Project Development and Finance
Subscribe to Project Development and Finance's Posts

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 transferability [...]

Continue Reading




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.




Key Takeaways | Domestic Supply Chain, Manufacturing and the DPA: How America Will Step Back into Its Global Leadership Role

The Inflation Reduction Act of 2022 (IRA) is intended to stimulate domestic production in the US energy market and incentivize investment into those projects that utilize such domestic content. On October 26, Partners Carl Fleming and Philip Tingle talked about what the passing of the IRA means for the supply chain (and all its issues as of late), manufacturing within the energy sector, the Defense Production Act and more with guest Brett White, VP of Regulatory Affairs at Pine Gate Renewables (PGR).

Below are key takeaways from the discussion:

1. The IRA Has Already Spurred Investment and Onshoring. The IRA brings improvement to manufacturing and the supply of domestic contents that are capable of bringing a lot of investment opportunities. Investors and manufacturers are already responding positively to it, including module suppliers who are already looking to bring facilities over to the United States. There is still a need for guidance from the US Department of the Treasury (Treasury) and other agencies with respect to regulation, specifically transactable regulations, including comprehensive domestic policy on onshore manufacturing and all the steps it entails. However, the McDermott and PGR teams have already seen a rise in activity surrounding mergers and acquisitions, finance and manufacturing in response to the IRA.

2. Carrot as Opposed to Stick Approach. The domestic content adder is a major carrot to incentivize domestic production, which is quite a contrast to the stick approach that was applied in connection with tariffs and the Auxin investigation. With regards to the tariffs and duties approach and the incentive tax treatment, they do not complement each other; there is a disjointed approach when you look at the tariff items. The Internal Revenue Service (IRS) and the Treasury must issue commercially viable, financially transactional guidance because these incentives are a part of financing for each side of the transaction, the supply chain side and the development side and so it has to be transactable.

3. Need for Further Clarification. The IRS recently issued a request for comments on the domestic content adder, as well as other IRA items. Those comments are due by November 4, 2022. The domestic content adder will be a boon for standing up a domestic supply chain, but the current language requires significant clarification before parties can fully transact. Once that language is determined, this guidance will solidify the number of manufacturers interested in bringing facilities to the United States. While the IRS has a lot on its plate with numerous IRA adders and other legislation, the McDermott and PGR teams see domestic content being among the first items to be clarified within the next few months.

4. Parties Are Transacting on IRA Adders. While some parties are waiting on guidance from the Treasury and the IRS on how they will interpret “manufactured product,” the McDermott team is leading a number of the [...]

Continue Reading




Key Takeaways | Clean Hydrogen Producers Get a Big Boost from the Inflation Reduction Act

Green hydrogen is a developing industry in the United States. The Inflation Reduction Act of 2022 (IRA), which includes $369 billion in energy and climate spending, even introduces a clean hydrogen production tax credit (PTC) and broadens the existing investment tax credit (ITC) to apply to hydrogen projects.

During the latest webinar in our Navigating the New Energy Landscape series, Partners Heather Cooper and Christopher Gladbach were joined by Ivana Jemelkova from FTI Consulting, Ulrich Reinhard from Air Liquide and Tommy Gerrity from Ørsted for a discussion on the future of green hydrogen development following the passage of the IRA.

Below are key takeaways from the discussion:

1. The IRA introduces a new PTC for hydrogen produced after 2022 for a 10-year period from the date the project in question is placed in service. The credit is calculated as a percentage of $0.60/kg based on the resulting lifecycle greenhouse gas emissions rate and may be multiplied by five for the satisfaction of the wage and apprenticeship rules (as slightly modified compared to the standard tax credit-related wage and apprenticeship rules). To qualify for this PTC, hydrogen must be produced in the United States in the ordinary course of a trade or business for sale or use, and the production must be verified by an unrelated person.

2. The IRA also introduces a new ITC equal to the energy percentage of the cost basis of each specified clean hydrogen production facility placed in service during a taxable year based on the resulting lifecycle greenhouse gas emissions rate. The credit may also be multiplied by five for the satisfaction of the wage and apprenticeship rules and is eligible to credit adders for the domestic content and energy communities’ bonuses. To be eligible for this ITC, construction of the specified clean hydrogen production facility in question must begin before 2025.

