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The Energy Market in 2021: From Crisis to Opportunity | Tax Credit for Carbon Capture Products

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 FTI Consulting’s Ken Ditzel, Senior Managing Director and Fengrong Li, Managing Director, who are both in the Economic and Financial Consulting Practice.


Below are key takeaways from the webinar:

  1. The carbon capture and sequestration tax credit under section 45Q is an important source of predictable revenue for carbon capture projects. The section 45Q credit was substantially expanded in 2018 and is worth up to $50 per metric ton for carbon permanently sequestered and up to $35 per metric ton for carbon used as a tertiary injectant in connection with an enhanced oil or natural gas recovery project. Internal Revenue Service (IRS) guidance released last year and final regulations promulgated in January have provided more certainty for the market to move forward with carbon capture projects and claim the enhanced section 45Q credit.
  2. There are currently about 32 strong contender carbon capture projects in the US market. About half of the carbon capture projects are traditional power generation and another third of projects are ethanol projects. Deep saline formations represent almost 90% of carbon sequestration storage capacity with enhanced oil recovery representing most of the remaining storage capacity.
  3. Tax equity investors—including banks, financial institutions and energy companies—are closely monitoring and have expressed interest in carbon capture projects. To date, there are no closed transactions that include tax equity structures. Rather, project sponsors have claimed the section 45Q credit against their own tax liabilities. The recapture lookback period was reduced from five to three years in the final section 45Q regulations, which may encourage tax equity investments.

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




US Senate Committee Introduces Clean Vehicle Charging Legislation

Earlier this week, a group of cross-party US senators introduced the Securing America’s Clean Fuels Infrastructure Act (the Act) to promote investments in clean vehicle infrastructure. The types of infrastructure supported by the legislation include electric vehicle charging stations and hydrogen refueling stations for fuel cell vehicles.

The Act would enlarge the benefits of the existing Alternative Fuel Vehicle Refueling Property Investment Tax Credit (ITC) (found in Section 30C of the Internal Revenue Code), diminishing costs associated with clean vehicle infrastructure development. The legislation targets American automobile owners, as electric and clean energy vehicles supplant traditional gasoline power vehicles.

The new legislation encourages increased private investment by providing incentives to build the much-needed infrastructure to support the wide adoption of clean energy vehicles. According to its sponsors, the Act would accomplish three goals:

  1. Clearly state the 30C ITC can be applied to each item of refueling property (i.e., each charger) rather than per location.
  2. Increase the 30C ITC cap for business investments from $30,000 to $200,000 for each item of refueling property.
  3. Extend the 30C ITC tax credit for eight more years from the December 31, 2021, expiration date, which means the 30C ITC would apply to refueling property that is placed in service by December 31, 2029.

Nonprofit environmental groups, transportation associations, energy companies and major automakers all support the proposed cross-party bill. If passed, the bill will bring increased activity in the renewable energy market for developers, investors and lenders.




New Resource Center: Navigating Change in the US Administration

Pandemic relief, taxes, income inequality, climate change, infrastructure, healthcare and civil rights: the new US administration is moving forward rapidly on President Joe Biden’s stated priorities. So how are these new policies affecting your business? We’re here to keep you informed!

McDermott Will & Emery’s multidisciplinary team of industry-leading lawyers are monitoring key legal areas to help you navigate and gain perspective on the most critical impacts of changing US policies. Access the latest updates in our new resource center.




Five Takeaways: The Energy Market in 2021 – From Crisis to Opportunity

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 Greg Wetstone, president and CEO of the American Council on Renewable Energy (ACORE).


