This is an extract from a recent report, “The Risk Profile of Tax Equity Investments: 2026 Edition” published by ACORE. This report examines the performance and risk profile of tax equity investments in the US clean energy sector. 

Introduction to energy tax credits 

Energy tax credits play a central role in supporting investment and growth across the energy sector. Their continued availability, alongside evolving mechanisms for monetising these incentives, provides a supportive framework for further clean energy deployment.

a. The federal energy tax credit programme plays an important role in supporting new capacity additions.

Federal tax credits provide financial incentives for a range of energy sources, manufacturing technologies, and critical minerals, driving adoption across states, industries, and customers. They work by reducing the tax liability of project developers and investors, effectively lowering the overall costs of developing energy projects. This reduction in costs has been a key driver in the scaling of energy technologies over the past two decades. The availability of tax credits has helped facilitate $1 trillion in private investments into the sector over the past 20 years and currently supports the employment of over 650,000 Americans. It has also helped lead to significant technological improvements, increased system efficiencies and reliability, and cost reductions across multiple energy technologies.

The most significant tax credits for the clean energy transition in US are the Production Tax Credit (PTC) and the Investment Tax Credit (ITC). The PTC is a $0.0275/kWh perkilowatt hour (kWh) tax credit for electricity generated by qualifying technologies, paid over a 10-year period. The ITC is a tax credit that is based on 30 per cent of the project’s cost as a one-time credit in the year in which the project is placed in service. 

b. Tax credits for energy projects will remain available over the coming decade

While certain energy tax credits were modified by OBBBA in July 2025, they are currently available for nuclear, carbon sequestration, geothermal, hydropower, marine and hydrokinetic, certain waste recovery property, battery storage, domestic manufacturing, critical minerals, solar, wind, hydrogen, and clean fuel production. The tax credits will remain available for many of these technologies through 2035. Taxpayers must meet prevailing wage and apprenticeship requirements for entities to receive the full value of the credits, increasing the base credit by a multiple of five if the project pays prevailing wages and adheres to registered apprenticeship requirements. OBBBA introduced prohibited foreign entity requirements for the energy tax credits to prevent foreign entities of concern from benefiting from US tax incentives. In addition to the baseline credits, bonus credits are available for projects using domestic content or that are built in energy communities or low-income communities. 

Furthermore, tax credits can be monetised through traditional tax equity arrangements, transferability, and direct pay, offering flexibility for investors in financing energy projects. Transferability enables project owners to monetise tax credits by transferring them to other taxpayers with sufficient tax liabilities, such as corporate buyers. Direct pay allows tax-exempt and governmental entities to invest in clean energy projects and claim the equivalent amount of the tax credit in the form of a direct payment from the IRS. Direct pay is also available for taxable entities that would receive credits for carbon capture, hydrogen, and the manufacturing of energy components. Clean energy projects can also access accelerated depreciation to reduce taxable income. Qualifying clean energy facilities, property, and technologies may use 5-year modified accelerated cost recovery. Alternatively, for eligible property, 100 per cent bonus depreciation allows taxpayers to fully expense the capital costs in the first year. 

The role of tax equity investments in energy project finance 

Clean energy projects typically have a high level of contracted revenue, limited variable operating costs, and predictable cash flows. Often held in an LLC and taxed as partnerships, they allow project sponsors to sell non-controlling passive interests in the LLCs to tax equity investors in structured tax equity transactions. These structures are designed to allow tax equity investors to fund a large portion of the capital cost of the project and to receive a pre-negotiated rate of return, which consists primarily of the value of available tax credits and other tax attributes. Tax equity is responsible for between one third and two thirds of a clean energy project’s overall financing. 

a. Tax equity demand exceeds supply, with domestic banks providing most of it

The U.S. clean energy industry attracts over $45 billion in tax credit investments annually, including over $20 billion from banks through tax equity arrangements. Demand for tax equity is expected to accelerate as investors look to finance energy storage and other eligible technologies that continue to qualify for tax credits. Expanding the investor base is needed, although traditional tax equity structures remain complex and costly.

