How Transferable Tax Credits Have Replaced Tax Equity for Many Clean Energy Developers

For most of the last two decades, a clean energy developer that earned a federal tax credit ran into the same wall: the credit was only worth something if you had enough tax liability to absorb it, and most developers didn’t. The usual fix was tax equity, an intricate partnership with a large financial institution willing to use the credits and depreciation in exchange for upfront capital. It worked, but it was slow, expensive, and open to a narrow set of players.

The Inflation Reduction Act changed that in 2022 by adding Section 6418, which lets a developer sell eligible clean energy credits directly to an unrelated party for cash. In just a few years, that provision has reshaped how a many projects get financed. For a large segment of developers, direct credit sales have gone from novelty to default.

The Old Model: Why Tax Equity Was a Bottleneck

Tax equity is a financing structure where an institutional investor joins the project sponsor in a partnership and takes an allocation of the tax credits, depreciation, and some cash flow in exchange for its investment. It’s still a powerful tool, and for capital-intensive projects it captures value that a simple credit sale can’t. 

The pool of participants was narrow too. Because the structures required large, predictable tax appetite and sophisticated underwriting, a handful of banks and insurance companies dominated the market for years. Industry participants have pegged traditional tax equity at roughly a $20 billion-a-year market concentrated among a small number of institutions, with minimum deal sizes that shut out smaller projects. If a developer didn’t already have a relationship with one of those investors, monetizing a credit was hard.

What Section 6418 Changed

Transferability swaps that partnership for a transaction. Under Section 6418, an eligible developer can sell all or part of a credit to an unrelated buyer, who pays cash and then claims the credit against its own federal tax liability. The IRS’s transferability guidance lays out the mechanics: payment has to be in cash, the cash the seller receives isn’t taxable income, and the buyer can’t deduct what it paid. A credit can only be sold once. The seller also has to complete an electronic pre-filing registration with the IRS to get a registration number for each credit, which both parties report on their returns when making the election.

The result is a much simpler deal. Instead of negotiating a multi-year partnership, the parties negotiate a purchase, typically backed by seller indemnities and, in many cases, tax credit insurance to protect the buyer against later disallowance or recapture. Analysts estimate the frictional cost of monetizing a credit through transfer runs well below the cost of a full tax equity arrangement, so developers keep more of each credit’s value. *

A Broader Pool of Buyers

The biggest change might be who’s willing to buy now. By separating tax appetite from project ownership, transferability opened the door to corporate buyers who would never have joined a tax equity partnership. As Utility Dive, reporting from an industry finance forum, described transferability as having broadened the market from a small set of traditional tax equity investors to a much wider range of players, and helped more than double the size of the available financing market.

The buyer base now reaches well beyond banks, to ordinary corporate taxpayers across retail, manufacturing, insurance, and other industries that simply want to lower a federal tax bill. Thomson Reuters coverage of a post-2025 policy panel called transferability broadly transformative, citing rapid adoption since the IRA and continued strong demand from corporate buyers. Industry market-intelligence estimates point the same direction: transferable credits have become an important corporate tax-planning tool rather than a niche strategy, and a substantial share of the largest U.S. companies now participate as buyers. A deeper buyer pool means more competition for credits, more liquidity, and better pricing for developers.

What It Means for Developers Without Tax Equity Relationships

For a developer that lacks the tax liability to use its own credits, and doesn’t have a standing relationship with a tax equity investor, this is the difference between a stranded benefit and cash in hand. A direct transfer requires no partnership, no investor taking an ownership stake, and no multi-month structuring process. The developer sells the credit, gets cash to pay down debt or fund the next project, and moves on.

That accessibility matters most for small and mid-size developers, manufacturers, and newer technologies that historically sat outside the tax equity club. It also helps with financing earlier in a project’s life. A forward commitment from a credit buyer can help a developer secure a bridge loan on better terms than equity, since the future cash from the credit sale is reasonably predictable.

What Transferability Does Not Do

Transferability doesn’t replace tax equity in every case, and it’s worth being clear about the limits. A straight credit sale monetizes the credit, but not the project’s accelerated depreciation, which stays with the owner, and it doesn’t deliver a step-up in tax basis. For projects where depreciation makes up a large share of the total tax benefit, that gap matters.

