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Ep337: How Tax Credit Markets Weathered 2025
00:30:32
Alfred Johnson, co‑founder and CEO of Crux, discusses key findings from Crux’s latest analysis of the clean energy finance market, including trends in tax credit transfers, tax equity, pricing and capital deployment amid policy and market headwinds....
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- [00:00]
A
Foreign. Welcome to Currents, the Norton Rose Fulbright podcast. Today we welcome back Alfred Johnson, co founder and CEO of Crux. CRUX is a platform that facilitates transactions. The tax credits markets, largely, that's what they're known for, but they're also been involved in debt and preferred equity transactions recently. Saw one actually on my way into work today that was announced. So their growing presence in the market truly has been remarkable, the growth trajectory there. So we'll get a little bit of that, let you brag a little bit. Alfred, thank you. And I asked you specifically to be on because I saw that Crux was releasing a new report on the state of the market and given how you guys are across, especially the tax credit transfer deals, wanted to hear from you what you guys are finding as you're monitoring the market. So anyway, with all that, thanks for recording with us today.
- [00:57]
B
Great, Todd, thanks for having me back on. I always love joining you. So you mentioned this new report that we've got coming out. It is the third market intelligence report that we've produced and has followed the growth of the company into new products. So we started with transferable tax credits, as you mentioned. We started. We now operate in debt capital markets and in structured investments, tax and preferred equity. And the report covers all of that in depth. So I have eight big takeaways that I'm happy to talk through with you. But in general, what the report shows is that even though there were substantial headwinds facing the industry over the past year, the market weathered them surprisingly well and with resilience. And there's a ton of investment that continues to go into clean energy and manufacturing of all kinds.
- [01:53]
A
Let's dig into it. It has been remarkable, at least from my vantage point, how strong the market has been given all of the negative press that you can read about, depending where you pick your news from. So maybe you could, why don't you do a little bit of summarizing, go through point by point and maybe I can ask you a couple follow up questions here and there, but let us know what you found.
- [02:19]
B
Yeah. So Todd, I've been struggling to find the perfect analogy for it. And I have settled on the metaphor of a ship in the sea at night. And the night was 2025 and it was a stormy night and there were winds at the bow of the ship and there were winds at the tail. And what we were facing was a lot of policy changes, right. Tariffs and changing supply chains associated with that, a uncertain future around the tax credits that evolved into the law passed over the summer and all sorts of other demands on labor and the other aspects of building these projects. But at the tail, we had the continuation of a lot of tax credits that had started in 2022. Categories like X advanced manufacturing and battery storage that were really starting to accelerate. You had interest rates drop over the period and you had a lot of capital coming into the space from the hyperscalers, in particular driving a ton of power investment and electricity prices up. So when the storm cleared and the morning started to emerge, the ship is further along than we would have expected. More capital flowed into the industry. And that's our first finding that capital deployment increased by about 6% from 24 to 25. In the.
- [03:47]
A
When you're, when you're saying capital deployment, just to clarify, are you talking about deployed tax equity or are you talking about total capital to build out renewable energy projects or the entire energy infrastructure? What do you mean?
- [03:59]
B
I am talking about total capital equity, debt and tax capital that went into what we call the clean economy. So, so that is renewable energy generation, battery storage, manufacturing and minerals, clean fuels, basically the categories that are also covered by the tax credits. And that segment saw an increase of about 6% to 120 billion of total CAPEX. Now the, the total number of financing that happened in 2025 was above 200 billion. And of course, Todd, that is because some later stage financing takes out earlier st. So the, the total number of financing also grew and the CapEx number grew to 120 billion. And that relates to the second finding of the report, which is tax monetization. And by that we mean the addition of retained tax equity and credits sold into the market. In direct transfers, total tax monetization grew to 63 billion, which was a 20% increase over 2024. And direct transfers went from a $28 billion market in 2024 to a $42 billion market, which is a 27% increase. A lot of that addition was coming from hybrid tax equity. So the tax credits sold out of tax equity structures that drove a lot of the growth in the market.
- [05:27]
A
On that fact, huge growth. Where do you get the numbers from? What level of confidence, you know, plus or minus, do we have on those kind of numbers?
