague: So I'm struggling a little bit, though, to understand if, if I'm the buyer of the credits, and I have a tax liability that I'm trying to reduce, let's say I have a million dollars in tax liability. When I buy credits, I'm spending money. So how is that reducing my tax burden?
• 8:28
  Tim Montague: You?
• 8:29
  John Carson: Let's say you have a Sure, great question. Let's say you have a million dollar tax liability. These credits can be used up to 75% of your liability. Okay, so let's say if you have a million dollar tax liability, you buy 750,000 credits. Those credits may go for a market price of, say, 91 cents, 92 cents, so you're already getting an eight or 9% savings against your taxes. So you would multiply, you know, make 91 cents times 750,000 got it that number is, what about 660 $670,000 so you're saving about, you know, 70 $80,000 whatever that math is, against your income tax liability. And in addition to that, I'll also note this for your buyers, for your for your audience of buyers, these can be used against estimated payments. So it's the IRS has said you don't have to make estimated payments.
• 9:26
  John Carson: And by the credits, you can factor these credits in in reducing your cash payments for your estimated tax liabilities.
• 9:36
  Tim Montague: Okay? And do you find that it's a both and that these companies are also doing projects directly, you know, installing rooftop solar or installing, you know, EV infrastructure or hydrogen infrastructure, because that would allow them to take, you know, the 30% ITC, if they were actually doing a rooftop solar project, are
• 9:59
  John Carson: you talking about the sponsors or the developers of the credits? They're actually using the credits themselves.
• 10:05
  Tim Montague: I'm talking about, well, yeah, so if, let's say I'm Walmart, okay, and I've got all these facilities, and Walmart is a good example of a company that is installing solar on their facilities. Most of the time, they're they're they're leveraging third party ownership of those assets, but let's just say, on one facility, and they own the facility, and so it's owner occupied, and they're like, Yeah, we're going to upgrade this facility. We're going to install solar, and it's going to cost a million dollars, and we're going to take that, you know, 30% or 40% you know, depending on where it is and who the who the off taker is, and the zip code, etcetera, etcetera, etcetera, right?
• 10:42
  Tim Montague: There's many factors that go into what the ITC is going to be, but, but let's just say 30% would, would. Would Walmart be doing that in addition to this buying of credits? I'm just curious like because a discount sounds really good, but is it?
• 10:59
  Tim Montague: Is it so compelling that that is a major strategy for major corporations? What
• 11:06
  John Carson: I have to offer is not a great strategy necessarily, for a corporation, because they could probably use those credits themselves, and they can Walmart, for example, obviously, they owe a lot of money in federal income tax liabilities. If they put in a solar facility that they own, and it's not third party or what have you, they would spend that million dollars that you just mentioned. They would have 30% or 300,000 in credits. They would probably keep that themselves and use it against their own liabilities for the year in which they generated the credits, or maybe carry them back. The inflation reduction actually allows them to carry the bag credits three years to prior tax years. Yeah, what we have to offer really is more valuable for a smaller or mid sized company that wants to acquire those credits, rather than a larger company generating those credits, right? Whereas that smaller, medium sized company, they want to offset their tax at a discount and achieve sustainability or ESG recognition, that's what they were, that's the value for them, yeah, is that they want to have a cash savings and that recognition for clean energy, I
• 12:12
  Tim Montague: get it. And what would you say are the common challenges that you and developers run into when trying to make this marriage between projects and buyers for the credits?
• 12:29
  John Carson: Yeah, I think the most common challenge is education on the credits and education on the inflation Reduction Act. And that's why we've done so much in regard to marketing. We've had a webinar for our buyers recently in regard to what are these credits? How are they used? What are the risks? How do you mitigate those risks? What is the pricing? What's the mechanics and so forth. I think it's a real education exercise.
• 12:51
  John Carson: Some of your buyers might be familiar with the film credits that are available in various states and so forth. I remember when it started in our state, 15 years ago, these credits were going film credits were going for 60 cents on the dollar, and people didn't understand them, and so forth. But I would say now they're, they're trading much higher than that, CPAs, tax attorneys, tax advisors, are much more comfortable with them.
• 13:14
  John Carson: I think, Tim, you're going to see that with the inflation Reduction Act credits as well.
• 13:20
  John Carson: It's a, it's going to be an education exercise. That's the main challenge that I see with these credits going forward. But we're up to that challenge. And I think it's a, it's a quick learning curve for
• 13:30
  Tim Montague: all of us. Yeah,
• 13:33
  John Carson: I make the other challenges for sellers to know exactly what materials, materials are needed to market these credits, they're going to need to get a due diligence report, a Cost Segregation report, prove that there's property insurance there, and so forth. But that's you know, that that can be handled as well. I think the main to answer your question, the main challenge, is education. The
• 13:54
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• 14:16
  Tim Montague: The 252 75 pairs, well, with CPS America's exceptional data communication controls and energy storage solutions. Go to chintpowersystems.com to find out more. Yeah, and I assume the IRS is tracking all of these credits. What prevents a a developer from selling the credits on a project multiple times?
