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Carbon Capture, Utilization and Sequestration – An Industry Primed for Explosive Growth? A Summary of the White House Council on Environmental Quality’s Report

On June 30, 2021, the White House Council on Environmental Quality (CEQ) delivered a Carbon Capture, Utilization and Sequestration (CCUS) report to Congress in accordance with the Utilizing Significant Emissions with Innovative Technologies (USE IT) Act passed in December 2020. The CEQ report highlights an inventory of existing permitting requirements for CCUS deployment and identifies best practices for advancing the efficient, orderly and responsible development of CCUS projects at an increased rate.

The Biden Administration is “committed to accelerating the responsible development and deployment of CCUS to make it a widely available, increasing cost-effective, and rapidly scalable climate solution across all industry sectors.” CEQ Chair Brenda Mallory recognized that in order “[t]o avoid the worst impacts of climate change and reach President Biden’s goal of net-zero emissions by 2050, we need to safely develop and deploy technologies that keep carbon pollution from entering the air and remove pollution from the air…The report … outlines a framework for how the U.S. can accelerate carbon capture technologies and projects in a way that benefits all communities.” Development of CCUS projects and related infrastructure will be encouraged and favorably looked upon by the Biden Administration as a demonstrable example of how it’s seeking to combat climate change.

CCUS – OPPORTUNITY OF THE FUTURE FOR MIDSTREAM COMPANIES?

CCUS refers to a set of technologies that remove carbon dioxide (CO2) from the emissions of point sources or the atmosphere and permanently sequesters them. In addition to removing CO2, carbon capture technology has the potential to remove other types of pollution, such as sulfur oxides. According to leading scientists and experts, removal of CO2 from the air is essential to addressing the climate crisis and alleviating the most severe impacts of climate change. Beyond the impact carbon capture technology will have on the climate crisis, CCUS will continue to have a valuable role in the US economy as the technology continues to evolve.

The CEQ report makes it extremely clear that any effective nationwide rollout of CCUS is heavily dependent on a massive buildout of pipelines for CO2 transportation infrastructure. Currently, there are approximately 45 CCUS facilities in operation or in development and 5,200 miles of dedicated CO2 pipelines. The number of CCUS facilities and the breadth of dedicated CO2 pipelines will need to expand at a rapid rate if CCUS is to become an effective tool for meeting net-zero emission by 2050.

Establishing CCUS at scale is going to be heavily dependent on—and presents a great opportunity for—midstream pipeline developers. Despite the 5,200 miles of CO2 pipelines and the potential to employ “orphaned” pipeline networks previously used by the oil and gas industry once remediated, there is no current network of CO2 pipelines at a scale large enough for permanent carbon sequestration across all industrial sectors. Thus, to achieve climate goals set by the Biden Administration, a significant amount of CO2 pipelines will need to be developed. According to the CEQ report, expansion of CO2 pipeline infrastructure in “the near term is [...]

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IRS Provides Relief on Begin Construction Continuity Requirements

Yesterday, the Internal Revenue Service (IRS) issued Notice 2021-41 (the Notice), providing relief for continuity requirements for the investment tax credit (ITC) under Section 48 and the production tax credit (PTC) under Section 45.

The applicable tax rate for the ITC and PTC is based on the year a project “begins construction.” Under existing IRS guidance, projects are treated as having begun construction by either satisfying the Physical Work Test or the Five Percent Safe Harbor. Both methods require a taxpayer to make continuous progress toward completion of the facility once construction has begun (Continuity Requirement). The IRS previously provided a Continuity Safe Harbor, whereby the Continuity Requirement will be deemed met if the project is placed in service within a certain number of years from beginning construction. For most projects, the Continuity Safe Harbor was previously four years and was extended to five years last year for projects that otherwise began construction in 2016 or 2017. Under the existing guidance, if the Continuity Safe Harbor is not met, a taxpayer can satisfy the Continuity Requirement by meeting the Continuous Construction Test (in the case of the Physical Work Test) or the Continuous Efforts Test (in the case of the Five Percent Safe Harbor). The Continuous Construction Test and Continuous Efforts Test are both demonstrated through facts and circumstances.

