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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.

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FERC Rejects Department of Energy Proposal Benefitting Coal and Nuclear

On January 8, 2018, the Federal Energy Regulatory Commission (FERC) rejected the Department of Energy’s (DOE) Proposed Rule, which would have required organized wholesale electricity markets run by independent system operators (ISOs) or regional transmission organizations (RTOs) to establish tariff mechanisms for purchasing energy from eligible “reliability and resilience resources” and mandated a recovery of costs plus a return on equity for such resources. Eligible reliability and resilience resources would have to be (1) located within an RTO/ISO, (2) able to provide essential reliability services, and (3) have a 90-day fuel supply on-site. Practically, these requirements would limit participation to coal and nuclear plants. (more…)

EPA Proposes to Require Carbon Capture and Sequestration; Creates Uncertainty for the Future of Coal

by Ari Peskoe

The U.S. Environmental Protection Agency (EPA) proposed the first ever CO2 emissions limits for newly constructed power plants last month. Under the proposal, power plants that have already acquired a preconstruction permit from the EPA and commence construction by March 27, 2013 do not need to comply with the rule.

The emissions limit, set at 1,000 pounds per megawatt-hour, would effectively require all new coal-fired plants to cut CO2 emissions in half from current rates. The only plausible technology for enabling such drastic cuts is carbon capture and sequestration (CCS). EPA’s proposed rule allows a new plant to implement CCS ten years after beginning operations, so long as its emissions after CCS are below 600 lb/MWh. That gives the coal industry some extra time to work through the many legal and regulatory issues currently facing the technology. 

Like any large-scale energy development, a sequestration project would trigger state and Federal environmental reviews. While there is extensive experience around the country reviewing and approving projects that involve injecting substances into the ground, no other project is designed to store vast quantities of gas underground for hundreds of years. It’s not clear how legislators, environmental agencies and the public will evaluate this risk.

Long-term liabilities relating to leaks are another legal hurdle. According to a Federal interagency task force report published in 2010, some businesses are uncomfortable with the risk but also unsure of how to quantify it. Insurers, and particularly investors, are fixed on short-term thinking, and 10 or 20 years is considered “long-term” in business decision making.  But sequestered carbon must stay underground for centuries.  There is no agreement on how to account for this time horizon.

A 2010 paper by a Harvard Law School professor and student researchers proposed a range of regulatory incentives to spur development of large scale test projects. The suggestions included establishing a trust fund paid for by industry to cover liabilities, developing sites on Federal land to streamline the approval process, imposing caps on liability and preempting nuisance and trespass claims. Regardless of the specifics, instituting any new regulatory system takes time.  Fracing is a multi-billion dollar business in the U.S., and yet after a decade of widespread use its legal framework is not yet firmly established. As has been documenting, legal norms are still developing, and all three branches of government are issuing new rules and decisions that have major impacts on the industry.

Without an impetus to do so, governments will probably ignore CCS, and the lack of legal certainty will hinder development.  Perhaps EPA’s rule, if implemented, will motivate action. Until then, rather than urging governments to enact rules that create legal certainty for CCS, the coal industry is likely to fight tooth and nail to kill yet another attempt by Washington to regulate CO2 emissions from the power sector. 




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