With the future for Biden-era energy incentives unclear, developers are rushing to get late-stage projects on the ground, and investors are turning to complex contract structures to manage policy risks.

Industry experts spoken to by Infralogic varied widely in their opinions of the likelihood Congressional Republicans could aggressively cut clean energy tax credits from the Inflation Reduction Act (IRA) of 2022 to pay for tax cuts prized by the Trump administration. But all said that the possibility of major changes to the IRA is significantly affecting sector activity.

Most glaringly, developers are rushing to begin construction on renewables projects to lock in incentives under current law, and investors are turning to complex contract structures to factor policy risk into valuations for projects that are unlikely to begin construction this year, experts said.

Kevin Smith, CEO at Arevon, told Infralogic the solar and battery storage developer is accelerating projects that are near the construction stage in order to lock in tax treatment under the current tax credit rules.

“We’re powering forward with our development activities. I think that’s what the industry is doing generally,” Smith said. “Projects that are later stage, they’re locking in the tax credits and start of construction.”

Smith added that for projects farther from operation, changes to the IRA could raise consumer prices significantly.

The renewables sector saw a similar dynamic in the final months of 2024, when many project sponsors were eager to begin construction or execute major capital deployments in order to secure eligibility for technology-specific credits that expired at the end of the year. Sponsors and developers at the time told Infralogic they preferred the familiarity and certainty of the legacy credits system to a new and somewhat unknown “technology neutral” clean energy tax credit ushered in under the IRA at the start of this year.

Now, an investment banker at an international financial institution active in the renewables space, tells Infralogic, projects that didn’t make the cut in 2024 are racing forward to start construction before Congressional Republicans pass a sweeping budget bill that could upend the incentives system.

“Developers are now rushing to get projects started, in order to lock in the tech neutral tax credits,” the banker said.

It’s complicated
The perceived safety of later-stage projects has contributed to a bifurcation in the market, where demand for early-stage projects is comparatively depressed, multiple sources said.

For earlier-stage projects, deals are still getting done. But buyers and sellers are increasingly turning to more complex contract structures in order to factor uncertainty into project and portfolio valuations, Elias Hinckley, a partner with Baker Botts’ Washington, DC office who works on energy, tax, and finance matters, said.

“Things are moving much more slowly, because people are trying to figure out how to balance who’s taking the risk around policy, especially if it’s a platform that’s got a longer term development pipeline,” Hinckley said.

Contracts where the final value of the transaction could change significantly depending on the continued availability of clean energy tax credits are becoming increasingly common, Hinckley said.

“We’re seeing a lot more structured sale-like approaches: Some things that look a little more like an earn out; some things where value for earlier-stage assets is very much tied to how much you can realize the current value of the incentives to support those assets,” Hinckley said.

Camilo Patrignani, head of infrastructure for private investment firm Libra Group, said it’s become very common for transactions on renewable assets that are farther from the notice to proceed (NTP) stage to include contingencies for reduction in IRA tax credits.

“The common thing that we see here is that anything you want to buy today, if it’s starting construction after this year, you’re going to want to have that contingency. That’s much less the case for projects at NTP,” Patrignani said.

Watching the calendar
For projects that are at or near the construction phase, a historic precedent against retroactive tax law changes in the US serves as a source of confidence for many in the market, Matthew Shanahan managing director at Marathon Capital said.

As the pages on the calendar continue to fall, Shanahan noted, the likelihood of any retroactive changes becomes smaller.

“While you cannot rule out a tax law change that is retroactive back to January 2025, that would be unprecedented,” said Shanahan. “And the longer we go without a tax bill passing – and I think it’ll be a while – then the more likely it is that they won’t do something that reverts to the beginning of the year. So the general feeling is that if the project is up and running, or has started construction in 2025, you’re going to be okay.”