Understanding Energy Storage

One of the US Department of Commerce’s (Commerce) signature contributions to Power Africa has been the Understanding handbook series developed by its Office of the General Counsel’s Commercial Law Development Program (CLDP). This open-source and plain-language knowledge library now includes six handbooks explaining a range of essential topics in power project contracts, financing and procurement. In recent years, the Understanding series has expanded to focus on unique challenges in Africa’s energy market, such as the complex nature of private participation in transmission projects. With 65,000 copies in print and tens of thousands more copies downloaded online, the Understanding series has become a trusted resource in Africa’s power project community.

The most recent addition to the Understanding series, Understanding Energy Storage, comes at a critical time in both the development of the continent and the effort to combat climate change globally. The hope is that this handbook will contribute to Power Africa’s efforts to catalyze new energy storage investment as a core component of overall market development. This handbook supports the Commerce’s Renewable Energy and Energy Efficiency Advisory Committee’s recommendations on (1) Clean Tech Export Competitiveness Strategy, (2) Energy Equity and (3) Technology Risk Mitigation and Financing; and advances the US International Climate Finance Strategy.

This handbook is from Commerce’s Commercial Law Development Program and is co-authored by McDermott Associate Seth Doughty.

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Key Takeaways | Guidance on the Wage and Apprenticeship Provisions

The Navigating the New Energy Landscape webinar series came back last week for a special bonus session that focused on the just-released Internal Revenue Service (IRS) guidance on the wage and apprenticeship provisions included in the Inflation Reduction Act of 2022 (IRA).

During this webinar, McDermott Partners Heather Cooper and Philip Tingle walk through the new guidance, covering key issues and drilling down into the impact of the 60-day countdown clock for which developers have to implement these provisions or face the loss of critical tax benefits for their renewable energy projects.

Below are key takeaways from the discussion:

1. IRS Notice 2022-61 provides additional guidance on the prevailing wage and apprenticeship requirements included in the IRA, which apply to a broad range of energy tax credits. Projects that do not meet these requirements potentially face an 80% reduction to any applicable energy tax credits. However, due to the 60-day delay between the release of the guidance and when the rules take effect, projects that begin construction before January 30, 2023, will not be subject to the requirements.

2. Notice 2022-61 also provides clarification (largely by reference) to existing US Department of Labor (DOL) regulations and prior IRS guidance. For example, it clarified that the existing IRS framework for determining the beginning of construction will be preserved. Other developments include a contemporaneous recordkeeping requirement necessary to establish compliance with the prevailing wage and apprenticeship requirements, clarification on the good faith effort exception to the apprenticeship requirements, and a new DOL email address for questions regarding prevailing wage determinations.

3. Despite this guidance, many questions remain unanswered. While many key definitions and rules are clarified by reference to DOL rules, this has not eliminated uncertainty regarding their implementation. McDermott’s energy & project finance team is working closely with the Firm’s employment team to tap into their vast experience with the DOL.

4. These developments raise many new considerations for developers. Those that can start construction before January 30 may wish to determine how to meet the beginning of construction requirements promptly and effectively before the guidance takes effect. Those that cannot start construction before January 30 will need to consider how to manage potential risks that arise from the new rules. This could require additional transactional scrutiny when drafting and negotiating around compliance.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




Key Takeaways | Carbon Capture Gets a Long Runway for Development

Featured prominently in the Inflation Reduction Act of 2022 (IRA), carbon capture, utilization and storage (CCUS) is one segment of the energy industry that could most benefit from incentivized development. On November 17, McDermott Partners Parker Lee and Philip Tingle were joined by Laura Gieseke, senior counsel at Western Midstream, and Spencer English, director at Piper Sandler, for a discussion on the current CCUS market and how potential benefits in the IRA might play out in future CCUS development projects.

Below are key takeaways from the discussion:

1. Progress in the CCUS market requires buy-in from the oil and gas industry. This has been the case thus far given the industry’s existing technologies and desire to reduce its carbon outputs. New incentives within the IRA, such as direct pay credits, are expected to spur further investment.

2. The three primary components of CCUS are physical capture, transportation of carbon by pipeline and sequestration systems. There has been more investment and research into physical capture and transportation as those projects deal with pre-existing structures within the oil and gas industry. While direct air capture is not as popular as other carbon capture measures, the industry is devoting time to study the feasibility of such projects.

3. The IRA allows for developers to treat amounts paid in excess of their tax liability for certain tax credits as a refundable payment and receive a cash refund from the Internal Revenue Service (IRS). Specifically, Section 45Q permits both tax-exempt and non-tax-exempt entities to take advantage of this incentive for carbon oxide sequestration credits. This “direct pay” allows CCUS developers to monetize tax credits without partnering with tax equity investors and will allow for increasing the scale of CCUS projects. This provision will remain in effect until 2033. The monetization mechanism for the direct pay credits still needs to be developed and put into practice.

4. There are important questions that the IRS needs to consider during its comment period that will shape the future of the CCUS market and financing for it. For example: How is carbon sequestration defined? If an entity avoids producing CO2, does that qualify as carbon sequestration? How do we verify sequestration? How is sequestration documented?

