Tax credit investors play a key role in the financing of renewable energy projects in the United States.

Section 45 of the U.S. tax code, together with other provisions, creates "tax credits" based upon the production of electricity from renewable energy sources. Table 1 identifies the tax credits per KwH for different methods of electricity production.

Table 1

A project that generates electricity from specified renewable methods can either retain its tax credits to offset its tax liabilities, or engage in a monetization transaction with tax credit investors to essentially sell those tax credits for cash.

While there are many ways to structure a tax credit monetization, the most common structure is for the project developer to contribute the project to a newly-formed entity or special purpose vehicle (the "SPV"). The SPV will often be formed as a limited liability company or limited partnership in order to have the tax flexibility required for the monetization.

Tax credit investors, wishing to pay cash in order to obtain credits for a greater amount, will purchase membership interests in the SPV. The operating agreement of the SPV will allocate the profits and losses of the SPV, and the tax credit attributes of the SPV, to the members of the SPV based upon the agreed upon allocation between the parties.

In some cases, tax credit investors will not receive any allocation of profits and losses but instead will receive only an allocation of 100% of the SPV's tax credits. In these cases, the tax credit investors are essentially paying their taxes in advance by advancing cash to the SPV in exchange for tax credits in future years. Depending on the situation, a tax credit investor might pay anywhere from 45% to 90% of the face value of the tax credits to be generated.

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