Domestic banks have traditionally provided the vast majority of traditional tax equity investment. Banks view tax equity as a low-risk asset class with attractive riskadjusted returns. Other tax equity investors in the market include insurance companies and other large tax-paying corporations. Passive activity and other legal limitations restrict the entities that can invest in tax equity to corporations, excluding other entities with large tax capacities, such as retail investors and individuals, or other pools of capital. 

b. Tax equity and transferability play complementary roles through hybrid structures 

Tax equity investors also help facilitate corporates into the tax credit transfer market through hybrid tax equity and transferability structures, where there is a tax equity investment provided by a bank with a portion of the tax credits sold to corporates, either by the sponsor or the tax equity investor. Tax equity investors monetise both the tax credits and other tax attributes of energy projects, such as tax depreciation, and are therefore an important option for project sponsors. In a typical tax equity transaction, the accelerated depreciation benefits provide an additional value equal to 10 per cent to 20 per cent of the project value. Tax equity transactions are also structured with long-term commitments from banks that developers rely on to raise construction debt. Tax equity’s comprehensive approach to the long-term capital needs of a project means that project sponsors get the most overall economic value from a tax equity or hybrid structure, rather than standalone transferability. 

Transferability supplements traditional tax equity and attracted roughly $25 billion in 2025, and much of this was deployed through hybrid structures. Traditional tax equity players also serve an important role in providing due diligence and syndication services for other corporates who buy transferable tax credits in hybrid structures.  Additionally, the transferable tax credit market will continue to grow to finance the range of clean energy projects that qualify for tax credits, and hybrid arrangements with banks who have expertise in the asset class and are putting their own capital at risk in the transaction will continue to create liquidity in this market. 

Tax equity structures protect investors from risks 

a. Partnership flip structures offer well-defined benefits for tax equity investors. They are the predominant U.S. tax equity structure for ITC and PTC investments. Typically, the tax equity investor provides 30 per cent to 60 per cent of project capital and receives 99 per cent of tax attributes and 5 per cent to 30 per cent of cash distributions until a predetermined yield or time-based benchmark is reached. In a yield-based flip, the benchmark is a specific IRR target; in a time-based flip, the benchmark is a fixed date. For time-based flips, the date cannot be earlier than five years after the project is placed in service. Thereafter, the tax equity investor’s tax allocations and cash distributions typically fall to about 5 per cent. PTC investors generally contribute after commencement of commercial operation, with some using pay-go structures, and typically have 9 to 10-year flip terms. ITC investors typically contribute 20 per cent around mechanical completion and 80 per cent after substantial completion, with 6 to 8-year flip terms. Investors receive tax credits, project cash flows, and accelerated depreciation, with tax benefits generally representing most of their total return.

b. The OCC has established criteria designating tax equity investments as loan-equivalent. In 2021, the Office of the Comptroller of the Currency streamlined banks’ ability to participate in tax equity financing under general lending authority. Under 12 CFR § 7.1025, tax equity transactions qualify as loan equivalents when: 

• The structure of the transaction is necessary for making the tax credits or other tax benefits available to the national bank or Federal savings association

• The transaction is of limited tenure and is not indefinite, including retaining a limited investment interest

• The tax benefits and other payments received by the national bank or Federal savings association from the transaction repay the investment and provide the expected rate of return at the time of underwriting

• The national bank or Federal savings association does not rely on appreciation of value in the project or property rights underlying the project for repayment

• The national bank or Federal savings association uses underwriting and credit approval criteria and standards that are substantially equivalent to the underwriting and credit approval criteria and standards used for a traditional commercial loan

• The national bank or Federal savings association is a passive investor in the transaction and is unable to direct the affairs of the project company

• The national bank or Federal savings association appropriately accounts for the transaction initially and on an ongoing basis and has documented its accounting assessment and conclusion contemporaneously. 

c. Tax equity has a senior equity position and is not subordinated to debt. Tax equity ranks ahead of the sponsor’s junior equity, receives priority in distributions and returns, while the sponsor bears the first-dollar loss. Project-level senior debt is generally not permitted. Where debt exists during the operational period of the project, forbearance arrangements protect tax equity from foreclosure risk. The principal sponsor typically provides 100% of the sponsor guaranty, limiting the tax equity investor’s exposure. Sponsors can also raise back-leveraged debt after construction, secured by the sponsor’s junior interest in the tax equity partnership. Lenders have no direct claim on project assets or cash flows, while tax equity remains protected from loan defaults.

d. Tax equity structures limit risks and downside for investors. Tax equity investors receive most returns from relatively certain tax credits and benefits, limiting exposure to project cash flows, development and construction risks. Partnership flips also help protect against resource variability, equipment issues, and power price declines. Investments typically have a 6–10-year horizon versus the asset’s 25–40-year life. Once the target return or flip date is reached, the investor typically exits with a return slightly above the target.