- [05:35]
B
Very high levels of confidence. We have now aggregated up $52 billion worth of transaction information across mostly 24 and 25 transactions. That includes forward transactions, so future year transactions and strips. We do that in three ways. So first, we see quite a lot of market volume on our platform and in the markets that we operate. Second, we survey the market and Go out to law firms and banks and large participants who are able to share information with us and then get a extended version of the report. So we collect that survey data. And then third, some amount of information is also publicly available through filings. So we scrape that and aggregate it into the totals that we have. So we feel quite confident in the numbers that we are presenting. Up $63 billion total tax equity and direct transfer market, and a $42 billion direct transfer market that has gone from about 9 billion in 2023 to 28 billion in 24 and all the way up to 42 billion in 25. So the third finding in the report, Todd, is that the tax credit pricing in the market eased in the second half of the year and less transacted from a volume perspective in the second half than the first half. That is a reversal from prior years. So in 23 and 24 we saw about 2/3 of the volume. In 24, which was a full year transact. In the second half. This year it was the opposite. So about 60% transacted in the first half, 40% in the second half. A lot of that was driven by easing in buyer demand. That came from a reduction in tax liability that many companies had after the tax law passed in the summer that led corporates to realign and figure out what their tax capacity was going to be. And that played through in pricing. There was a lot of discussion about that at the time and frankly, it felt more acute than the numbers that we find show. So what we found was that in IG rated ITC average pricing, so this is for everything of all sizes, from very small to very large, went from 94 in the first half of 25 to 93. Everything I will say is gross pricing. The net is then reduced by transaction costs. Non IG rated ITCs went from 91 to 90, so again, about a cent in reduction in price. And we saw a similar dynamic in production tax credits, which trade at a premium to investment tax credits, but also saw reductions. So IG rated PTCs on average traded down from 95 to 94. And in non IG rated PTCs, we saw them trade down from 94 to 93. There were some more pronounced pricing effects in the 45x advanced manufacturing market as market participants awaited FIAC guidance. And with less interest in 45x tax credits and somewhat lower pricing that was printing in the back half of the year, many 45x sellers stayed out of the market. So we have a lower percentage of the market in the back half of 25 that came from 45x. It was about 40% of the market over the full year of 2025. And it is a reduction of what we have seen from 2024. So the fourth finding that we have is that hybrid tax equity, as I mentioned, grew quite materially. And an interesting thing here is that the market for retained tax equity, so tax equity that was historically provided by banks and other large companies was about a $20 billion market before the introduction of transferability. That is now a $36 billion market if you look at total deployments of tax equity. So total investments of tax equity, interestingly, the retained portion of the hybrid transactions added to traditional tax equity that is being executed in the market is about $22 billion. So basically all of the growth in the market has come from the ability to transfer out of tax equity structures. Obviously that is a hugely valuable contribution to the market because it expands the availability of, of tax equity capital and is driving some of the volume into the transfer market. I think that there is still a lot of opportunity for growth here. The binding constraint, as it has always been, is investors in the tax equity market. We recently launched an offering on this, have now done four deals totaling more than 700 million of investments in tax equity. And we're really following our, our sponsors and our partners in doing that, where there's just so much need to deploy more in order to meet the need of the market. As we continue to see growth in solar, wind and particularly battery storage, at least in the near term, how do
- [10:55]
A
you think that changes over the second half of 2026 and into 2027 as the tax law changes and makes it more difficult for solar and wind to qualify for the ITC ptc.
