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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 [...]

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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.




Key Takeaways | A Deep Dive into Wage and Apprentice, Domestic Content, Transfer and Direct Pay

On August 31, McDermott Partners Heather Cooper and Philip Tingle provided a detailed review of the wage and apprentice, domestic content, transferability and direct provisions of the Inflation Reduction Act of 2022. They discussed the technical requirements for each of the new sections and offered insight into how these new rules will impact the deal pipeline, planning and negotiations.

Below are key takeaways from the discussion:

  1. The extension and expansion of the existing ITC and PTC by the Inflation Reduction Act (IRA) come with additional requirements, a critical component of which is the all-new wage and apprenticeship requirement (W+A) for 1MW or greater energy projects. Because of both the newness of the rules and the need for additional IRS guidance, the beginning construction rules are going to have continued relevance while taxpayers wait for the market to sort out how it will address W+A compliance.
  2. For projects beginning construction after the W+A guidance, taxpayers must consider how they will monitor W+A compliance, in particular with respect to wages paid to and labor provided by employees of contractors and subcontractors. Taxpayers should consider what types of covenants and representations they will require of contractors, how to draft indemnities to allocate the risk of default, costs to cure failures to meet W+A, and in the worst case the loss of 80% of the ITC or PTC.
  3. There is limited direct pay available to tax-exempts, government entities, Indian tribes, and the like, except for the credits for clean hydrogen, carbon capture and advanced manufacturing credits—which are available to non-exempt taxpayers.
  4. As an alternative to direct pay, taxpayers may elect to transfer their credits for cash. Those proceeds are tax-free, generally with no cap, phase-out, limitation or exception. For partnerships, the election is made at the partnership level, which creates planning complexities on who will control elections and make indemnities, and how remaining partnership items will be taxed and allocated. Taxpayers will need to plan around such situations, and transferability likely won’t simplify the financing of renewable projects.

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 | In the Room Where It Happened

On August 25, McDermott Will & Emery kicked off its latest 10-part weekly webinar series focused on navigating the new energy landscape following the enactment of the Inflation Reduction Act of 2022 (the Act)—the largest and most important climate action in US history.

During the first webinar, McDermott Partners Carl Fleming and Edward Zaelke hosted Greg Wetstone, president and CEO of the American Council on Renewable Energy (ACORE), for a discussion on the conversations leading up to this historic legislation and its future impact on the renewable energy industry.

Below are key takeaways from the discussion:

1. The Act represents a major win for the renewable energy industry, particularly its extension of tax credits up to a 10-year (or potentially longer) period, allowing businesses in the energy sector to plan on stable tax platforms for longer than a couple of years—something that is truly unprecedented for the renewables industry. Other major highlights include the introduction of tax credits for energy storage and new technologies, such as hydrogen, programs to encourage domestic manufacturing and the monetization of tax credits. The McDermott Energy & Project Finance team has already seen a spike in standalone energy storage mergers and acquisitions (M&A) activity and a heightened interest in financing structures.

2. Of further noteworthy importance is the Act’s introduction of the ability to transfer tax credits. Although the direct pay provisions of the Act were not as broad as hoped for by many, Greg believes that the transferability provisions will have a significant impact on the renewable energy market. In his view, the constraints on transferability are minimal and allow for the monetization of credits without partnership flips or sale-leasebacks, although there may still be a role for these types of transactions. According to Greg, the market will likely see a mix of tax equity structures and other kinds of financing as there is now more latitude as to how to monetize these credits. The Energy & Project Finance team is currently advising on a number of innovative structures to allow clients to capitalize on this new game changer for tax credits.

3. Another notable feature of the Act is the ability to stack credits related to domestic content, energy communities and wage and apprenticeship requirements. Although further regulations and guidance are needed in these areas, it is agreed amongst industry specialists that appropriately stacking these incentives could make renewable energy projects much more lucrative while creating beneficial societal impacts, such as building a domestic workforce and supply chain and transitioning away from fossil fuel-driven economies. The Energy & Project Finance team is working with various clients to narrow down such requirements and to help properly “stack” these credits.

4. Reducing greenhouse gas emissions was a true driving force behind the Act and is a meaningful step toward addressing climate issues. However, the devil will be in the details regarding how the [...]

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Key Takeaways | Renewables Tax Takeaways from the Manchin-Schumer Deal on Taxes, Climate and Energy

On August 1, McDermott Partners Philip Tingle and Heather Cooper hosted a webinar to address the climate bill, dubbed the Inflation Reduction Act of 2022, which unexpectedly came back on the table on July 27. Click here for a summary of the bill.