In the Notice, the IRS further extended the Continuity Safe Harbor to six years for projects that otherwise began construction in 2016 through 2019 and to five years for projects that otherwise began construction in 2020. In other words, the Continuity Safe Harbor will be satisfied if a taxpayer places the project in service by the end of a calendar year that is no more than five or six years (as applicable) after the calendar year during which construction of the project otherwise began.

The Notice further provides that for a project that does not satisfy the Continuity Safe Harbor, the taxpayer can satisfy either the Continuous Efforts Test or Continuous Construction Test (regardless of whether the taxpayer is relying on the Physical Work Test or the Five Percent Safe Harbor). Under previous guidance, a taxpayer relying on the Physical Work Test was all but certain to fail the Continuous Construction Test, which seems to require regular physical work from the time construction begins. The Continuous Efforts Test appears to encompass more activities than the Continuous Construction Test and may be easier to satisfy for some taxpayers.

The Notice clarifies that the relief was in response to the fact that “regional, national, or global circumstances due to the COVID-19 pandemic have continued to cause delays in the development of certain facilities eligible for the PTC and the ITC. These extraordinary delays have adversely affected the ability of many taxpayers to place facilities in service in time to meet the Continuity Safe Harbor.”

The Notice will be welcome relief to many taxpayers who have struggled with project delays in recent years.




Seeing a $100 Billion Market Opportunity, North Carolina Governor Commits to Developing 2.8 Gigawatts and Eight Gigawatts of Offshore Wind by 2030 and 2040, Respectively, through Executive Order

Last week, North Carolina Governor Roy Cooper issued Executive Order No. 218 titled, “Advancing North Carolina’s Economic and Clean Energy Future with Offshore Wind,” announcing a goal of developing 2.8 gigawatts of offshore wind energy resources by 2030 and eight gigawatts by 2040. This executive order comes after the North Carolina Department of Commerce issued a report in March that found offshore wind energy development along the Atlantic is a more than $100 billion market opportunity through 2035.

Within the order, Cooper recognizes the favorable economic impact offshore wind development will create for North Carolina, including an estimated 85,000 new jobs and $140 billion in capital expenditure along the Atlantic Coast by 2035. “This coordinated approach to developing our offshore wind supply chain will bring new jobs to North Carolina for generations to come,” North Carolina Secretary of Commerce Machelle Baker Sanders said. “From building out the supply chain, to installing equipment, to operating the wind facilities, North Carolina’s manufacturers and workforce are well positioned to play an integral role in the entire East Coast market, not just for projects directly off the state’s coast.”

In addition to the economic benefits the offshore wind development will bring to North Carolina, this executive order will further assist the state in achieving the North Carolina Clean Energy Plan’s goal of a 70% reduction in power sector greenhouse gas emissions by 2030 and carbon neutrality by 2050. “The coordinated effort of state and federal partners on this issue is an important step forward in our transition to a clean energy economy in North Carolina and key to meeting the goals of the state’s Clean Energy Plan,” North Carolina Clean Energy Director Dionne Delli-Gatti said.

North Carolina’s commitment to create 2.8 gigawatts of offshore wind capacity by 2030 and eight gigawatts by 2040 is one of the largest targets to date, exceeding Virginia’s goal of installing 5.2 gigawatts of offshore wind power by 2034 and New Jersey’s goal of 7.5 gigawatts by 2035, Michelle Allen, project manager for the North Carolina political affairs team at the Environmental Defense Fund, said. Although North Carolina’s target is one of the biggest to date, the target of 2.8 gigawatts would almost be completely fulfilled should North Carolina’s current offshore wind project, Kitty Hawk Offshore, be built to its full capacity of up to 2.5 gigawatts. If North Carolina reaches its target, the energy generated will power roughly 2.3 million homes by 2040.

