Crux's Alfred Johnson Outlines Trends in the Market for Transferable Tax Credits

Sponsored by: EDF Renewables

The Inflation Reduction Act has revolutionized how the energy transition is being financed. The IRA is chock full of tax credits and other incentives designed to spur investment in renewables and one key aspect of the IRA pertains to the transferability of those tax credits. Alfred Johnson, the co-founder and CEO of Crux, joins the show to discuss how the market for transferable tax credits is taking shape. The team at Crux recently released their Mid-Year Market Intelligence Report, which details how the market for transferable tax credits is faring so far this year.

Alfred also offers his insights on how the market for transferable tax credits is set to grow -- regardless of political uncertainty -- and what firms can do to make their tax credits 'highly transactable' in a rapidly evolving market.

And finally, Alfred tells the remarkable story of how part of his inspiration to co-found Crux came from a source that is VERY familiar to listeners of this podcast.

Key highlights
Background information at Alread and the founding of Crux - (3:34)
How Crux's 2024 Mid-Year Market Intelligence Report was compiled - (6:41)
The 6 key takeaways from the Mid-Year Market Intelligence Report - (9:31)
What's driving growth in the market for transferable tax credits - (11:18)
Participation in the market expands beyond big banks and Big Tech - (14:27)
How long it takes deals to close - (15:46)
Regions where deals are originating - (17:55)
How the market is coping with political uncertainty - (19:13)
Possible headwinds the market might encounter - (20:28)
How big will the market be by 2030? - (21:56)
How organizations can make their tax credits highly transactable - (23:43)
Where Alfred got some of his inspiration to co-found Crux - (28:05)


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Transcript

(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)

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Sean McMahon

What's up everyone and welcome to the Renewable Energy SmartPod. I'm your host, Sean McMahon, and today we are going to be talking about one of the many ways the inflation Reduction Act has revolutionized how the energy transition is being financed. The IRA is chock full of tax credits and other incentives designed to spur investment in renewables, and one key aspect of the IRA pertains to the transferability of those tax credits. 

We've discussed tax credits on previous episodes, but to dive deeper into the trends that are shaping this brand new market for transferable tax credits, I'm going to be joined today by Alfred Johnson, the co-founder and CEO of Crux. Crux is a sustainable finance technology company that's modernizing the way clean energy and decarbonization projects are financed in the US. The platform Crux has created brings buyers, sellers and other intermediaries together to transact and manage transferable tax credits in one marketplace. The team at Crux recently released their Mid-Year Market Intelligence Report, which details how the market for transferable tax credits is faring so far this year. Alfred and I are going to dig into the key findings of that report and chat about other trends when it comes to transferable tax credits. 

Looking ahead at the calendar for this show, we're going to be sticking to the finance theme for a bit as I welcome to the podcast Luis Silva, the Chief Financial Officer of EDF Renewables. Luis is going to be a great guest because he'll be able to offer the developer's perspective on what's going on within the renewables industry when it comes to how all these deals are coming together and being financed. 

I'm also excited to announce that we're going to be catching a glimpse of things from the perspective of the United States government. Chris Creed, the Chief Investment Officer at the Department of Energy's Loan Programs Office, will be stopping by to talk about the work being done at the LPO to responsibly deploy the billions and billions of dollars in capital the Biden administration has made available to accelerate high impact energy and manufacturing investments in the US. 

So yeah, there's a lot of great content coming your way. And as always, just a friendly reminder that if you want a roundup of renewable energy news and insights delivered to your inbox each day, head on over to SmartBrief.com and sign up for the Renewable Energy SmartBrief, or you can just click on the link in today's show notes.

Right now, let's get things rolling with Alfred Johnson from Crux. Alfred, how you doing today?

Alfred Johnson  03:32

I'm good. Sean, thanks for having me. 

Sean McMahon  03:34

Yeah, I've been looking forward to having the show. I've seen your organization's name in the headlines lately. So for some of our listeners who might not be familiar with Crux, what do you all do?