Below are key takeaways from the presentation:

  • Last week’s surprise Congressional bill incorporates many of the same features we saw in last year’s Build Back Better bill, including an extension of the existing PTC and ITC, to be replaced by a technology-neutral PTC and ITC available for any energy producing projects or storage technology with net zero greenhouse gas emissions. Those new credits would remain in place without phase down until at least 2032.
  • If enacted, taxpayers need to consider how the proposal impacts their pipelines. Taxpayers may no longer need to worry about “begin construction” for purposes of locking in the tax credit phase-down under the current law, but will still need to think about “begin construction” rules vis a vis the new wage and apprentice requirements, and also think about placed-in-service dates for purposes of eligibility for the new domestic content bonus and transferability provisions.
  • The bill doesn’t offer the much-desired direct pay feature for most projects, but offers a transfer optionality that could dramatically change how facilities are financed. Developers will need to consider how the transfer mechanism impacts timing of getting paid for the credits, stranded depreciation, tax basis step-up valuations, and the discount rate for selling the credits, and whether it still makes sense in some cases to bring in tax equity.
  • There are lots of different incentives scattered throughout the bill and market players will need to carefully assess how these incentives may refocus how and where they build projects. For instance, new credits for storage and hydrogen, and significant credit boosts for projects in low-income, coal and other traditional energy communities.



Key Takeaways | Update on the Solar Circumvention Proceeding and Discussion of Possible Comments in Response to Commerce’s Recent Memo

On May 17, 2022, Carl Fleming, Lynn Kamarck and Tyler Kimberly from McDermott’s Energy and Project Finance and International Trade teams hosted Solar Energy Industry Association (SEIA) General Counsel and Vice President of Market Strategy John Smirnow for a roundtable discussion that provided substantive arguments, best practices and other advocacy strategies for US solar developers who are preparing to submit collective and individual responses to the US Department of Commerce (Commerce) this week following Auxin Solar Inc.’s petition and Commerce’s subsequent memorandum.

Below are key takeaways from the discussion:

1. To reach an affirmative circumvention determination, Commerce must confirm that the processing occurring in the target countries (i.e., Cambodia, Malaysia, Thailand and Vietnam) is “minor or insignificant.” While Commerce’s precedent establishes that the processing required to make a wafer into a module (including cell production) is not “minor or insignificant,” it has suggested the opposite during this circumvention inquiry.

2. Commerce could terminate the circumvention proceeding on the basis that including cells or modules completed in the target countries within the scope of the existing Chinese orders would not be “appropriate.” However, there is no clear indication as to what “appropriate” means.

3. What developers need the most right now is certainty. Because of the uncertainty surrounding the amounts of cash deposits and the final assessment of import duties, some developers are unable to make key business decisions. While Commerce tried to provide some of this certainty in its May 2 proposal, it did not accomplish that goal.

4. Developers can share their views regarding the investigation by submitting comments to Commerce by 5:00 pm EDT on May 19, 2022. Comments can include discussion of any difficulties complying with Commerce’s proposed certifications and whether such certificates would be useful to the company, the treatment of cells or modules manufactured in non-targeted countries and inconsistencies between prior Commerce decisions and the investigation at hand.

5. SEIA is calling for a Public Interest Requirement in anti-circumvention investigations to prevent similar petitions from being filed and moving forward in the future.

McDermott is currently preparing comments for a number of US solar developers and also providing additional feedback on comments prepared by other US solar developers to ensure that they are putting their best foot forward during this critical period.

For more insight on this topic, please watch our recent webinar recording where our executive leadership panel discussed the commercial, legal and policy responses to Commerce’s anti-circumvention investigation.




Key Takeaways: Risks, Opportunities and Disclosures in the Era of Climate Change

On April 27, members from McDermott’s ESG, Impact & Sustainability Group, including Counsel David Cifrino and Partners Thomas Dawson, Carl Fleming and Jacob Hollinger, hosted a webinar on risks, opportunities and disclosures in an era of climate change.

Below are key takeaways from the webinar:

  • There is intense industry and investor interest in new rules the United States Securities and Exchange Commission (SEC) has proposed on climate-related risk disclosure and how they harmonize with international sustainability standards. The proposed disclosure is very specific and detailed and would apply to companies in all sectors. The disclosure can be divided into three separate categories: a separate non-financial “Climate-Related Disclosure” section in annual reports and registration statements on climate-related governance, risk management, strategy, and goals; detailed reporting of greenhouse gas emissions, and financial statement climate-related metrics.
  • The SEC proposal for greenhouse gas reporting has many differences from the Environmental Protection Agency’s (EPA) existing Greenhouse Gas Reporting Rule, although the two sets of requirements are not necessarily inconsistent. Some aspects of the SEC proposal that are not in the EPA rules include: required reporting from the SEC registrant rather than being facility or supplier specific; no reporting threshold; contains no set mandatory calculation methodology; and has a third-party attestation requirement.
  • US insurers face separate specific considerations with respect to the rules. Of the approximately 5,000 insurers in the US, only about 110 are SEC registrants. States are typically the primary regulators for insurers and some states have existing annual climate disclosure requirements. Currently 35 states do not have such requirements, but it remains to be seen whether the SEC proposal will push more states to require submission of annual climate disclosures or to modify other disclosure filing requirements to include specific climate risk disclosure items.
  • The main “megatrend” in the market is toward decarbonization which impacts valuations, operations, employees and markets. Renewable energy is expected to continue its record growth through 2050. Several factors driving this growth includes technology improvements, decreasing costs, improved battery storage and a supportive policy environment.
  • Independent power producers are potential partners in helping Fortune 100 companies, tech giants and governments “go green.” For entities that cannot produce green energy but want to ensure their energy comes from green sources, corporate power purchase agreements with independent power producers provide a way of doing so.
  • Corporations bought a record 31.1 gigawatts of clean energy through power purchase agreements, or PPAs, in 2021. This is up nearly 24% from the previous year’s record of 25.1GW.