As a result of the executive order, Sanders must appoint a clean energy economic development coordinator and create the North Carolina Taskforce for Offshore Wind Economic Research Strategies. The order further requires the state’s Department of Environmental Quality and Department of Military and Veterans Affairs (NCDMVA) to elect offshore wind coordinators and take steps to support offshore wind development.




Nine Governors Issue Letter to President Biden Urging Continued Prioritization of Offshore Wind Development

On June 4, 2021, days before the Biden Administration announced its intent to consider further expansion of offshore wind development in the Gulf of Mexico, nine governors issued a joint letter to US President Joe Biden’s administration to commend its commitment to offshore wind development and provide recommendations to build upon the momentum to prioritize offshore wind development in the United States.

Signed by the governors of Connecticut, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Virginia, the letter urges the Biden Administration to continue to prioritize offshore wind development while also focusing on the development of a long-term relationship and plan between the federal and state governments to advance the offshore wind industry. According to the governors’ joint letter, doing so will create thousands of jobs and cause significant investments to be made in aging ports and the accompanying US supply chain that will build, operate and maintain the new infrastructure.

The governors further noted that the expansion of the offshore wind industry “creates an unprecedented opportunity for the United States to capture significant economic development activity and build equity in coastal communities while improving air quality and increasing the option for energy diversity.” However, the governors also recognized in their joint letter that realization of this opportunity will depend on several variables, including “the pace and uniformity of the federal permitting process, the degree of regional coordination among states, the amount of available space in federal lease areas, the potential impacts on marine resources, and the availability of supporting infrastructure to deliver high-voltage power from project areas to the mainland.”

Notwithstanding, the governors aim to collaborate across their respective states to consult with one another regarding any permitting challenges, natural resource consideration, opportunities to coordinate schedules and to align construction timelines so that states’ respective clean energy targets may be met. Additionally, the governors provided the following strategies to support offshore wind development:

  • Set long-term targets for the Bureau of Ocean Energy Management’s lease area scoping and establishment that are informed by state clean energy goals
  • Supplement interstate coordination during project design and permitting processes
  • Consider setting long-term targets for offshore wind ports that can support the scale and timeline of state procurement targets
  • Ensure adequate transmission capacity
  • Provide support for other marine industries and users



DOI Announces Competitive Lease Sale for Offshore Wind Development off the Coasts of New York and New Jersey

The US Department of the Interior (DOI) announced plans to expand offshore wind development off the coasts of New York and New Jersey by proposing a lease sale it strives to complete by the end of this year. More specifically, the Biden Administration proposed a competitive sale of eight lease sites for over 627,000 acres of federal waters on the Outer Continental Shelf in the New York Bight. This proposed lease sale will support the administration’s goal of installing 30 gigawatts of offshore wind energy by 2030.

The proposed leases contain notable stipulations, including the encouragement of project-labor agreements during construction and the requirement of increased engagement with the fishing industry and other affected ocean users during the leasing process. “The development of renewable energy is an important piece of addressing climate change,” US Secretary of the Interior Deb Haaland said in the DOI’s statement, adding, the “new proposed lease stipulations puts a priority on creating and sustaining good-paying union jobs as we build a clean energy economy.”

The lease sites have the potential to generate an additional seven gigawatts of offshore wind energy, powering more than 2.6 million homes and creating thousands of new jobs. “A lease sale not only opens a door to investment in New York and New Jersey, but will support jobs and businesses throughout the U.S.,” National Ocean Industries Association President Erik Milito said. “Providing new offshore wind opportunities will boost critical investments into the supply chain, ports, and workers, and will provide a foundation for exceptional offshore wind growth.”

Despite the stipulations within the proposed leases, the DOI’s Bureau of Ocean Energy Management (BOEM) claimed that 11 offshore wind developers have already expressed interest in the leases. Should the lease sale occur, it would be the first competitive offshore wind lease sale for the administration. A Proposed Sale Notice has been issued in the Federal Register, which opens a 60-day public comment period and provides further information about the potential lease areas, proposed lease provisions and conditions, as well as auction details.