Alfred Johnson  03:44

So Crux is the sustainable finance company that's building the market for transferable credits. The transferable credits were created by the inflation Reduction Act. There'll be no surprise to your listeners, but the mechanism there is that renewable energy companies and manufacturers earn a ton of credits, many of which they aren't able to use because they don't pay enough in federal taxes, and so there has been a need for them to monetize those credits, which is now available through transferability. So the law makes that new market available, makes it large, and we are going to be we already are the central order book in that market, where buyers, sellers and intermediaries are able to connect and transact. Okay, tell

Sean McMahon  04:30

me a little bit about your background. Obviously. Crux is a relatively young company, the IRA is only a couple years old. What were you doing before this?

Alfred Johnson  04:38

So I started my career Sean in the federal government. I was at Treasury working on the financial crisis response, working for a guy named Lee sacks, who was leading that team for Secretary Geithner, joined in March of 2009 as we were working on the stress tests and the recovery plans for the banking sector. I then started to work on the recovery. Act, which was my first exposure into these clean energy incentives, that law, at the time, was one of the larger climate laws that had ever been passed. Went into the White House, worked for Bill Daley when he was President Obama's Chief of Staff, which is especially fun because we just announced that bill is going to be a senior advisor to the company. And then I went to BlackRock, working in structured finance around the European financial crisis, but also with banks on regulatory capital issues, among other things. Got into tech after that, Sean built and sold a marketplace software company before with my same co founder, Alan Kramer, who is my co founder here at Crux and then I went back to Treasury, working for Janet Yellen as her deputy chief of staff, doing the covid response technology, financial markets work before leaving in the summer of 22 right before the IRA was passed, and then we started the company.

Sean McMahon  05:54

Wow, I gotta say, you've been in a lot of hot spots the financial crisis, covid, all these places, irons in the fire everywhere, I guess,

Alfred Johnson  06:01

Yeah, it, well, it's it's particularly interesting to be in the government when things in the economy aren't working. And I have considered myself privileged to be in the seat with the team that was working on the financial crisis, especially because it was such a unbelievable orientation to the way that markets can form and the way that markets can break. And so I take a lot of that lessons into the work that we're building here as we try to form a deep, liquid and healthy market for these tax credits.

Sean McMahon  06:34

Okay, now that's a perfect segue to my next topic. Here you're talking about the market for tax credits, transferable tax credits, actually. So you and the team at Crux recently put out the 2024 mid year market intelligence report. We're gonna have a link to that in the show notes for any of our listeners to check out. It's tremendous report. So what does that report encompass?

Alfred Johnson  06:52

That report covers what we estimate was nine to $11 billion of transactions that happened in the first half of 2024 in order to make that estimate, we identified $6.8 billion of specific transactions through three sources. One is publicly announced deals. Two is a survey that we did that had more than 100 responses. And three is Crux platform data, where we're seeing quite a lot of bidding activity. And in fact, Sean, on Tuesday of this week, we saw $1.3 billion of bids on just that day on the platform. So we're able to extract a lot of insights from all three of those sources. We're able to identify that very large amount of deals that we know transacted in the first half of the year, allowing us to estimate the nine to 11 billion, and further estimate that in 2024 we think 20 to 25 billion of transferable credits will transact. The report covers the volumes in the market, the composition of that volume. So we're seeing a larger share of wind, solar and storage in the first half of the year than we saw in the back half of 2023 but as the year goes on, we expect more smaller deals to transact. We expect more new technologies, categories like advanced manufacturing, to transact in good size. And you asked what what is in the report? One of the things that we spend a lot of time looking at and talking about is pricing data across sizes and technology types, and we produce some curves on pricing for ITCs investment tax credits and production tax credits in the report, as well as data on things like insurance and risk management. So it's pretty comprehensive. That

Sean McMahon  08:35

That sounds like a tremendous report. I want to get to some of the High Line takeaways in a second here, but you mentioned more than a billion dollars in bids on Tuesday. We are recording on Thursday, August 8, Tuesday, the markets had a little fun. Took a kind of a big downward turn. It's since rebounded. But any correlation between that, or is that just a coincidence?