Read more on “SEC Proposes Landmark Standardized Disclosure Rules on Climate-Related Risks” and “Climate Change Regulatory Update for US Insurers”.




Key Takeaways | Keeping the Lights On: Cyber Threat, Vulnerability and Oversight Considerations for the Energy Sector

During the latest webinar in our Energy Transition series, Partners Carl Fleming and Scott Ferber hosted PWC Principals Brad Bauch, US Power and Utilities Cybersecurity & Privacy Leader, and Mark Ray, Cybersecurity & Privacy, to discuss the cyber threat landscape that the energy sector currently faces, the US government’s oversight of cybersecurity and key considerations for building a robust compliance program.

Below are key takeaways from the webinar:

1. The Cyber Threat Landscape. Threat actors are continually evolving in the tactics, techniques and procedures they are deploying against their targets, making it a daunting threat landscape. Where nation state threat actors are involved, the risk of compromise is heightened. Ransomware continues to be, by far, the most prevalent issue organizations are contending with across all sectors and geographies—followed by supply chain attacks and zero-day exploits. Amid Russia’s invasion of Ukraine and the punishing sanctions being imposed, along with Russia’s demonstrated willingness to use malign cyber means against an array of targets, the energy sector should be on high alert for cyberattacks.

2. US Government Engagement. The US government is using a carrot-and-stick approach with the private sector to encourage and, in some instances, require robust cybersecurity, as well as information sharing. Bottom line, the government is expecting more of the private sector (particularly the energy sector) when it comes to dealing with cybersecurity.

3. Building a Robust Compliance Program. There are unique considerations when building a robust compliance program that encompasses both Information Technology (IT) and Operations Technology (OT) systems. As a starting point, companies should consider:

  • Benchmarking against cybersecurity compliance programs at peer companies and similar industries
  • Creating processes that are enterprise-wide, with a control standards-based approach
  • Avoiding program siloing
  • Ensuring active monitoring and controlled access of IT and OT systems
  • Developing strong protections for legacy OT software that is operationally essential.

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




Key Takeaways | Commercial, Legal and Policy Responses to Commerce’s Anticircumvention Investigation

The US Department of Commerce (Commerce) recently initiated a circumvention investigation against solar cell and module imports from Cambodia, Malaysia, Thailand and Vietnam. This decision has the potential to profoundly impact the companies that import or rely on imported crystalline silicon photovoltaic cells (CSPs) in the United States. To help companies navigate this investigation, McDermott’s Carl Fleming, Lynn Kamarck and Tyler Kimberly were joined by Brett White, vice president of regulatory affairs for Pine Gate Renewables, for a fireside chat that covered, among other things, the specific issues Commerce will investigate, how to assess the risk of this decision across developer portfolios and the opportunities presented for improving current renewables legislation.

Below are key takeaways from the discussion:

1. Commerce’s decision to initiate a circumvention investigation into whether CSPs imported from Cambodia, Malaysia, Thailand or Vietnam are circumventing antidumping and countervailing duty orders on CSPs from China has generated market uncertainty for companies that import or rely on imported CSPs.

2. Whether any assessment of duties or penalties that result from the investigation will have retroactive effect is currently unclear. Applicable regulations do not require Commerce to apply duties retroactively, providing an opportunity for “interested parties” to offer feedback to Commerce as to why retroactive application would be unfair. (In this context, domestically, importers of record, businesses and trade associations and industrial users are generally recognized as interested parties.)

3. Major legal and factual issues may sway Commerce’s ultimate determination, while certain factual discrepancies in Auxin Solar Inc.’s petition to Commerce may lead to a preliminary decision by Commerce. (The deadline for the preliminary decision is August 29, 2022, and it’s unlikely that Commerce will act before this deadline.) Additionally, certain “country of origin” legal analyses are implicated in any ultimate determination Commerce makes.

4. Auxin’s petition and Commerce’s investigation have given more attention to the issue of importing CSPs and to the Build Back Better Plan (BBB), so there is optimism that this may push US Congress to act more quickly on the adoption of certain tax credits, domestic content credits and other incentives under the BBB.

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




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