The lease sale announcement builds upon the Biden Administration’s commitment to advance offshore wind development, which includes approval of the Vineyard Wind project—the first large-scale project in federal waters—and the recent announcement to assess potential renewable energy opportunities in the Gulf of Mexico.




Biden Administration Aims to Fix “Structural Weaknesses” in Key Supply Chains and Rolls Out National Blueprint for Lithium Ion Batteries

The White House released a report on June 8, 2021, detailing the findings and recommendations of a crucial supply chains review ordered by US President Joe Biden in February. The order directed the examination of semiconductors, electric vehicle (EV) batteries, critical minerals and pharmaceuticals, four products that are critical to American national security, economic security and technological leadership. Tuesday’s report found “structural weaknesses” in the supply chains of all four products, which were only worsened by the COVID-19 pandemic.

The Biden Administration plans to take the following actions to address these structural weaknesses:

  • Issuing a national blueprint on lithium EV batteries to improve domestic production
  • Financing key strategic areas of EV battery development using the US Department of Energy’s loan authority
  • Forming a strike force to “propose enforcement actions against unfair foreign trade practices” that have harmed these crucial supply chains, including potentially using the controversial Section 232 of the Trade Expansion Act of 1962 to restrict imports of neodymium magnets (a key component of electric motors)
  • Establishing a public-private consortium to onshore the production of essential medicines

Taking a more holistic approach, the National Blueprint for Lithium Batteries (Blueprint) set five broad goals to improve the domestic lithium battery manufacturing industry. Those goals include:

  • Securing access to raw and refined materials, as well as discovering alternatives for critical minerals for commercial and defense applications
  • Supporting the growth of a US materials-processing base that’s able to meet domestic battery manufacturing demand
  • Stimulating the US electrode, cell and pack manufacturing sectors
  • Enabling end-of-life reuse, critical materials recycling at scale and a full competitive value chain in the United States
  • Maintaining and advancing US battery technology leadership by strongly supporting scientific research and development (R&D), science, technology, engineering and mathematics (STEM) education and workforce development

The report calls for a variety of policies to achieve these goals, including promoting private investment in the mining, battery manufacturing and recycling industries, training workers for employment throughout the lithium battery supply chain and making use of public-private partnerships to encourage investment and ensure industry alignment with the Blueprint’s goals.

The report also called for congressional action to fund at least $50 billion in semiconductor R&D and to incentivize the adoption of electric cars through the passage of legislation.

Michael Burnett, a summer associate in the Washington, DC, office, also contributed to this blog post.




Key Takeaways | How Traditional Energy Funds are Shifting Toward Green Energy: A Conversation with Encap Investments and Quantum Energy Partners

The energy market has undergone significant change in the past 12 months, with even more on the horizon. Our webinar series explores how these changes have shaped—and will continue to impact—the energy industry, including discussions of what’s to come.

Our latest webinar featured McDermott partners Edward Zaelke and Parker Lee, as well as Shawn Cumberland, Managing Partner of Energy Transition of EnCap Investments, and Alex Jackson, Director at Quantum Energy Partners.

Below are key takeaways from the webinar:

1. Although energy transition investment funds may have different focuses, they generally take an all-of-the-above approach, with respect to investing, in the various subsectors of the energy transition and are willing to invest in any technology, in any portion of the energy industry (except for highly capital intensive projects with binary risk profiles).

2. Similar to the approach for conventional oil and gas investments, investment funds are focused on investing in strong management teams with a successful track record, which is manifested either through a management team that already has an interesting business plan or a management team that can successfully implement the investment fund’s strategy for a new business.