Alfred Johnson  08:53

I think it's mostly a coincidence. It's indicative of a theme that we have seen in this market since the third quarter of last year, where we're seeing increasingly more participants in the market on all sides of it, sellers coming and looking to sell their credits, buyers that include everybody from family offices to the fortune 50 participating and intermediaries of all different shapes and sizes with whom we partner At Crux to participate in the market, and and $1.3 billion is a high water mark for us, but is indicative of a broader Upswing that we have seen in activity as 2024 has gone on.

Sean McMahon  09:31

Okay? And then getting back to the report itself, you did a great job of outlining what's in it, how you gathered the data. What are some of the key takeaways?

Alfred Johnson  09:38

So there are really six big findings in that report. Sean 120, 24 is off to a really strong start, and we expect a stronger finish. Two deals are skewed towards established technologies in the first half of the year, I mentioned that we're seeing a lot of wind, solar and storage. Just to put numbers on that, that makes about 75% Percent of the sample in 2024 those traditional technologies made up about 50% of the sample in 2023 so what that shows is that utility scale projects and those established categories transacted in the first half of the year in a disproportionate share. Average pricing that we see in 2024 is a bit higher than what we saw in 2023 that is largely indicative of this sizing dynamic, where larger credits tend to trade at a premium to smaller credits. So that is lifting the averages that we see in the market deal size and insurance continue to play a dominant role in pricing, and the market is getting increasingly competitive. We're seeing many credits that list on Crux receive a bid within the first week. Our latest data on that is that 77% of credits that get a bid get it in the first week, and many are seeing multiple bids. And then the last big takeaway, the sixth, is that buyers are starting to look forward beyond 2024, so some of that 1.3 billion that we saw on Tuesday were bids on 2025, and 2026 credits. The market has not yet been liquid in future years, but I think we are getting to the place where buyers are starting to be more perspective in terms of their activities in the market. 

Sean McMahon  11:18

Well, it sounds like you're describing, you know, momentum in this market. So what would you attribute that to? Is this one of those things where it's just companies we've gotten a couple years and Treasury came out with enough guidance on how to execute on all this, or are people kind of rushing to do it in case there's political change? Or what do you think are some of the drivers here? 

Alfred Johnson  11:39

So the market for renewable energy development in the United States was growing exponentially in the decade that preceded the IRA. And then in the summer of 2022 Congress passed and the President signed the largest piece of climate legislation ever passed by any government ever so that that subsidy was added to a market that was already exponentially growing and provided to different categories of technology than got it before. For example, advanced manufacturing, so the production of wind components, solar components, batteries in the in the United States that gets the 45x tax credit that's anticipated as a share of the market to produce hundreds of billions of dollars of tax credits within the period of the IRA. So there's a lot of forces, tailwinds, that are driving the supply in the market. Buyers have historically been constrained in the traditional tax equity market to mostly the largest banks that have been the providers of that capital, as people have become more aware of the program on the buy side, many corporate tax directors, CFOs, even CEOs, are engaging In the opportunity here to invest in sustainability while managing tax liability. And I think it's one of these things where now, if you're at a conference of tax directors, everybody is aware of the program. Many have participated in it. The credit transactions are much simpler than tax equity deals. We did a deal between a utility seller and fortune 100 buyer that closed in 22 days. So this is a transactable market with high quality supply and a lot of duration to it as the program plays out over the decade that the IRA is in place and even longer, given the fact that the IRA provides the credits for 10 years, or until we get to 25% of 2022 greenhouse gas emissions levels. So people are expecting that the program will be in place for a long time. 

Sean McMahon  13:50

We'll be right back. 

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Sean McMahon

And now back to my conversation with Alfred Johnson from Crux. 

