Contributed by Benjamin Tran, Bitech Technologies CEO

The United States renewable energy sector continues to experience the excitement and anticipation reminiscent of Christmas morning, as it is presented with numerous opportunities and benefits following the implementation of the Inflation Reduction Act (IRA). Despite years having passed since its enactment, market participants have yet to fully comprehend the extent of provisions that have been made available.

The Inflation Reduction Act of 2022 (IRA), touted as the largest climate investment in U.S. history, has been instrumental in bringing the U.S. Administration's vision of a fair, internationally competitive, and sustainable economy to fruition. Two years since its implementation, it is evident that the IRA is successfully translating the Renewable Investing in America agenda into tangible actions, particularly through the interest shown by the private sector towards the U.S. Department of Energy's Loan Programs Office (LPO).

$80 Million ITC Offer to Bitech Technologies: An Exemplary Model of IRA Benefits

Bitech Technologies [OTCQB: BTTC], a leading energy company, has just made an exciting announcement that could be sending ripples through the renewable energy industry. In our latest press statement, the Company revealed that it has executed a non-binding term sheet for an investment tax credit (ITC) for its BESS flagship project, Project Redbird.

According to the offered term sheet, Bitech Technologies will receive $80 million in ITC for its 100-Megawatt (MW) capacity Battery Energy Storage System (“BESS”) project located in Fort Bend County, Texas. This milestone is expected by its management team to be a major leap forward for Bitech Technologies.

With a projected generation of $78 million by the third quarter of 2025 based on a 50% investment tax credit, meaning 50% of its projected capital expenditure of approximately $160 million, Project Redbird has taken one step forward to get ready to receive financing. With this recent development, Bitech is expected to accelerate its path towards monetization and ITC money is expected to arrive around Commercial Operation Date (COD) , thus adding a significant cashflow for the said project.

In light of project financing ability, it is instrumental that this tax credit transfer agreement greatly benefits the progress of Bitech's flagship project. Bitech's partnership with a renowned firm known for its ITC provision in renewable energy investments. This collaboration is seen as a testament to the potential and credibility of Project Redbird.

Bitech has also discussed its future plans for Project Redbird and how this new agreement will play an essential role in achieving the Company's goals. In addition, Bitech has expressed its confidence that along with project equity investment or debt financing, this tax credit transfer agreement would pave the way for the first COD expectedly by the second quarter of 2025.

The entire team at Bitech Technologies is thrilled about reaching such a milestone and looks forward to working with several financing partners to make its flagship Project Redbird and many of its BESS projects in its portfolio successful. As the Company continues to push boundaries and redefine what was once thought impossible in renewable energy technology, one thing is clear - Bitech Technologies' determination will not falter until it achieves corporate vision of a greener and more sustainable future.

Bitech Technologies is an emerging growth innovator in the renewable energy market, integrating cutting-edge technologies into its operations. Specializing in Battery Energy Storage Systems (BESS) as an independent power provider (IPP), Bitech aims to enhance grid reliability, optimize energy supply, and support renewable integration through innovative technology solutions.

Unlocking Sustainable Growth: Exploring the Benefits of Title 17 Clean Energy Financing

Resource Provision: In light of IRA Title 17 program funding being available until September 30, 2026, the Loan Program office (LPO) has prioritized ensuring that potential applicants have a thorough understanding of the Energy Infrastructure Reinvestment (EIR) program established by the IRA. Additionally, we have published well-received guidelines on how projects falling under the Section 1703 categories (Clean Energy, Innovative Supply Chains, and State Energy Finance Institution [SEFI]) can be supported for critical minerals processing, manufacturing, and recycling—project types previously not eligible for LPO support. Our state outreach team has also actively promoted interest in the SEFI category through nationwide engagement efforts and by providing resources for new applicants. As a result, over a dozen state organizations have now established pathways for clean energy project developers to access both state and federal financing opportunities.

In the second year after the IRA was passed, the Title 17 Clean Energy Financing program saw six conditional commitments announced, totaling just over $5 billion. In addition, a $3 billion loan guarantee was also closed during this time. The first ever EIR announcement occurred in March with the Holtec Palisades conditional commitment, followed by a second announcement in July for Clean Flexible Energy's Project Marahu, which consists of multiple utility-scale solar and battery storage projects in Puerto Rico.

The successful commercialization of various technologies such as remote methane detection and cleaner steelmaking can be attributed to LPO's growing in-house technical team and its access to DOE's nationwide expertise. These competencies have played a significant role in enabling innovative deployments like these. This is crucial for achieving the Biden-Harris Administration's goal of reducing economy-wide net greenhouse gas pollution by 50% by 2030, including hard-to-decarbonize industrial processes.

As of July 31, 2024, the Title 17 program reports a remaining loan authority of $127.6 billion across its four categories. This amount significantly exceeds the current loan requests in the pipeline.