3. Environmental, social and corporate governance (ESG) policies have become pervasive in all industries—especially within the energy industry—and must permeate all aspects of an investment fund’s strategy. Effective ESG policies and proper environmental stewardship have become licenses to operate within the energy industry and without them, operating companies and investment funds will have extremely limited ability to gain legitimate interest from potential investment partners.

4. When developing a relationship between an investment fund and a management team for a new investment, it is critical for both parties to ensure there are aligned interests and expectations between the two parties.

5. Investment funds see abundant opportunities within the energy transitions space and are bullish on those investments’ capability to satisfy energy demand over the next two to three decades but are also looking to achieve diversification to protect their limited partners from the cyclical nature of energy investment.

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




Biden Administration Explores Offshore Wind Development in the Gulf of Mexico

Earlier this week, the Biden Administration announced its intent to consider further expansion of offshore wind development in the Gulf of Mexico. This announcement comes two weeks after the Biden Administration announced an agreement to lease almost 400 miles off California’s northern and central coasts for wind development. Potential offshore wind leasing in the Gulf of Mexico may play an integral role in the administration’s goal of installing 30 gigawatts of offshore wind by 2030.

To continue its exploration into offshore wind development in the Gulf of Mexico, the US Department of the Interior’s Bureau of Ocean Energy Management (BOEM) will publish a Request for Interest (RFI) in the Federal Register on June 11 to evaluate development interest, potential environmental consequences and other possible uses of the proposed area. Interior Secretary Deb Haaland acknowledged that, “Offshore wind development has the potential to create tens of thousands of good-paying, union jobs across the nation. This is an important first step to see what role the Gulf may play in this exciting frontier.”

The RFI will focus specifically on the Gulf of Mexico’s Western and Central Planning Areas offshore to Louisiana, Texas, Mississippi and Alabama. Although the emphasis is on wind energy, BOEM is also seeking information on other renewable energy technologies, according to the Interior Department. Publishing the RFI will open a 45-day comment period, after which the agency will review comments and data received to determine the next steps in the renewable energy leasing process in the Gulf.

“The Gulf of Mexico has decades of offshore energy development expertise,” Mike Celata, regional director of BOEM’s Gulf of Mexico office in New Orleans, said. “Working directly with our partners in the Gulf, we will make sure that offshore renewable energy development proceeds in an orderly, safe, and environmentally responsible manner.”

Developing offshore wind projects in the Gulf may prove more difficult than projects on the east coast (or even deepwater projects in California) for a few reasons. First, other than the Electric Reliability Council of Texas (ERCOT), wholesale power markets are generally not developed in the region. Second, the wind resource (with some exceptions) is not as strong as the wind resource on the east coast. Finally, it is unclear whether states will provide the necessary incentive programs (in the form of offshore wind renewable energy certificate (OREC) programs or otherwise) to support development. There are a few mitigating counterfactors however, including the historic presence of major oil developers in the region that are collectively looking to “go green,” vocalized support from leadership—including the Governor of Louisiana—the declining price of offshore wind technology and the recently expanded offshore investment tax credit (ITC).

Currently, BOEM has leased approximately 1.7 million acres in the Gulf of Mexico’s Outer Continental Shelf for offshore wind development and has 17 commercial leases on the Atlantic— from Cape Cod to Cape Hatteras. After the comment period concludes on the RFI, information on offshore wind development in the Gulf is expected to [...]

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Biden Administration Advances California Offshore Wind Development

On May 25, 2021, the Biden Administration announced an agreement to lease almost 400 miles off California’s northern and central coasts for offshore wind development. The announcement expands on the recent approval of the first major offshore wind project in US waters. In an effort to decarbonize US power generation, the administration noted, “These initial areas for offshore wind development in the Pacific Ocean could bring up to 4.6 gigawatts of clean energy to the grid, enough to power 1.6 million American homes.”