- [11:08]
B
So that brings me to another finding, which is that we found that safe harbored wind and solar is quite significant. So our estimate of safe harbored wind and solar in the prior Section 48 tax credit regime is about 70 gigawatts and then total safe harbor capacity, we estimated about 170 gigawatts. That's safe harbored in any way, FIAC and other ways. And so there's quite a lot of tax credits that will come to the market over 26, 27, 28, 29 as those projects are delivered. And that will continue to support the tax equity market size, other dynamics there. And this is another one of the findings is that battery storage is categorically booming. Right? We are looking at a deployment in 2025 on a gigawatts basis of about 19 gigawatts. In the market, which is a 72% increase from 2024. And again, to use the analogy of cross cutting wins, there's so many factors that are pushing batteries along. Right. First of all, they got a standalone tax credit for the first time in 2022. We're seeing declining costs in battery prices, we're seeing improving performance, we're seeing high curtailment in in markets like California and Texas. That's propelling a lot of market signal. We're seeing demand from data centers and building batteries on site. And all of those factors together are coalescing to drive a ton of investment in battery storage that is showing up in the tax credit markets. So it's about 20%, 2025% of the tax credit market, including solar and storage. So standalone and solar and storage is one of the fastest growing segments. It is also showing up in the tax equity market. And to your question of what happens to the tax Equity Market in 2728 and so on, I think you will see that safe harbor pipeline start to work through and you'll see categories like battery start to take more of the share.
- [13:16]
A
It sounds like listening to you since I'm always reluctant to make any kind of predictions more than a year or two out of Rapidly things change in this market that at least probably through 2027 there's so much backlog and safe harbor equipment there that the market may continue to grow significantly at least through 2027.
- [13:37]
B
Yes, we expect the market broadly. So tax equity markets specifically will continue to stay stable and or grow slightly based on the figures that I just shared and the growth of storage as a tax equity segment. The market broadly of direct transfers will continue to grow in part because of increasing diversification. So we're just seeing so much more of the market come from categories like advanced manufacturing, clean fuels, nuclear, critical minerals will be a larger segment as more investment happens there. And so the market will continue to shift in its composition as we see the wind and solar credits for new projects started after the middle of this year go away. There's still so many credits associated with other parts of the clean economy.
- [14:29]
A
Yeah, we, we just released a podcast on Z which seems like now should get easier to transact on given the additional guidance. One wanted to get an idea from you if, if you think that is true and if you're seeing any trends there and then also what you're seeing on Q for carbon capture, no doubt
- [14:48]
B
we are seeing more 45Z. So clean fuels as a segment of the market is between 3 and 4% of total volume that is positioned to grow. Based on the guidance and investments in the category as far as 40Q is concerned, there are not. It's still not making up a meaningful part of the tax credit market. Obviously there have been some significant tax equity announcements in 45Q, but the project pipeline is not yet delivering much in terms of tax equity and tax credits. And of course, tax equity and tax credits are the most lagging indicator. Right. Because it is the projects that are placed in service or close to it. You would see more activity in earlier stage construction financing, for example, around categories like that.
- [15:38]
A
Yeah, it seems like that is one area where there's potential to make up for or any declines in other areas if some of these 45 projects actually get placed in service.
- [15:49]
B
Yes. And of course you have these broader macro dynamics that are really kind of reduced to two if you're being most simple. One is energy demand growing and rising electricity prices, which is pulling the market. And the second is reshoring of manufacturing capacity where just so much has happened over the first half of this decade. So if you look at the charts on manufacturing investment by Technology Starting in 2020, you go from a very small amount of manufacturing investment in battery and solar supply chain to a significant amount between 10 and 15 billion per quarter that was happening in the 2024, 2025 period. It has reduced somewhat from peaks. So we're not at the same level in Q4 that we were in Q4 24, but this is cumulative. Right. So the manufacturing investments happen and then the projects come online. And when the projects come online, you have capacity that exists within the United States. And we've seen in the solar module supply chain, for example, that we went from something like 6 gigawatts of total capacity in 2022 to 90 gigawatts today. So the market just has so much more depth to it in terms of the amount of capacity that we have to meet the need that is coming from rising energy demand and electricity prices. And from a tax credit perspective, this is one reason why we are so bullish and expect continued growth in X once the manufacturing lines are running. As long as there is demand for the product, every new facility that comes online adds to the quantum that sold in the market for that year.
- [17:39]
A
So I distracted you a little bit there. I don't know if you got through your eight points or.