• 14:45
  John Carson: Yeah, there go.
• 14:45
  John Carson: They are trans these credits are transferred through an IRS portal to which my sellers or myself act on their behalf, we will register these credits, and each of the projects gets a unique asset identification number. Okay, so if I have a rooftop installation on top of a Walmart at such and such address, it's going to have a unique asset identification number, and then the IRS is going to understand and recognize that on their form, 3800 transfer of the credits, in regard to the business credits, where, where these are claimed, it's going to list that asset unique asset identification number, and how many credits a taxpayer is claiming as a result. So there's, there's definitely tracking and registration of these credits with the with the Treasury
• 15:37
  Tim Montague: got it. So you mentioned the the IRA, the inflation Reduction Act, which is, you know, been a boon for the industry. I mean, it took the ITC to 30% which was sketched. To step down to, I think, 10 or 15% significantly reduced. And and then it, then it created these adders. And you get up to 60% on the ITC, if you if the stars align in terms of, you know, having American made equipment and energy communities, that's right, and LMI communities. So, you know, looking from 2021 pre IRA to 2025 you know, what is that meant for ARMA capital and the DG tax credit market? In your opinion,
• 16:25
  John Carson: I think it's going to be absolutely huge. If you look at forecasts of megawatt and gigawatt build out by market sector. Utility scale is a fair amount of it, but just actually a little bit more than utility scale is distributed generation.
• 16:41
  John Carson: In other words, solar arrays may be less than in our space, many of whom, from a quantity standpoint, are 20 megawatts or less, and definitely items, you know, 10 megawatts and less. And I think there's just a massive opportunity, not just for the buyers of these credits, but also for the sellers of these credits. And I would say what, it's not just a matter of being able to transact these credits.
• 18:04
  John Carson: I've been working with some EPCs Tim, where it literally takes a a project that was just on an Excel spreadsheet, just on a sales pipeline, and now, because of the credits, because there's an ability to monetize them, and the bankers and the lenders know this, that it just, it goes from someone's sales pipeline to a project in the ground with solar mountain and connectivity. Why?
• 18:28
  John Carson: Because there is an ability to recognize the value of these and monetize the value of these.
• 18:36
  John Carson: Investment Tax credits go back to the sponsor. It's, it's, it's really game changer. And I know that game changing is an overused term, but it really applies in this situation.
• 18:48
  Tim Montague: Well, I would wholeheartedly agree. And what boggles the mind, in my opinion, is that Joe Biden does get more credit for the IRA like when you when you look back at the last four years this, this is a major boon for the US economy. It's incentivizing manufacturing. And I'd like to talk a little bit, if we can, about manufacturing, because it's, you know, there's a lot of opportunity for onshoring and reshoring of solar products. Is that? Is that a niche that Arma is involved with?
• 19:22
  John Carson: Not, not as much we really deal with the tax credits generated at near the end of the project. Now, obviously we get involved in regard to the opportunity and pre selling the credits and what have you. But we don't get as involved in regard to qualification of the adders, including domestic content and so forth.
• 19:40
  Tim Montague: No, I mean, I mean building manufacturing facilities?
• 19:45
  John Carson: Oh, absolutely.
• 19:45
  John Carson: Well, now we are looking at a number of opportunities to sell the ITCs from that are created from the advanced manufacturing facilities. Yeah, absolutely.
• 19:56
  John Carson: And particularly in one of one example or two examples, is not just the clean hydrogen that we're working in but also in regard to solar cells and so forth, and solar panels, just a lot of opportunity. There
• 20:12
  Tim Montague: are there other industries besides hydrogen and solar cells that are you're aware of that are eligible for these credits,
• 20:20
  John Carson: not to my knowledge immediately, but I will say we are, well, we're we are transacting the credits from EV infrastructure, which that's the 30 C. So we basically have four lines of credits for which we're marketing credits to our taxpayers. One is solar, which is Section 48 second is EVs, which is Section 30 C, hydrogen, clean hydrogen credits, and then advanced manufacturing, I would say that's the bulk of our business right there, in regard to the federal credits. And like I said, we're we're just seeing so much opportunity and really so much need based on that market segment in its size.
• 21:01
  Tim Montague: Very cool. So would you be able to walk us through a success story? I
• 21:08
  John Carson: can yes, there is one where I was working with an EPC in the southwestern United States. And I'll actually mention two very briefly. One is there was an agricultural user of solar electricity for a facility in the southwestern United States, and he was looking to reduce his his loan outstanding, and he didn't realize that he qualified for these credits, having said that this was a farmer, he didn't really have much need for these credits. And. So he went through the process that we guided him through, because we don't just connect buyer and seller. We really facilitate the whole process all the way through. And we were able to monetize his credits, get him to get him cash that he can pay down his loan facilities, and he's obviously in today's interest rates. Tim, he's very happy about that.