Overview of the Provision of the IRA

The successful implementation of the Inflation Reduction Act (IRA) and other critical matters, such as equipment sourcing and project siting, will be essential in achieving certainty for a particular project. Although uncertainties may arise due to these factors, one thing is certain: the IRA provides increased flexibility for financing structures. Specifically, there are three new resources-neutral options available, including the Investment Tax Credit (ITC) and Production Tax Credit (PTC), which offer opportunities for standalone storage and transferability outside of traditional tax equity structures. These measures aim to support and encourage investment in projects while minimizing inflation risks. Therefore, further guidance on the IRA is necessary to ensure its effectiveness in reducing inflation rates and promoting sustainable energy solutions.

This article examines the advantages of increased flexibility in terms of party perspectives for the financing of a hypothetical utility-scale solar-plus-storage project. Specifically, we will mention four (4) different financing structures that have become available under the new law which offers benefits and drawbacks for each structure below.

• Base case - This involves an ITC partnership flip, where a single tax equity transaction monetizes the tax credits for both the solar and storage components of the project. We assume construction and back-leverage debt at term-conversion in this scenario.

• PTC case - This structure is similar to the base case, except that the project will elect PTCs for its solar portion.

• Standalone case - The third structure takes advantage of the new IRA stand-alone solar ITC. Here, we explore using standalone ITC financing for the battery component of the project.

• Transfer case - Alternatively, we will examine the option of selling the ITC for cash on the open market using the new transferability provisions of the IRA instead of utilizing a tax equity structure.

As Bitech Technologies shifts its attention towards BESS and specific projects, it is also strategically co-locating its BESS projects with several solar projects of its portfolio. In light of this, our discussion will solely revolve around the Base Case, Standalone Case, and Transfer Case scenarios.

Base Case

The foundational structure of our Base Case is likely to be familiar to market participants in the US renewable energy industry. It has been widely used for solar-plus-storage transactions prior to the passing of the Investment Tax Credit (ITC) and Renewable Energy Act (IRA). This structure involves a solar project and Battery Energy Storage System (BESS) owned by one or more special-purpose entities known as ProjectCos. These ProjectCos are then owned by a single holding company, referred to as HoldCo. This arrangement also serves as the vehicle through which an outside tax equity investor can hold an ownership stake, creating a partnership at the HoldCo level for tax purposes in the US.

Upon completion of the tax equity transaction, the HoldCo will have two types of ownership interests: Class A, which represents the tax equity membership interests, and Class B, which represents the cash equity membership interests. While this article does not delve into the finer details of a partnership flip structure, it's worth noting that there are certain considerations specific to the tax equity transaction process:

1. The Class A and Class B members of HoldCo will be eligible for an amount of tax credits (ITC) based on the eligible basis, which is determined and supported by a third-party appraisal, of both the solar project and BESS when they are placed in service.

2. In an ITC partnership flip structure, the tax equity investor must become an owner of HoldCo before either the solar project or BESS is placed in service. Typically, this involves a two-stage closing process where the Class A tax equity investor provides 20% funding just prior to the placed-in-service date, followed by a second funding of 80% after the project is placed in service. This initial funding coincides with the transfer of ownership of Class A membership interests to the tax equity investor.

3. The available Investment Tax Credits (ITCs) for the HoldCo, in addition to other advantageous tax benefits such as depreciation, are divided between the Class A tax equity and Class B cash equity members. It is common practice to assign 99% of these benefits to the tax equity investor. This investor typically provides upfront funding in two installments, which coincides with their recognition of 99% of the ITCs associated with the solar project and BESS. This arrangement allows for a significant portion of the investment to be repaid in the first year, with the remaining principal and returns being received by the tax equity investor through future years via retained tax benefits and distributions from a portion of project and BESS revenues.

4. Upon the completion of the solar project and BESS, the tax equity investor is prohibited from transferring their interests to a third party for a period of five years.

5. Before the enactment of this Act, only BESS systems that were installed alongside and charged by solar systems were eligible for ITCs. In this scenario, the BESS was treated as part of the solar system for legal and financing purposes, similar to inverters or racking systems. Third-party tax equity financing was only feasible if the solar and BESS systems were financed as a single asset with identical documentation, investors, and lenders.

In reference to the debt used in the current scenario, we have taken into consideration a standard form of construction funding and subsequent leveraging. A formal credit agreement will be executed concurrently with the commitment from tax equity investors. Subsequently, the sponsor will issue a notice-to-proceed (NTP) for construction contracts immediately after these closings. During the construction period, ProjectCos and project assets are established as the main collateral for the financing.

Why is the Base Case structure expected to remain popular among project participants? In recent years, a vast majority of solar-plus-storage transactions have been successfully financed using this well-established framework. Its straightforwardness and familiarity to developers, investors, and lenders can be attributed in part to its similarity to traditional solar (non-storage) ITC transactions. The treatment of the battery energy storage system (BESS) typically follows the same guidelines as a solar project, with additional due diligence regarding technical, off-take contracts, and tax matters specific to the BESS. As a result, transaction documents, models, and supporting documentation such as appraisals remain largely unchanged from those used in solar-only deals.