Below are key takeaways from this week’s webinar:

  • The renewable energy industry continued to grow throughout the Trump administration; 2020 was a banner year with 28.5 GW of new wind and solar (the previous record, in 2016, was just below 23 GW).
  • The renewable industry is likely to receive its first legislative action as part of the infrastructure bill (likely through the budget reconciliation process); however, it will likely not occur until after impeachment proceedings and a COVID-19 relief bill have been completed.
  • It is not clear that a clean energy standard could be passed through the budget-oriented reconciliation process or that carbon pricing would have sufficient votes to even pass the reconciliation process, so the best current option may be to continue and expand tax incentives for renewable energy.
  • The Biden administration has committed to a “whole of government” approach to clean energy, which is expected to include an aggressive Federal Energy Regulatory Commission (FERC) policy once a third commissioner is appointed in June; sweeping executive orders (some of which we have already seen); aggressive federal procurement targets; streamlined permitting; and broader Department of Energy guidance in innovation.
  • A refundable tax credit at 85% of the current value is very much on the table, but it remains to be seen whether there are sufficient votes in the Senate for this to make it through the reconciliation process.

To begin receiving Energy updates, including invitations to the webinar series, please click here.

Access past webinars in this series.




The Carbon Tax Checklist

Many stakeholders have called for the United States to adopt a carbon tax. Such a tax could raise billions of dollars in annual revenue while simultaneously reducing greenhouse gas emissions. Several carbon tax proposals were introduced in the last Congress (2019-2020 term), and it is likely that several more will be introduced in the new Congress. Several conservative economists have endorsed the idea, as has Janet Yellen, President Biden’s Secretary of the Treasury. But the details of a carbon tax matter—for revenue generation, emissions reductions and fairness. Because Congress is likely to consider several competing carbon tax proposals this year, this article provides a way to compare proposals with a checklist of 10 questions to ask about any specific legislative carbon tax proposal, to help understand that proposal’s design and implications.

1. What form does the tax take: Is it an emissions tax, a fuel tax or a production tax?

The point of a carbon tax is to reduce greenhouse gas emissions by imposing a price on those emissions. But there is more than one way to impose that price. Critically, the range of options depends, to a very large degree, on the type of greenhouse gas the tax is trying to address.

The most ubiquitous greenhouse gas is carbon dioxide (CO2) and the largest source of CO2 emissions is the combustion of fossil fuels. Those emissions can be addressed by imposing a fee on each individual emission source or by taxing the carbon content of the fuel—because carbon content is a reliable predictor of CO2 emissions across different combustion circumstances. Most carbon tax proposals are fuel tax proposals; they impose a tax on fuel sales, corresponding to the amount of CO2 that will be emitted when the fuel is burned.

For CO2 emissions, the fuel tax approach has one significant advantage over the emissions fee approach. The fuel tax can be imposed “upstream,” rather than “downstream,” thereby reducing the total number of taxpayers and the overall administrative burdens associated with collecting the tax. A tax imposed on petroleum products as they leave the refinery, for example, is a way to address CO2 emissions from motor vehicles without the need to tax every individual owner of a gasoline-powered car. Most CO2-related carbon tax proposals work that way—they are upstream fuel taxes rather than downstream emissions taxes.

But not all greenhouse gas emissions can be addressed through a fuel tax, because not all greenhouse gas emissions come from fossil fuel combustion. Methane, for example, is released in significant quantities from cows, coal mines and natural gas production systems. A carbon tax directed at those emissions is likely to take the form of an emissions fee imposed on the owner or operator of the emission source. Many carbon tax proposals, however, simply ignore methane emissions or expressly exempt agricultural sources.

Fluorinated gases are yet another type of greenhouse. If they are subjected to a carbon tax, that tax is likely to take the form of a production tax, which would be imposed [...]

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IRS Provides Relief for Offshore Wind and Federal Land Projects

New guidance from the Internal Revenue Service (IRS) extends the Continuity Safe Harbor to 10 years for both offshore wind projects and projects on federal land. The relatively quick release of this guidance following enactment of the offshore wind investment tax credit (ITC) last week suggests strong support for these projects by Congress, the US Department of the Treasury and IRS.

Access the article.




COVID-19 Stimulus Bill Includes Key Renewable Energy Tax Credits

The US stimulus bill passed into law yesterday includes several key extensions and additions to the tax credits available for renewable energy. The bill had been agreed to by Congress early last week and was signed into law by the president last night.

Access the full article here.