3. Although the tax incentives related to hydrogen are new, the hydrogen industry has been around for over a century. Yet, it is not until recently that hydrogen production technologies have been seen as a clean energy solution. As such, there has been a visible uptick in the delivery of hydrogen through (1) renewable energy sources, such as wind and solar (referred to as green hydrogen), and (2) other energy sources, such as natural gas, supported by carbon capture and storage technology (referred to as blue hydrogen). This trend will be even further bolstered by the IRA, which strives to minimize the carbon impact over the production lifecycle of hydrogen from various energy sources and technologies.

4. With the United States being the second largest consumer in the world, industry experts believe there will be no shortage of demand for hydrogen and hydrogen-related technologies in the near future, especially in light of the enactment of the IRA. Yet, despite the growing opportunities related to hydrogen (g., its use to fuel [...]

Continue Reading




Key Takeaways | Technology-Neutral Tax Credits: When Will ITC and PTC Disappear?

During this webinar, McDermott Partners Heather Cooper and Joel Hugenberger hosted Jay Chang, managing director at CCA Group, for a discussion on how the new technology-neutral tax credit will work and how it may impact the industry moving forward.

Below are key takeaways from the discussion:

1. The newly introduced technology-neutral tax credits (for both the investment tax credit (ITC) and production tax credit (PTC) regimes) are unique in that they can be applied to any facility producing energy so long as the greenhouse gas emissions from said facility are net zero. At this time, emission classes have not yet been established by the Internal Revenue Service (IRS), although carbon dioxide capture can be taken into account for calculating the emissions rate under the new technology-neutral tax credit regime. (More guidance surrounding this topic is expected before 2025.) However, it is expected that traditional renewables facilities (e., solar and wind) will be treated as having net zero emissions. Nonetheless, all technologies will have the option to select either ITCs or PTCs and not be restricted by their respective industry (as was previously the case).

2. Generally, the technology-neutral tax credits will follow the ITC and PTC mechanism; there will be 30% ITCs and 100% PTCs, each with potential adders or penalties against each, respectively. The technology-neutral tax credits will also be subject to identical wage and apprenticeship rules that apply to the current tax credits in connection with PTCs and ITCs.

3. Technology-neutral ITCs and PTCs are applicable to projects placed in service after 2024 (e., on or after January 1, 2025). The old ITC and PTC regimes are set to apply to projects that begin construction prior to or during the year 2024. For those projects that overlap between both periods, it is unclear as to which regime would apply. Taxpayers are still awaiting additional guidance from the IRS concerning this inquiry.

4. Technology-neutral PTCs are available to taxpayers without them having to provide evidence of a sale of output. Now, so long as the output is verified by a third-party meter reader, a taxpayer can take advantage of these new credits. Additionally, taxpayers can now claim these technology-neutral tax credits for new additions to existing facilities (which could be particularly beneficial for facilities that might be upsized post-2024.)

5. To note, assuming greenhouse gas emissions reach a target of 25% of the current 2022 rates, technology-neutral ITCs and PTCs will begin to be phased out starting in 2034. Projects beginning construction in 2034 will be entitled to 75% of tax credits. In the following year, projects will be entitled to 50% of tax credits, with projects being entitled to 0% of tax credits in 2036. However, if the proposed greenhouse gas emissions goal is not reached by 2034, this proposed timeline will be extended.

6. In the past, renewable technologies have had to quickly adjust [...]

Continue Reading




Key Takeaways | The Current State of the US P3 Market

On September 28, McDermott Partner Emeka Chinwuba and Star America Infrastructure Partners’ Michael Rueger and Kamil Seidl discussed the effects of the Infrastructure Investment and Jobs Act (IIJA) on the P3 market and what impact the Inflation Reduction Act will have on future energy projects. They also provided an outlook on secondary and brownfield assets and addressed barriers to bridging the funding gap.

Below are key takeaways from the discussion:

1. There has been an increase in capital raise activity amongst financial sponsors in anticipation of a robust pipeline of infrastructure projects as the impact of IIJA begins to permeate through the US P3 market.

2. Progressive P3 procurement models continue to gain traction as total procurement and project costs can be significantly reduced, especially since the risks can be better defined before pricing is locked in.

3. Political risks remain a concern, especially for user-fee-based infrastructure projects, and the need for P3 champions on a project-by-project basis remains essential to the growth and continued diversification of the market.