Furthering the Biden Administration’s “whole-of-government approach” to clean energy, the US Department of Interior in connection with the US Department of Defense identified an area northwest of Morro Bay that will support three gigawatts of offshore wind. The Humboldt Call Area is also being considered as a potential offshore wind location, which would bring 4.6 gigawatts of energy to California. The Department of Defense played a significant role in identifying areas for offshore wind development, as they take part in significant training and operations off the coast of California that are essential to national security. Both the Department of Defense and Department of Interior plan to work closely together to ensure protection of military operations while pursuing new domestic clean energy resources.

To support this development in the deep Pacific Coast waters, new floating offshore wind technology will be deployed. The US Department of Energy (DOE) has invested more than $100 million in researching, developing and demonstrating floating offshore wind technology. Floating turbine technology will likely be a prime candidate for DOE Loan Programs Office support because it is (1) large enough in scale, (2) has a long lead time to develop and (3) is not commercially scalable in the same way as offshore technology that utilizes bottom anchoring. Lenders will have questions about the technology and having that guaranty could significantly aid project financing.

Ahead of yesterday’s announcement, California invested millions into its budget for environmental needs, including funding port upgrades and power lines that will carry electricity to California homes. We expect further developments in California from a legislative perspective to further offshore development.




Why 2030 is the New 2050 after the Leaders Climate Summit and What President Biden’s Accelerated Transition to a Sustainable Economy Means for Renewables Developers, Investors and Corporates

2030 is the new 2050 as US President Joe Biden has officially set a new goal for fighting climate change over the next decade in the United States. At the Leaders Climate Summit (the Summit) on Earth Day, he announced that America would aim to cut its greenhouse gas emissions at least 50% below its 2005 levels by 2030. If successful, this transition would lead to a very different America and would affect virtually every corner of the nation’s economy, including the way Americans get to work, the sources from which we heat and cool our homes, the manner in which we operate our factories, the business models driving our corporations and the economic factors driving our banking and investment industries. The effectiveness of this transition lies in the administration’s ability to pull on two historically powerful levers: Tax policy and infrastructure funding. However, tax policy will call upon multiple sublevers, such as increased tax rates, expanded tax credits, refundability, carbon capture, offshore wind, storage, transmission and infrastructure investment. All of this will be bolstered by the American corporate sector’s insatiable appetite for environmental, sustainability and governance (ESG) goal investment.

QUICK TAKEAWAYS

There were six key announcements at the Summit for renewables developers, investors and corporates to take note:

  1. The United States’ commitment to reduce its greenhouse gas emissions by 50% – 52% below its 2005 emissions levels by 2030
  2. The United States’ economy to reach net-zero emissions by no later than 2050
  3. The United States to double the annual climate-related financing it provides to developing countries by 2024
  4. The United States to spend $15 billion to install 500,000 electric vehicle charging stations along roads, parking lots and apartment buildings
  5. A national goal to cut the price of solar and battery cell prices in half
  6. A national goal to reduce the cost of hydrogen energy by 80%

President Biden’s goals are ambitious. It is clear from the history of renewable incentives in the United States as well as current developments that moving forward, the green agenda will predominately rely on two primary levers being pulled at the federal level: Tax policy and infrastructure funding. The federal tax levers mentioned above will not be pulled in a vacuum. Instead, they will be pulled in the midst of a tectonic shift among individual investors that now demand that institutional investors and corporations begin to create and meet ESG goals as individual customers are beginning to take a corporation’s climate goals and footprint into account when making purchasing decisions.

As a result, we discuss the following areas in greater detail below:

  1. Tax policy
    1. increased tax rates
    2. expanded tax credits
    3. refundability
    4. carbon capture
    5. offshore wind
    6. storage
    7. transmission
  2. Infrastructure bill
  3. ESG environment

DEEPER DIVE: BREAKING DOWN EACH LEVER AS WELL AS ITS OPPORTUNITIES AND CHALLENGES

  1. Tax Policy: The consistent message from the Biden Administration, at the Summit and elsewhere, makes clear that tax policy will likely play a significant role in the administration’s ambitious climate agenda. At [...]

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