5. Tax equity investors have a good sense of potential risks for wind and solar projects, but there is a desire to diversify into different technologies. While direct pay will permit the oil and gas industry to proceed with CCUS projects without tax equity partners, the industry expects tax equity partners to join down the road to allow for maximum utilization of the available tax credits.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




Key Takeaways | Hospitals and Renewable Energy: New Financial Incentives and Opportunities in the Inflation Reduction Act

During this webinar, Heather Cooper and Carl Fleming, partners in the McDermott’s energy & project finance group, teamed up with McDermott+Consulting’s Debra Curtis to break down the key opportunities and actionable steps that your in-house team stakeholders need to know about to take advantage of what the Inflation Reduction Act of 2022 (IRA) has to offer. Discussion topics included a highlight of important provisions in the IRA and the incentives they hold for hospitals, an update on how the Biden administration is approaching climate change and healthcare, how to track funding sources and apply for tax credits and deductions and more.

Below are key takeaways from the discussion:

1. Hospitals, Healthcare and Climate Change. Hospitals and the healthcare sector both have a role to play in climate change mitigation. The healthcare sector accounts for about 8.5% of all greenhouse gas emissions in the United States and about 4.5% of emissions worldwide. These emissions are generated mostly from running energy-draining facilities 24/7. Hospitals have an opportunity to not only track and report emissions, but also to reduce them.

2. Hospitals and Healthcare Systems Now Face Climate Change Operational Risk. While there may have been a lack of oversight and accountability on hospitals and the healthcare sector in regard to climate change, there are now several forces pushing hospitals—and the healthcare system more broadly—to undertake efforts to reduce their dependence on fossil fuels.

3. Health Sector Climate Pledge. On June 30, 2022, US President Joe Biden announced the “Health Sector Climate Pledge.” As a result, the US Department of Health and Human Services (HHS), in partnership with the White House, is mobilizing the healthcare sector to reduce emissions. Under the Pledge, 61 of the largest US hospital and health sector companies (which account for about 650 hospitals) committed to reducing greenhouse gas emissions by 50% by 2030. Additionally, in response to the Biden administration’s directive to federal agencies on climate change, the HHS has taken several other steps to address the issue. Internally, it has created small offices to examine climate change, health equity and environmental justice.

4. The IRA Is Historic. Perhaps the biggest incentive for hospitals to take action comes from the IRA, which President Biden signed into law back in August. The IRA is the largest climate change legislation ever enacted globally and provides for $369 billion in climate change programs and incentives with a 10-year timeframe (versus the prior one-to-three-year increments). It also greatly expands tax credits for US companies that adopt energy-saving renewable technologies and, for the first time, makes these credits available to nonprofits—a category that includes just over half of the nation’s hospitals.

5. The IRA Unlocks Opportunities for Hospitals. Under the IRA, hospitals now (1) have access to a new significant financial incentive for energy efficiency, (2) gain access to the previously restricted tax equity market via [...]

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Key Takeaways | How the Inflation Reduction Act Impacts the Oil and Gas Industry + The Role of Natural Gas Moving Forward

The landmark Inflation Reduction Act of 2022 (IRA) was a long-anticipated legislative package for the industry because it promotes investment in alternative forms of energy. During this webinar, Partners Denmon Sigler and Philip Tingle hosted David Herr, managing director of corporate finance at Kroll, and Chris Culver, director of natural gas supply and strategy at Valero, for an engaging discussion on how the IRA impacts the oil and gas and natural gas industries.

Below are key takeaways from the discussion:

1. A combination of the war in the Ukraine, issues with the Nord Stream 2 pipeline stemming from said war, widespread corporate commitments to net-zero emissions targets, and the passage of the IRA have created immense levels of volatility in the natural gas market and created a lack of clarity as to what the future for natural gas will look like.

2. An additional knock-on effect from the conflict in the Ukraine is that Europe has had to seek natural gas sources from outside of Russia, with a significant portion of that coming from the United States. An upshot of that trend is that natural gas has become much more of a global commodity and is priced like crude oil historically has been.

3. At its core, the IRA is a mechanism for transitioning away from fossil fuel-based energy production, however, there are features within it that apply to traditional energy sources. For example, renewable natural gas (RNG) has received a 10-year credit, credits for carbon sequestration at natural gas-fired facilities are covered under the IRA and nuclear energy is now entitled to a production tax credit.

4. For renewable fuel development, the 10-year horizon for tax credits granted by the IRA allows investors to participate in the full industry development cycle (pilot stage, development stage and maturity stage) to see overall production cost reductions that were evident in renewable energy development over the past decade, all under the umbrella of tax credits during that time horizon.

5. The current demand for RNG faces a multitude of production challenges as today’s prevailing prices for RNG are much higher than traditional natural gas. However, those high RNG prices are expected to drop over the medium term as RNG production benefits from tax credits under the IRA help boost overall supply.

6. There has been significant growth in the demand for greener motor fuels, which will drive up the overall market demand for green hydrogen because green hydrogen serves as a necessary feedstock for the production of green motor fuels.

To access past webinars in the Navigating the New Energy Landscape series and to begin receiving Energy updates, including invitations to the webinar series, please click here.




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