You mentioned how initially banks were the big player in these markets, but you've also, in this report, outlined how there's growth into other sectors. Are we talking about multiple sectors, or are things still kind of just confined to, you know, the Amazons, Google's the metas. You know, big tech,

Alfred Johnson  14:44

Tech companies, for sure, are active in the market. Google had been active in the tax equity market before. And in fact, our Chief Commercial Officer, Rob Parker, was doing tax equity at Google in the 2010 so they have been a participant. Banks remain a really critical participant in the market. Traditional Tax Equity isn't shrinking, it's growing. It's just complemented by transferability, and increasingly, we're seeing the two tools used in concert, as far as new buyers, substantially all of our deals have been closed with buyers that had not participated in the traditional tax equity market before, and those include manufacturers, food and ag companies, insurance companies, other kinds of financial services companies, family offices. So there's really good indication that this market is broad on both sides, and that particularly on the buy side, there is depth of demand coming from lots of different industry segments. 

Sean McMahon  15:43

That sounds like it's good for the market, for sure. And you mentioned that, you know, a recent deal closed in 22 days. You referenced that as if it's fast. I have no idea how long it takes the average deal to close. So what is that? Is that super fast? And what? How long does it take the standard or normal deal to close that is super fast? 

Alfred Johnson  16:00

So the traditional tax equity market would typically take six to nine months in order to close a deal. So we're talking about a significant reduction of time, energy and effort required to close the deal. And you know, if you think about 22 days as as business days. You're really talking about a pretty narrow window of time where the partners on both sides are looking at the deal, understanding the diligence, understanding the attributes and transacting that was a production tax credit sale, and we do see about 45% of production tax credits close within six weeks, they're simpler deals to transact than ITCs, investment tax credits, though, investment tax credits are overwhelmingly still closing in less than three months. 

Sean McMahon  16:49

Are there any other types of tax credits in the IRA that are more complicated? I mean, you kind of went over the PTCS and the ITCs, you know? What? About some of the manufacturing stuff or or domestic, you know, I guess domestic content, things like that.

Alfred Johnson  17:00

Broadly, the credits fall into the section 48 investment tax credits, or section 45 production tax credits. There are 12 different specific tax credits that can be sold for cash that run the gamut from renewable energy infrastructure associated with EV charging to the electricity credits associated with solar, wind, battery storage, bio energy, advanced manufacturing credits are a quite substantial portion of the market. There are also credits for nuclear. We have a very large nuclear deal listed on the platform right now. We expect some nuclear credits to transact in the back half of this year, they're credits for hydrogen and carbon capture. So it's really all of the different activities and infrastructure and the production of those components and power that are necessary to evolve the energy system. 

Sean McMahon  17:55

And I want to talk for a second about where all these deals are coming from. Do you see any kind of regional trends or specific states, you know, Texas, California, things like that.

Alfred Johnson  18:04

Yeah, the first big trend that I would observe is rurality as a location where projects are overwhelmingly getting built. The Department of the Treasury has produced some information on the census tracks that are receiving investment, they've shown that those census tracts tend to be more low income than other census tracts. They tend to be outside of big cities, and that, of course, makes sense if you're building a large wind or solar facility that is overwhelmingly likely to be in an area that has space, but manufacturing facilities are also getting built all across the country. We're seeing a lot of battery manufacturing in places like Georgia, seeing solar panel manufacturing in places like South Carolina. There's a huge amount of battery storage installation that is happening in Texas. There's a lot that's been produced and written about that. But overwhelmingly, we're seeing the production and investment happen across the board in every State of the Union, and I think that is translating into more popular support for this program that will enhance its durability.

Sean McMahon  19:13

Are any participants in the marketplace out there particularly concerned about potential political change? If you know what I'm saying in November.