That’s why the market hasn’t abandoned tax equity, it’s layered new options on top of it. A hybrid structure, often called a “T-flip,” pairs a traditional tax equity partnership that captures depreciation with a Section 6418 sale of the credits to a third party. According to law firm White & Case, these hybrids let sponsors capture depreciation and basis value while still reaching the broader buyer pool that transferability unlocks. Transferability has become the default for straightforward credit monetization; tax equity and hybrids remain the tools for squeezing out every dollar on the most capital-intensive deals.

The Post-2025 Landscape

Any developer weighing this path in 2026 needs to account for the One Big Beautiful Bill Act, signed in July 2025. The headline for monetization is reassuring: the Act preserved Section 6418 transferability for the full duration of the applicable credit period, even though earlier drafts had proposed sunsetting or repealing it. That’s a meaningful source of certainty for a market that now depends on it.

Two changes do need attention. First, the Act added new foreign-entity restrictions: credits generally can’t be transferred to prohibited or specified foreign entities, and buyers are now doing more diligence on a seller’s compliance as a result. Second, as Steptoe and other firms have noted, the Act accelerated the wind-down of the wind and solar credits. Those projects generally must begin construction by July 4, 2026, or be placed in service by the end of 2027 to stay eligible. Credits for storage, clean fuels, advanced manufacturing, nuclear, and carbon capture fared better. The transferability mechanism itself is intact. The underlying eligibility timelines are just tighter for some technologies, which makes planning ahead more important than it used to be.

Where Fallbrook Fits

A simpler transaction isn’t the same as an easy one. A clean transfer still depends on proper IRS registration, a well-drafted transfer election, careful risk allocation between buyer and seller, and diligence that now includes foreign-entity compliance. Fallbrook, a facilitator with roughly four decades of experience in tax credit transactions, helps developers connect earned credits with buyers positioned to use them and coordinates the documentation and diligence a sound transfer requires. Fallbrook acts as an intermediary in these transactions. Because pricing on transferable credits moves with market conditions, credit type, seller credit quality, and transaction specifics, developers benefit from understanding those dynamics directionally before committing to a plan.

The Bottom Line

Section 6418 changed the default for a large share of the market, not just added an option. Developers who once needed a bank partnership and months of structuring can now sell a credit for cash to a far wider set of buyers, at lower cost, with the mechanism confirmed to stay in place for the life of the eligible credits. Tax equity still has its place for the most depreciation-heavy projects. But for many developers, particularly those without established tax equity relationships, transferability has become the more practical route to turning a credit into capital.

* Figures on market size, buyer participation, and relative transaction costs reflect third-party market commentary and analyst estimates and are directional; they are not offers, quotes, or guarantees of pricing or availability.

Sources

• 26 U.S. Code § 6418: Transfer of certain credits (Legal Information Institute). law.cornell.edu/uscode/text/26/6418
• IRS: Elective Pay and Transferability FAQs: Transferability. irs.gov/credits-deductions/…transferability
• Kirkland & Ellis LLP: “One Big Beautiful Bill Act Brings Big Changes to Green Energy Tax Credits.” kirkland.com/…one-big-beautiful-bill-act
• Steptoe LLP: “The One Big Beautiful Bill: Impact on the IRA’s Clean Energy Tax Credits.” steptoe.com/…impact-on-the-iras-clean-energy-tax-credits
• White & Case LLP: “Clean Energy Tax Credits – Transferability and Deal Structure Alternatives.” whitecase.com/…transferability-and-deal-structure-alternatives
• Thomson Reuters: “What to Expect From Clean Energy Tax Incentives Post-OBBBA.” tax.thomsonreuters.com/news/…post-obbba
• Utility Dive: “Transferability is transforming clean energy project finance, say dealmakers.” utilitydive.com/news/transferability-ira-clean-energy-tax-credits…

Disclaimer: This article is provided by Fallbrook Financial Services for general informational purposes only and does not constitute legal, tax, accounting, investment, or financial advice. Fallbrook acts as a facilitator and intermediary in tax credit transactions. Federal tax credit programs, eligibility rules, foreign-entity restrictions, transfer procedures, and market conditions are complex and subject to change and to specific facts and circumstances. Nothing herein is an offer to buy or sell any tax credit or a quote of price or availability. Figures reflect third-party estimates available at the time of writing and should be independently verified. Consult the Internal Revenue Service and your own qualified legal and tax advisors before making any decision. Fallbrook makes no representation or warranty as to the accuracy, completeness, or current applicability of the information contained herein.