• 21:59
  John Carson: Another success story that we had was an even larger facility.
• 22:02
  John Carson: I think this one was about four megawatts, maybe even five megawatts. And it was one of those stories where it was fair sized facility for distributed generation, about 10 million of capital cost, not to mention the batteries that were there, about 4 million of credit. So overall, not a very, very large facility.
• 22:19
  John Carson: In the grand scheme of things, it literally went from the sponsor or the investor said, you know, I just, I can't make this work in regards to the long term savings are there, but I just can't make it work on a cash flow basis. We were able to give them engagement letter say we're going to return x amount of cents per on the yield per the credits, once the credits become available, he was able to take that to his banker, who got him a loan alongside the REAP grant. I think it was to said, Hey, if you get the REAP grant and you get this, we can make this happen. And so it literally took a project that was just hypothetical, this on someone's sales pipeline to having solar panels in the ground. Why?
• 23:05
  John Carson: Because they had an exit strategy on the tax credits.
• 23:09
  John Carson: They can monetize that so they can pay down the loan, or what have you. And it's like I said before, it's a it's a total game changer. And as as I think the IRA was designed to do,
• 23:20
  Tim Montague: yeah, yeah. I mean, I really, I like this, because not all corporate entities have a tax liability, and so the transferability of their of their tax credits is very, very important, right? And then there's also the direct pay for nonprofits, which includes schools, municipalities, 501, C, threes. And that was, that was also a very significant Delta.
• 23:53
  Tim Montague: Mm, hmm,
• 23:54
  John Carson: absolutely. And what those nonprofits can elect to use tax credits rather than direct pay. The direct pay, as you know, they have to put, they have to front the cash and then apply for the direct pay. And I don't know how many months that could be, 1214, months before the direct pay hits. It may be less than that, depending on the time of the year. Yeah. But they could also, like, transfer the credits and not have to come as far out, as far as cash. So
• 24:20
  Tim Montague: what? What is the lifespan of a, of a, you know, from conversation to contract.
• 24:24
  Tim Montague: How long does it take to make these deals happen?
• 24:30
  John Carson: Yeah, I would say, if we're if we're talking about selling credits or pre selling credits, if we're talking about selling credits that are readily available, then I would say it can be as little as 30 to 60 days, assuming that there's a smooth registration process with the IRS and so forth. And we can, we can find a buyer for these because there's so much taxpayer demand for these credits, if it's a, if it's now, the Treasury is also allowed Tim for buyers to pre for actually, sellers to pre sell the credits that are going to be created in, say, you know, nine months or 10 months, or what have you. Now, we're able to do that as well.
• 25:10
  John Carson: We can line up a buyer, say, first of September, to buy credits that are going to be generated first of April, or what have you. Now, obviously that takes longer, but it's it is also another, not to abuse the term, but a game changer in regard to that demand and that financing of the solar facility, the renewable energy facility, to be able to pre sell the credit, saying, I know these credits are going to come online at this date. Once the the the switch is turned on, the place and service goes in, we're able to pre sell those credits in those situations, it can be a very quick time turn around, assuming that the IRS registration works smoothly as well as there's a due diligence report noting the number of credits to which Your clients eligible.
• 26:02
  Tim Montague: So what else should my listeners know about tax credit, finance for distributed generation?
• 26:09
  John Carson: I would want them to know that don't think there's not an option. There are options out there, and we can, we can work with EPCs, we work also with renewable energy, tax attorneys and firms and so forth, to structure something where we're able to sell credits on a spot basis. We're able to pre sell credits, and we're also able to go to our tax person, say, we have these credits coming. Would you like to buy them in 25 in 26 or what have you, and go ahead and line up that tax credit finance. But what I would say, more than anything. Your buyers. Tim is, don't assume just because you're not 100 megawatt facility, utility scale solar, don't assume there's not a avenue for monetizing your credits, because we're here serving specifically that DG space, which, again, like I said, I believe it's underserved, but we're here to help. Very
• 27:02
  Tim Montague: good. Well, check out all of our content at cleanpowerhour.com please tell a friend about the show. Give us a rating and a review on Apple or Spotify and reach out to me on LinkedIn. I love hearing from our listeners. You can also meet me face to face at any number of industry events. I will definitely be at re plus in Anaheim, California in September, as well as the solar farm Summit, if this gets to you before that event in early July.
• 27:29
  Tim Montague: And with that, I want to thank John Carson, the managing partner and founder of Armagh Capital, for coming on the show today. Thank you so much. John
• 27:39
  John Carson: Tim, thank you so much armaghcapital.com.
• 27:42
  Tim Montague: Thank you so much.
• 27:42
  Tim Montague: All right, take care.