Five Takeaways: Utility Acquisition of Renewable Projects – A Discussion of the Legal and Tax Issues Regarding Utilities, Developers and Tax Equity

Increasingly, utilities are replacing older generation fleets with more cost-effective generation technologies. Renewables are cost-competitive alternatives in this effort for a number of reasons, including the current tax incentives. A utility’s acquisition of a renewable asset presents many issues not otherwise present in a non-utility acquisition, particularly if the utility intends to include its investment in rate base.

In our webinar, we discussed the legal and tax issues associated with renewable energy transactions based on our experience representing both utilities and developers.


Below are key takeaways from this week’s webinar:

  1. 2021 will bring an increase for the renewable energy industry, despite the effect COVID-19 has had on the market.
  2. Some issues to consider when creating a tax equity structure that involves a utility are: regulatory investment limitations, related party and normalization considerations.
  3. Utility build-transfer agreements should be executed well in advance of the notice to proceed. These agreements usually involve classic mergers & acquisitions (M&A) representations and warranties that are made in advance of the project beginning.
  4. Developers under a build-transfer agreement should consider ways to mitigate risk.
  5. Timeline is important. A utility will commonly use the interim period between entering into a build-transfer agreement and closing the transaction, to complete tax equity documents and make certain representations and warranties to the tax equity investor.

To begin receiving Energy updates, including invitations to the webinar series, please click here.

Access past webinars in this series.




Final Section 468A Regulations Issued at Last

On September 4, 2020, the Internal Revenue Service (IRS) and the US Department of the Treasury (Treasury) published in the Federal Register final regulations under section 468A of the Internal Revenue Code (the Code) that address three issues raised by the nuclear electric industry concerning qualified nuclear decommissioning funds (“qualified funds”). These final regulations conclude a many years-long regulation project to clarify the rules relating to decommissioning costs and self-dealing rules. McDermott submitted multiple sets of comments throughout the process, and Marty Pugh provided vital testimony during an IRS hearing on the proposed regulations.

Access the full article here.




Six Takeaways: Utilization and Structuring for Section 45Q Carbon Capture Credits

On Thursday, June 11, McDermott partners Phil Tingle, Heather Cooper and Jacob Hollinger were joined by Ken Ditzel, managing director at FTI Consulting, to discuss their insights into the proposed Section 45Q carbon capture and sequestration credit regulations.


The Treasury Department and IRS recently published proposed regulations implementing the Section 45Q carbon capture and sequestration credit. The regulations clarify some questions about the credit, though many questions remain. For further discussion, see our On The Subject.

Below are six key takeaways from this week’s webinar:

      1. Carbon capture projects are likely to be economically important moving forward. Ken Ditzel estimated there are more than 600 economically viable projects, including both secure geological storage at deep saline formations and enhanced oil recovery projects.
      2. The proposed regulations provide a compliance pathway for satisfying the reporting requirements. For long-term storage, taxpayers should comply with Subpart RR of the Clean Air Act’s greenhouse gas reporting rule. For enhanced oil recovery projects, taxpayers may choose either Subpart RR or alternative standards developed by the American National Standards Institute (ANSI).
      3. Taxpayers can claim the credit if they utilize the captured carbon for a purpose for which a commercial market exists, instead of storing it. Additional guidance is needed to determine what commercial markets the IRS will recognize and how they will go about making those determinations.
      4. The proposed regulations offer considerable flexibility to contract with third parties to dispose the captured carbon and to pass the section 45Q credit to the disposing party. Contracts must meet certain procedural requirements, including commercially reasonable terms and not limiting damages to a specified amount.
      5. If the captured carbon dioxide leaks, the carbon capture tax credit is subject to recapture by the IRS. The taxpayer who claimed the credit bears the recapture liability, but IRS guidance permits indemnities and insurance for credit recapture.
      6. The partnership allocation revenue procedure issued in February 2020 provides flexibility for the section 45Q credit relative to other tax equity structures, by only requiring 50% non-contingent contributions by an investor member. This may make projects easier to finance, especially in light of the other contracting flexibility in the proposed regulations.

Download the key takeaways here.

To begin receiving Energy updates, including invitations to the Renewables Roundtable and Q&A Webinar Series, please click here.

To access past webinars, please click here.




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