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.




Federal Government Approves First $900 Million Toward Development of a National Network of Fast-Charging Electrical Vehicle Stations

The National Electric Vehicle Infrastructure (NEVI) Formula Program, sponsored by the US Department of Transportation’s (DOT) Federal Highway Administration (FHWA), will provide $5 billion in funding for states to establish an interconnected network of electric vehicle (EV) charging stations over the next five years beginning in 2022, with $1 billion in funds being dispersed each of those five years. This funding comes out of the much larger $1 trillion bipartisan Infrastructure Investment and Jobs Act, which passed back in November 2021.

KEY TAKEAWAYS

The EV charging stations must be (1) nonproprietary, (2) publicly available or available to authorized commercial motor vehicle operators from more than one company and (3) be located along interstate highways. The FHWA must distribute the NEVI Formula Program funds made available to it each fiscal year, through 2026, so that each state receives an amount equal to the state FHWA funding formula determined by 23 U.S.C. § 104. To receive funding, each state must submit a plan describing how it intends to distribute the NEVI Formula Program funds.

A DEEPER DIVE

On September 14, 2022, the Biden-Harris administration announced approval of 35 states’ plans, amounting to the first $900 million in US federal funding to build EV charging stations under the NEVI Formula Program. The approved funding comes from the allotted NEVI Formula Program funds to be disbursed throughout fiscal years 2022 and 2023. The FHWA expects to complete its review of the remaining states’ plans by September 30, 2022.

In addition, the Biden-Harris administration signaled that there would be an allotment of $2.5 billion in grants to be utilized for funding EV charging infrastructure in economically disadvantaged communities, rural towns and urban neighborhoods. Further, the recently passed Inflation Reduction Act of 2022 earmarks $3 billion for not only widespread EV adoption, but also ensuring that charging stations are located in underprivileged communities.

The NEVI Formula Program funding is designed to help build up to 500,000 EV chargers across approximately 53,000 miles of highway throughout the country. The proposed guidelines would require states to build at least one four port fast-charging station every 50 miles (some states may receive exemptions for a limited number of rural areas), with each station located within one mile of an off ramp. The program is designed to ease EV purchasers’ anxiety surrounding range capability on long road trips throughout the United States.

State DOTs were permitted to begin projects prior to approval. The recently approved funds may be used to reimburse the states for funds already spent on their respective projects, in accordance with their submitted plans. Eligible costs under the NEVI Formula Program includes almost any cost associated with getting chargers in the ground.

States and Territories with approved plans include Arizona, Arkansas, California, Colorado, Connecticut, District of Columbia, Delaware, Florida, Georgia, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota, Tennessee, Utah, Washington and Wisconsin.

States that have submitted [...]

Continue Reading




Key Takeaways | Tax Credit Bonuses for Low-Income and Coal, Oil and Gas Energy Communities

On September 13, McDermott Partners Heather Cooper and Philip Tingle provided a detailed overview of the bonus tax credits under the Inflation Reduction Act of 2022 for projects satisfying low-income thresholds or built-in energy communities with ties to coal, oil and natural gas, including the technical requirements for each bonus and how these new rules will impact deal pipeline, planning and negotiations.

Below are key takeaways from the discussion:

1. There is an annual capacity limitation of 1.8 gigawatts direct current for low-income bonuses. It’s unknown whether this capacity will be allocated to projects on a first-come, first-served basis or shared amongst all applicants annually in the event capacity is reached. The Internal Revenue Service must provide guidance on this point within 180 days of enactment.

2. Projects that fail to satisfy relevant low-income/poverty metrics are subject to recapture (with a one-time opportunity to cure). It remains to be seen whether circumstances outside taxpayer control (e.g., local economic improvement) will trigger recapture.

3. At present, it is difficult to transact on the energy community bonus-based projects located in brownfield or MSA/non-MSA because of a lack of guidance. Projects located in census tracts with retired coal fired EGUs or coal mines, however, can be transacted based on the statute alone.

4. Projects will require researching, tracking and targeting areas where coal mines closed, coal fired EGUs retired and (after relevant guidance is released) brownfields are located.

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.




STAY CONNECTED

TOPICS

ARCHIVES

Ranked In Chambers USA 2022
GCR 100 global elite