Alfred Johnson  19:21

Certainly, it is on everybody's mind, as it is for many citizens right now, I will say this week has been a very productive one. On this front, there was a letter that was produced by 18 Republican members of Congress and sent to Speaker Johnson yesterday that advocated for the continuation of the tax credit program, saying that those members represented districts that had disproportionately benefited from the IRA that was driving private investment, and that if Congress were to take away those provisions that would have a direct impairment on jobs manufacturing and the. Development of cleaner energy in a world where we're seeing energy usage and demand go up, not down, I think that we're going to see continued broad based support for the program. So you know, even though people are rightly attended to the potential that policy can impact the shape of the market, people are progressing as though the market will be in place for a long time, and then it's going to drive a lot of investment in the clean energy infrastructure and manufacturing. 

Sean McMahon  20:28

And so it sounds like there's a lot of momentum in certain corners of this. And you talked about, you know, tailwinds, obviously, from 10 years of growth coupled with the IRA passes, it really just kind of put on a perfect launch pad. But are there any headwinds that might be out there?

Alfred Johnson  20:41

Yeah. So this is a market, and it will be subject to supply and demand, and we're looking at a very large increase of credits that needs to come to market and be sold. So there are very good indications of the health of the market and the depth of demand on the buy side, but we went from a seven to $9 billion market in 2023 to what we think will be a 20 to $25 billion market in 2024 that could as much as double again the following year and and as the market grows like that, there are different kinds of credits that will need to transact. There are forces like policy and the macro economy which will influence both the production of credits and also the appetite from corporate buyers to purchase them. So there are all sorts of factors that will influence this market over time, and I think there people are probably a little monolithic in their thinking that the market will always trend in a singular direction and that there won't be variability. I expect there will be some variability over time,

Sean McMahon  21:52

And now you're on record for saying there will be variability. I noticed that the mid-year report that your team put out estimates the 2024 market to be about $20 to $25 billion. Where do you see that in 2030?

Alfred Johnson  22:06

So Evercore ISI has done the best research on what the uptake of the credits will be over time, and in the report that they put out a couple months ago, they have the potential supply of credits in the market going above 100 billion by 2030 now, some of those credits will be monetized via tax equity. Some will be elected pay so redeemed directly into the government. And those compositions are unknown right now. So I think the best way to think about the potential size of the market is to think about what uptake could be. And in that context, it gets quite large. 

Sean McMahon  22:47

But you're not going to put a number on it for me, are you?

Alfred Johnson  22:50

Yeah, I think easily, based on the growth rate that I see in this market right now and the number of projects that have been announced in advanced manufacturing and infrastructure of various kinds. I think it is entirely plausible that this market reaches $100 billion in the next few years of annual credit supply. And you know that that is being levered. The credits are being levered many times by private dollars that are getting invested in the projects that are made more economic by the fact that the credits exist. Goldman has the best numbers on that. They estimated that the IRA would drive $3 trillion of renewable energy and manufacturing infrastructure over the 10 year period. So there's just a ton of building that's being done right now. 

Sean McMahon  23:37

All right. Well, we'll bring you back here in a few years and see if we top that 100 billion dollar mark.

Alfred Johnson  23:41

Let's do it. Sign me up.

Sean McMahon  23:43

Okay, one other thing I spotted on your website as I was looking at the mid year report, and this kind of goes back to how there's kind of new players entering the market all the time from different sectors. So you have a paper there that's about how to make your tax credits highly transactable in an increasingly competitive market. How does the a company go about doing that?

Alfred Johnson  24:01

So we do see some differentiation in the market in terms of the credits that receive an extraordinary amount of buy side interest, and those generally fall in a couple categories. So credits that are sold by developers that have a great track record, that are production tax credits as opposed to investment tax credits. PTCS will tend to trade at a premium versus ITCs. Larger increments tend to trade at higher prices than smaller increments. Established technologies tend to trade a point or two higher than less established technologies when guidance is not yet out on a category of credits that can impair the price that those credits see in the market. So there are a bunch of different factors there, generically to make your credit highly transact. And to have success in the market, we find that preparation really matters. So sellers that come prepared with the materials that they will need for diligence are ready to have high quality conversations with buyers, do better in cases where the credit is likely to require insurance by the buyer sellers. Should have conversations with those insurance providers. They don't need to secure a policy, but it's useful to understand what that dynamic will look like relative to your credit. So there are a bunch of things like that that we are, frankly in his assisting at Crux with things like due diligence checklist that we make available within the product, standardized documents that we make available to buyers and sellers to be able to transact more efficiently. So we're leaning in quite aggressively to make sure that people have success when they bring their credits to the platform. 