It should be noted that the tax equity investor is not permitted to transfer its interests to a non-affiliated party for a period of five years once both the solar project and BESS are in service.

Standalone Storage Case

One notable provision under the Act is the standalone Investment Tax Credit (ITC) now available for storage projects. This allows for the possibility of monetizing tax credits from a Battery Energy Storage System (BESS), regardless of whether it is integrated with a solar project or solely powered by renewable energy. With regards to our hypothetical solar-plus-storage project, this opens up the potential for a third structure - an ITC tax equity financing solely for the BESS, separate from that of the solar project (with its own tax equity partnership and investors).

The availability of standalone BESS financing presents opportunities for different project timelines and brings in additional financing parties. For instance, if the solar asset is scheduled to be placed in service in 2023 while the BESS is expected to follow after one or more years, developing and financing the BESS project separately may simplify its financing process.

One potential solution for financing the solar project would be to secure funding from a new investor who is interested in a 2024 Production Tax Credit (PTC) deal. Additionally, the Battery Energy Storage System (BESS) portion of the project could have separate financing terms and investors, as it would likely qualify for a 2025 Investment Tax Credit (ITC) transaction. This approach eliminates the need to combine site control documents, third-party reports, or permitting efforts.

Efficiency is a key factor that motivates project participants to finance BESS and solar projects as single assets. In many cases, these projects are developed together with shared real estate, permits, and interconnect facilities. Consolidating these assets under one financing agreement with the same counterparties makes sense from both a simplification and cost-saving perspective. For example, a unified financing streamlines due diligence processes and allows for shared third-party reports such as appraisals, insurance policies, and Independent Engineer (IE) reports.

Transferability of Credits

For years, the sine qua non of tax equity financing has been that Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) could not be sold or transferred. This meant that in order to claim the tax credit, one had to actually own the project. However, with the implementation of the Internal Revenue Act (IRA), this rule is set to change in 2023. The most significant and yet perplexing aspect of this change is that project owners will now be able to sell their credits annually. It should be noted that only credits can be transferred and not depreciation, which typically makes up a significant portion of the investment return for tax equity investors. Additionally, if stranded with the sponsor, depreciation can often prove to be inefficient. This new development marks a major shift in tax equity financing and opens up new possibilities for project owners in terms of monetizing their annual tax credits.

This indicates that sponsors who sell tax credits will need to arrange a tax equity investment that places more emphasis on depreciation and cash flow, rather than the more significant ITC. This could result in higher transaction costs compared to the benefits gained. Furthermore, the buyer, unlike a tax equity investor, will not be able to deduct any of their purchase price for the credit (unlike the tax equity investor who is allowed to deduct a portion of their investment). In an ideal market scenario, our hypothetical solar-plus-storage project could greatly benefit from these opportunities.

Regardless, in a world where there is an established platform and structure for widespread access to tax credits, the likelihood of buyers and sellers connecting would be higher. Initial costs incurred would eventually be absorbed, leading to the potential development of an efficient market. It is conceivable that certain structures could be put in place to allow for investor purchases and additional investors under specific circumstances. Furthermore, leveraging may also be possible for both the project itself (based on anticipated future cash flow from purchase payments) and the acquiring fund (based on anticipated future investments). However, there is still much work to be done in terms of identifying proper risk allocation, indemnities, documentation, and diligence requirements before any significant progress can be made. These are all well-explored considerations in a tax equity transaction.

Importantly, the potential shift in traditional tax equity structures creates an opportunity for increased engagement from traditional lenders in project financing. These lenders have historically been hesitant to take on a subordinate role to tax equity partners. However, in much of the global project finance sector, outside of US renewable energy projects, it is standard for debt to be held at the project level during operations. This presents a chance for additional investments from banks, insurance companies, and bond holders to enter the market and could potentially impact debt pricing. Sponsors facing challenges in securing desired levels of leverage for their projects would benefit from exploring these options.

Conclusion

The passing of the Inflation Reduction Act has brought numerous benefits for the US renewables industry. One of the main advantages is the increased support for new technologies, providing a boost for innovation and advancement in this sector. The act also offers the option to transfer tax credits, which can be appealing for companies looking to invest in renewable energy. Additionally, it presents opportunities for new market participants and potentially simpler structures, making it easier for businesses to enter and navigate this market. However, with these benefits come some challenges as well. Labor costs are expected to rise due to prevailing wage and apprenticeship rules, which require strict record-keeping. This may cause some friction in the short term compared to a year ago, especially with increasing capital costs. Nevertheless, the long-term outlook is positive and promising. Like a high-quality train set, the IRA is expected to have a lasting impact on the renewables industry for years to come.