Structures mitigating performance risks: Tax equity investors’ performance risk is mitigated by long-term contracted cash flows, creditworthy offtakers, lack of senior debt, priority cash distributions, and returns primarily from tax attributes. Power price risks are managed through independent studies, portfolio experience, reduced reliance on cash distributions, and structural enhancements. Operational and production risks are assessed through modelling and stress scenarios, while mechanisms such as preferred returns, cash sweeps, and pay-go contributions provide additional protection. Tax equity investors also have limited construction risk, with ITC projects potentially including mechanisms to recover the initial investment if the project fails to reach placed-in-service status.

Tax credit risks: In addition to performance risks, tax equity investors may also face tax credit risks related to ITC recapture, but the risks are minimal. ITCs are subject to recapture if a project is removed from service within the first five years after it is placed in service or if there is a change in ownership. Actions that can trigger recapture include the project suffering a casualty loss or the project being sold to a third party after placement in service. If the ITC is recaptured, the investor loses a portion of their previously claimed tax credits. Given the lack of senior secured debt, the risk of change of ownership is well mitigated. Property and casualty insurance coverage protects investors against losses from recapture or disallowance, and the historical impacts of recapture on investors’ overall portfolios are limited. 

Diligence and risk assessment: Tax equity investors will conservatively assess risks in their underwriting and upfront due diligence processes. These strategies help investors understand a project’s viability and structure their investments to minimise their exposure to downside risks and allocate certain risks back to the sponsor. Before closing a tax equity investment, the bank performs due diligence similar to a project finance loan transaction. The tax equity investor will review and comment on project contracts, including the PPA, interconnection agreements, EPC contracts, site lease agreements, O&M agreements, and other key project documents. The tax equity investor engages outside legal counsel, who will provide a tax opinion to the investor that the tax benefits should or will be respected by the IRS.

Historical Performance of Tax Equity Investments. 

In April 2026, ACORE surveyed domestic banks actively investing in tax equity. Since 2020, these banks have invested approximately $93 billion in energy-project tax equity, representing over 75 per cent of the market. The survey found that both ITC and PTC investments deliver overwhelmingly positive returns and remain resilient to key financing risks, including recapture, foreclosure, and bankruptcy, in the post-OBBBA era. 

a. Tax equity investments continue to yield overwhelmingly positive returns. Nearly all survey participants reported positive after-tax returns for ITC and PTC investments exited between 2020 and 2026. Two investors reported minor negative returns on their lowest-performing deals, representing less than 2 per cent of their total portfolio values. Participants also expect current ITC and PTC investments to generate positive after-tax returns, with one institution anticipating minor negative returns on less than 2 per cent of its portfolio.

b. Overall, losses associated with investments to date are extremely rare, and results from the survey highlight the low-risk nature of tax equity across the US clean energy sector. Half of the respondents have experienced recapture; however, recapture events affected less than 1 per cent of their total investments, and no respondents report that recapture caused negative after-tax returns on affected investments. Additionally, no survey respondents report having experience with foreclosures regarding the tax equity investment interest in PTC or ITC investments, and only one respondent reported experience with bankruptcies; however, the events were limited to just 1 per cent of their total investments and had no associated negative after-tax returns. Nearly all respondents report that they expect their banks’ underwriting criteria for tax credit transactions to become more stringent after the passage of OBBBA. 

Conclusion 

Tax equity structures have protective features that shield investors from project risks and protect their returns even in downside cases. Tax equity investments are not speculative in nature and have a different risk profile than traditional equity investments, with their value driven primarily by tax benefits. The tax equity investor’s position is senior to the project sponsor’s junior equity, providing a priority in earning returns and avoiding structural subordination to long-term debt. These investments are underwritten to be robust and are structured to perform well under various stress scenarios. Moreover, the historical returns associated with exited energy tax equity investments, as well as projections for current investments, demonstrate overwhelmingly positive yields. The risks from recapture, foreclosure, and bankruptcy have had no or extremely limited impacts on investors’ overall portfolios.

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