Sean McMahon  25:58

Now you mentioned how you kind of provide a list for sellers coming in of what they should have ready for a transaction. What else does Crux do behind the scenes? I'm really curious how you do what you do.

Alfred Johnson  26:08

So sellers will come to Crux. We'll have a conversation about the pipeline of credits that you're looking to sell. We'll build a strategy together. You'll list your credits on the platform. That's a short digital teaser, including fundamental information about the credit. That credit then gets posted to the Crux platform. It's propagated across all of the instances of Crux. We send automated emails out to people that are in the system about a new credit being available. People will then bid on the credit. I mentioned that we see credits that receive bids. Generally receive those bids within the first week, and often seeing multiple bids as the seller you'll you're able to process what you're getting from potential buyers. That's both the price that the buyers are willing to pay, but also things like who the buyer is, payment terms, things like that. You will then down select to a number of partners that you might want to work with. Everything is at that point, anonymous and non binding, but you'll say this bid that I got from Sean, or this bid that I got from somebody that I don't yet know is named Sean, looks good to me. And then you'll have a conversation on the back of signing NDAs and uploading them to the platform, and then the technology is helping you to facilitate the process from end to end. We've got a purpose built data room. We've got standard transaction docs that are available to you within the platform. And then we're not we're not going away. This is both people and technology and process. So we will stay with you as the seller, from end to end, helping you navigate the process. And on the same side, we have other people that are working with the buyers to help them navigate the process and and have the right conversations at the right time. And that's how we've been able to close deals in as fast as 22 days in that example that I mentioned.

Sean McMahon  27:58

Well, geez, this sounds definitely sounds like exciting times for you, and what's going on in the marketplace.

Alfred Johnson  28:05

Yeah. So Sean, I have to say, this podcast has been an important source of information from even the earliest days of crocs. I told the story on another podcast about how when I was thinking about this idea, spent a lot of time walking my dog around, listening to podcasts and listen to this one in particular, right around the time that the IRA was passed. You had Lauren Collins on from V and E, where at the end of it, Lauren makes this very prescient call for a marketplace to form around the credits, and I then sent her a cold message on LinkedIn, and was like, that was a brilliant observation and great, smart podcast that you did. So I have Lauren to thank, and you to thank for the idea that has led to the formation of Crux.

Sean McMahon  28:56

That is amazing. I love that. And yeah, you nailed it. Lauren is a great guest. We've had her on here multiple times. And, you know, if I'm not mistaken, I think that was actually one of her bold predictions. You know, it's what I put a lot of guests here to ask for these bold predictions. So now you're telling me that you know you were listening to Lauren make her a bold prediction, and now you're kind of making it come true. I'm sure she'll be thrilled to hear that.

Alfred Johnson  29:18

Tremendous insight, tremendous foresight. She's a great lawyer.

Sean McMahon  29:22

You're absolutely right. And Alfred, I gotta say, that anecdote, it really warms my heart, and it's also a perfect way to wrap up this conversation. So I'm looking forward to hearing more from you and Crux in the coming years, but thanks for taking the time today to join me on this show. 

Alfred Johnson  29:40

Sean, it's been great to be on here the IRA turns two next week, and I think it's been interesting to reflect on all that has happened in the market in two years. And so thanks for having me on the show and giving me the opportunity to chat about with you.

Sean McMahon  29:55

Well, that's our show for today, but before we get out of here, I want to say one final thank you to the exclusive sponsor of today's episode, EDF Renewables. 

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