- [17:43]
B
We didn't go through all eight. I can do a couple of the ones that we missed along the way because we were jumping around a little bit. But tech neutral credits entered A choppy market. So there was a definite investor preference for the existing or the legacy versus the tech neutral credits. We saw about a point and a half to a two point difference in pricing for similarly situated credits in ITC and PTC and across the credit rating spectrum. So that was definitely a theme in the market. It's been reported somewhat that the tax equity market has been much slower to take up the tech neutral credits. I think we will see more of that as we start to move through the safe harbor pipeline. We of course will. We have to. Another finding that we found in the report is that tax credit buyer participation has brought in quite a lot. So we obviously started with the existing tax equity investors as the core of what was the early market for transfers. There were about 50 or so of the Fortune 1000 that participated in the market in 2023. And by the way, Todd, here, I'm using public filing data that comes from the Fortune 1000 public filings to the SEC. So, so we had about 50 participants in 2023. We had about 150 participants in 2024. We're now up to about a quarter of the Fortune 1000 that has participated in the market. And it's pretty broadly distributed. So we have financials making up an outsized share, energy makes up an outsized share, as does industrials. But we see consumer discretionary, healthcare, it, consumer staples, utilities, all participating in the market. And I think this is now reaching a tipping point where it's really a question of why aren't you participating in the market. And we see some pretty significant effects in terms of effective tax rates of those that participate versus those that don't. The average ETR effective tax rate of those that don't participate is about 25 and the average of those that do is about 22. So there's about a 3 cent reduction in the effective tax rates that are paid by participants in this market versus those that aren't.
- [20:00]
A
Direct correlation there, you could say, based on the pricing.
- [20:03]
B
Yes, absolutely. So there are a bunch of other findings in the report, Todd. It's about 90 pages. We find we go in depth on availability of tax equity into different segments. For example, finding that a significantly higher portion of utility solar tax equity is retained by the tax equity investors versus community solar. That's again something that the market knows well by experience. But we find that about 51% of utility scale solar is retained and that number in community and CNI is about 25%. And so much more of the activity and preferred equity investments is happening in the Community and CNI segments, it's a really stark difference. So we see something like a 35% volume of transfers coming out of Community and CNI that are coming through a preferred equity or subsequent to a preferred equity investment. We see none of that in Wind, for example. In Wind you see a significantly higher portion that is retained in traditional tax equity, retained as part of hybrid tax equity, or sold out of the market through a traditional transfer structure. So there's a lot of information on that. We have detail on the insurance markets which have convulsed a bit in 2025. The cost and availability of insurance for certain segments and around unknown regulatory issues like Fiat has been a real headwind for the market, particularly around things like those preferred equity structures and larger step ups and that is driving market behavior. We're seeing step ups really start to come down and converge around where insurance is available. And then we have pricing that goes to the level of the credit across all of the different credits that we see trading on the market. So we have that for 24 and we break it out by size segment.
- [21:56]
A
So there's one of the reasons that, or the primary reason I should say that we wanted Debian is I absolutely love it when the guests can give specifics and get into real numbers that are actionable by the audience, which you've done in spades here. If people want access to this report, how do they get it?
- [22:15]
B
Come talk to us. So if you're an existing client and many of your listeners are, then you probably already have it in your inbox. If you're not, you can find it on a banner on the top of our website and fill out the form and you can download at least the publicly accessible version of it. We are definitely happy to share greater depth of the report. Again, we will be able to speak at the credit type level, size level, financial characteristics level of all of the potential sellers in the market. So are very happy to engage directly with clients that are interested in understanding more about what the financing picture around their projects will be, how tax credit pricing will influence the cost of other capital. We are increasingly advising developers and manufacturers that are accessing the market on how to do so and what to expect in their process. We're helping to run some processes for people. We are an active tax equity investor, as I mentioned, and facilitating other kinds of structured investment. And then we are investing heavily in 26 in our data and our software, so producing a lot more reports like this and then also have really invested in building the industry leading data room. And AI platform for transactions, which everybody who is transacting on Crux is able to use with increasingly more depth in the feature set.
- [23:44]
A
All right, so just kind of, in conclusion, a couple questions for you. One, are you finding that as a result of the transparency that you're bringing to the market, that pricing is coalescing around specific numbers where, you know, it's, it's not like going in to negotiate for your car and you don't know what the person paid that's standing 20ft away from you because they could, they could easily pay a thousand dollars more than you. Because it just depends how skilled they are negotiating and how tough the salesman was and how bad the salesman wanted to make his or her quota at the end of the month kind of thing. And because this information is becoming more public, that one, speeds up transactions and two, just, there's less emphasis on skill negotiating and more on let's just get this deal closed.
