Tax equity is a financing structure that enhances the financing of clean energy projects from investors in return for tax benefits. Such notable tax benefits include depreciation and project shares from a partnership. Additionally, the eligible tax credits can be sold to a third party for money without going into a long-term partnership.
Tax equity is not a new concept; it has been around since the Energy Tax Act of 1978. However, the method by which the credits can be monetized has changed dramatically, mainly after the emergence of the transferability of tax credits introduced by the Inflation Reduction Act (IRA).
This transferability promotes investments in clean energy projects by letting the owners sell Investment Tax Credits (ITC) or Production Tax Credits (PTC). So, want to make a profitable investment in clean energy projects? Let’s untangle the nuances of tax equity structure and the ITC vs PTC impact on those structures.
Understanding the Nuances
Before getting to know how ITC vs PTC impacts tax equity, you have to understand what tax equity and investor appetite are. Here’s a brief outline of tax credits and tax equity.
What is ITC
Investment Tax Credit (ITC) is an incentive that offers investors a dollar-for-dollar cutback in income taxes for clean energy developers. The cutback is usually made according to the percentage of the total capital investment in the project.
What is PTC
Production Tax Credit (PTC) is similar to the ITC, but instead of being based on investment, PTC is based on production. PTC offers an ongoing tax credit based on the kilowatt-hours a clean energy project produces, usually over 10 years.
What are Tax Equity Structures
Tax equity structures define how investors with high-level federal tax liabilities can invest in renewable energy projects. Some common structures that are heavily driven by investor appetite to monetize incentives are listed below.
Partnership Flip (P-Flip): The most common structure where a tax equity investor joins a developer in a partnership, taking 99% of tax benefits until a target return is met, then flipping to a minority stake.
Sale-Leaseback (SLB): The developer sells the project to an investor and leases it back, allowing the investor to claim tax benefits.
Inverted Lease (Lease Pass-Through): A hybrid structure where the developer acts as a lessee and passes tax benefits to the investor.
Hybrid Structures (T-flips): Emerging structures that allow for the sale of tax credits to third parties, expanding investor participation.
Investor Appetite
Investor appetite can be referred to as the level of risk and irregularity an investor is prepared to take to attain their financial goals. It is commonly categorized as aggressive, moderate, or conservative.
ITC vs PTC: What’s the Key Difference
Investment Tax Credit (ITC) is a one-time, upfront credit based on a percentage of project construction costs. In contrast, the Production Tax Credit (PTC) is an ongoing, annual credit based on the actual electricity produced over 10 years.
| Characteristics | Investment Tax Credit (ITC) | Production Tax Credit (PTC) |
| Calculation | Initial Capital Investment % | kWh of Electricity Produced |
| Duration | One-time | 10 years |
| Best Suited For | High-cost/Low-production projects | High-production/Low-cost projects |
| Key Advantage | Immediate, upfront tax reduction | Long-term revenue stream |
| Technology Examples | Solar, Storage | Wind, Geothermal, Solar |
How ITC vs. PTC Impacts Tax Equity Structures And Investor Appetite
The ITC vs PTC are federal incentives that greatly impact the tax equity structures and investment risks. Here’s a detailed breakdown of how ITC vs PTC impacts.
Impact on Monetisation
ITC mainly monetizes the capital investment and allows investors to claim the credits upfront in the first year of the project. The said credit equals the percentage of the eligible project cost, for instance, the 30% base. ITC requires a cutback in the reducible basis of the project, which means half the credit amount.
The PTC monetizes the operational performance. It allows the investors to claim the credits annually based on the output. It is a continuing, per-kilowatt-hour (kWh) credit based on energy generated over 10 years. That single difference of front-loaded vs. performance-based shows very different tax equity structures.
Impact on Deal Timing & Capital Structure
ITC deals in tax equity contribute most of its capital to the Commercial Operation Date (COD). That means when the project is placed in service is more important than construction milestones. The eligible basis is the cost on which the ITC is calculated (30%), while avoiding recapture as in a 5-year window. Hence, financing feels more like a single monetization event.
In PTC deals, the capital is often staged rather than being supplied in a single upfront lump sum. It is supported by yield-based true-ups, also known as the pay-as-you-go adjustments. It requires having confidence in factors such as resource quality (wind, geothermal) and long-term operational performance. The financing has been successfully widened over 10 years.
Preferred Structures: Why You See What You See
For projects claiming the Investment Tax Credit (ITC), the partnership flip structure is widely used because it aligns well with the upfront nature of the credit. Under this structure, a tax equity investor typically receives the majority of the tax benefits and depreciation during the early years of the project, while the developer retains operational involvement.
Once the investor achieves an agreed return, often over a multi-year period, the ownership interests “flip,” reducing the investor’s share and shifting greater economic control back to the developer. This structure allows investors to efficiently utilize accelerated depreciation and tax credits while providing developers with a clear path to long-term ownership.
For projects relying on the Production Tax Credit (PTC), partnership flip structures are also commonly used, but sale-leaseback arrangements may be considered in certain situations. Because PTC value depends on ongoing energy production, these structures require detailed performance measurement, production tracking, and long-term operational confidence.
In a sale-leaseback, the project owner sells the completed facility to an investor and leases it back for continued operation. This allows the investor to claim the tax benefits, while the developer maintains control of day-to-day operations. The structure can provide significant upfront capital but involves more complex compliance and reporting requirements.
Risk Allocation Differences
Investment Tax Credit (ITC): The investors worry the most about eligibility and recapture.
Production Tax Credit (PTC): The investors worry the most about underperformance.
| Risk Type | ITC | PTC |
| Construction risk | High focus | High focus |
| Performance risk | Lower | Critical |
| Resource variability | Minimal | Central |
| Recapture risk | 5 years | None (Credits can still be lost due to disallowance or underperformance) |
| O&M importance | Moderate | Very high |
Know What is Good for You
Ever since the Energy Tax Act was created in 1978, the potential to monopolize clean energy credits has been around. But the introduction of transferable tax credit transactions has changed the way the credits are monetized. Now, the ITC and PTC serve as tools that investors, developers, and manufacturers utilize to finance projects. Hence, understanding the ITC vs PTC and its impact can help investors determine the best project and the optimal investment structure.
