Carbon Capture: Optimizing the Value of 45Q to Improve Deal Structures and Project Economics
During Infocast’s CCS/Decarbonization Project Development, Finance & Investment Summit held July 23-25, 2024 in Houston, Linklaters tax partner Michael Rodgers moderated a panel on Optimizing the Value of 45Q to Improve Deal Structures and Project Economics in carbon capture and storage (CCS) projects with Bryen Alperin of Foss & Company, David Heikkinen of White Hawk Energy, Jerry Smith of Atlantic Global Risk and Michael Yurkerwich of CRC-IB.
Post-IRA, there is a plethora of tax credits and technologies for which such credits are available, and even more ways to monetize those credits. This is especially apparent in the case of the Section 45Q credit for CCS projects, which as a result of the IRA, increases not only the dollar value of the credits (provided prevailing wage and apprenticeship requirements are met), but effectively turns the credits into refundable credits, by allowing for a “Direct Pay” option during the first five years after the project’s placed-in-service date. The panel discussed how the market is responding to these opportunities and how developers and investors are monetizing Section 45Q credits, highlighting the following key points.
- Creative 45Q monetization structuring is possible, with timing paramount. For savvy investors with carbon removal, additionality and transferability in mind, the timing of when credit monetization will happen influences the capital stack. In less-than-ideal scenarios when tax equity is not able to commit capital early on (as has been the case with CCS), hybrid structures known as transfer flips (“T-flips”) can help get deals done, while nonetheless putting risk on what credits will sell for in the future. Additional tools include monetizing tax losses, leveraging Direct Pay and direct transferability, which allows developers and investors to make project decisions earlier and shortens the sales cycle. Investors can find credit discounts by buying current-year credits, and tax savings can be redirected into buying qualified offsets in the burgeoning market for non-tax credits and offsets.
- Operational or industrial risks pose challenges. Concerns about the leakage risk of carbon dioxide into the atmosphere, which would engender a possible recapture of Section 45Q credits, pose marketability challenges. Insurance policies that take these risks into account can meaningfully protect against some of these concerns and are putting investors at ease. Additionally, in the transfer market for tax credits, there are many credits available as alternatives to Section 45Q credits, putting Section 45Q credits at a disadvantage when compared to other credits that do not carry with them a risk of recapture.
- The once-touted Direct Pay program has not emerged as the game changer many had hoped for. Since the Direct Pay regulations were released in March, concerns regarding the timing of receipt of refunds under the Direct Pay program have loomed large. Accordingly, it has been particularly difficult for projects to borrow against Direct Pay, so developers of CCS facilities are turning to other means of monetization. While Direct Pay is still appealing as a type of “last resort”, the certainty regarding the timing of receipt of funds present in tax equity and transferability deals seems to be winning the day.
- Market uncertainty marries an optimistic appetite. Although some CCS projects may encounter skepticism for environmental concerns around leakage and permitting, project timelines and possible delays, insurance tools exist to support project execution certainty, and tax equity and transferability have helped provide certainty regarding tax credit monetization. CCS projects must find the right balance between the cost of capital, risks and ability to execute. Near-term commitments are easier to finance than those further out from development.
Overall, careful understanding of the project and monetization structures for Section 45Q credits is necessary in the valuation, costs and financeability of CCS projects.