- [24:30]
B
Yes. So we have seen conversion on pricing temporarily. Right. Like I, I would say that in eras of the market we see pricing converge and, and the eras are unpredictable. Like the first half of 24 was a different era than the second half of 24. And the dynamic there was that significantly more buy side interest came into the market in the back half of 24 and that drove up credit pricing in the back half of 25. We saw less buy side interest in the market. That led to some reduction in price as we talked about, but it led to less than frankly we anticipated. And part of that is because sellers do have a choice of when they sell and how quickly they do it, or I should say, most sellers have that choice. And so the result of that is we saw inflation X, for example, a number of credits clear in the market and sellers in the market that were smaller and had working capital issues be the ones that had to take pricing in the back half of 25, we saw a large number of the OEMs stay out of the market. We think about 3 to 5 billion of 45x20, 25, 45x remains unsold. And that's partly because they may have come to the market, seen pricing they didn't like and weighted. And so I think, Todd, we can tell you with accuracy what the credit would transact at in the market if it traded today. Right. We have algorithms and the ability to look at a broad data set and tell you what we think fair pricing is going to be on that credit if you transact today. The thing we can't tell you is when you will Transact. And there is definitely a, there's a forward estimate of that people have to make as to whether or not the market is going to be deeper and more liquid in the future than it is today. And what I can tell you today is that in 2025 credits there is a lot of supply. So 10 ish billion dollars worth of credits, 3 to 5 billion of that being 45x that are 2025 credits that will need to trade in 2026. That's a higher volume than needed to trade in 2025 of 2024 credit credits. And buyers are really interested in those credits. So that market is active. The market on 26 credits is less active. And so if you are a 26 seller and you want to lock in a price today because you think that market pricing may deteriorate in the back half of the year as even more volume comes into the market and we see buyers that bought strips in the past be out of the market. Whatever your set of predictions would be, to trade quickly, you'll probably have to reduce your price, right? And so there's just these levers that people need to pull that have to do with their internal cost of capital, their working capital issues, their ability to self monetize that will define what volume comes to the market when. And it it defines less what the temporal pricing in the moment is that is more determined by who is transacting because the market is either liquid or they have to sell.
- [27:49]
A
Have you seen big differences for example in what a PTC will trade for? An ITC will trade for what it'll trade for if it's generated by a solar project versus a standalone battery storage. Or is it? The prices are fairly comparable across all the technologies and it's really more who's the seller and when do they want to sell.
- [28:11]
B
It is more related to ITC versus PTC where PTC trades at a premium to ITC credit rating of the seller where IG credits traded a significant premium to those that are sold by non IG and size of the deal. Once you normalize those factors, you will tend to see PTCs sold by 150 to $300 million. Wind facilities and solar facilities trade at comparable levels. That was also true of 45x in 2024. In 2025 that became less the case. So we saw more diversion of 45x pricing versus other PTCs not huge like buyers still like 45x and like that. It's a PTC but it traded at a discount to wind PTCs because of some of the considerations and buyers not being as interested in participating in the absence of absolute Clari on fiat. And that dynamic, as I mentioned, just led a lot of the supply to wait in the market. So generally speaking to your question, like trades for like. As guidance comes out, it allows for reversion of like to like. I I anticipate that we'll see something similar with Z, which has traded at a discount to other kinds of more established production tax credits. But I think as the market gets more comfortable, as more volumes come through, and as we exist in this now post guidance period, you'll start to see normalization of pricing.
- [29:49]
A
All right, well, that I'll take as the last word because I could probably talk to you for another half an hour, but then you may not come on next quarter.
- [29:57]
B
Always happy to come on, Todd. Love the pod, and thanks for having me.
- [30:03]
A
You can find us online at WW www.projectfinance.law or send us an email at currenttownortonrosefulbright.com Please rate, review and subscribe on Apple Podcasts, Spotify or your preferred podcast app. Our show today was produced by Emily Rogers.
- [30:19]
B
Stay ahead of the Current.