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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 [...]

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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 [...]

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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 [...]

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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 [...]

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Senate Passes Tax Extenders Deal That Includes Extension of Renewable Energy Incentives

The US Senate today passed a package of tax extenders as part of the year-end appropriations act that the US House of Representatives passed on December 17, 2019. President Trump is expected to sign the legislation before the end of the day tomorrow to avoid a government shutdown. The package includes a one-year extension of the production tax credit (PTC) under section 45 for wind and other technologies. It also includes limited extension of other energy tax incentives that were set to expire and a retroactive extension for some credits that had already expired in 2018. Most of the credits will now expire at the end of 2020, setting up the prospect of a broader tax extenders deal during lame duck session after the 2020 election.  The bill also included a one-year extension through 2020 of the new markets tax credit under Section 45D at $5 billion.

Extension of Energy Tax Credits

Many energy tax credits and incentives are scheduled to expire or begin to phase out at the end of 2019 or have already expired. The Further Consolidated Appropriations Act will extend the expiration date to the end of 2020 for many credits. The package did not include an extension or expansion of the Investment Tax Credit (ITC), disappointing the solar industry. The extenders package also did not include the proposed expansion of the ITC for energy storage technology or the extension of energy credits for offshore wind facilities.

Production Tax Credit

The PTC provides a credit for each kilowatt hour of energy production for qualified renewable energy facilities. The PTC expired for non-wind technologies at the end of 2017, while a reduced credit of 40% was available for wind facilities through the end of 2019, expiring for years 2020 and beyond. As we reported previously in House Passes PTC, NMTC Extension, under the tax extenders package, projects that begin construction in year 2019 are eligible for the 40% credit, and projects that begin construction in 2020 will be eligible for a 60% credit. This potentially leaves taxpayers in a frustrating position to the extent they already took steps to begin construction on a wind project in 2019 to take advantage of the 40% credit in anticipation of its expiration at the end of 2019. Taxpayers seeking the increased 60% PTC for wind projects will need careful planning to ensure any work done in 2019 does not attach to the 2020 project, thus dropping the credit to 40%.

Additionally, the full PTC would be retroactively revived and extended through 2020 for:

  • Closed loop biomass
  • Open loop biomass
  • Geothermal plants
  • Landfill gas (municipal solid waste)
  • Trash (municipal solid waste)
  • Qualified hydropower
  • Marine and hydrokinetic renewable energy facilities

Under current law, those technologies are generally only eligible for the PTC to the extent construction began before 2018 (other than certain closed-loop biomass and qualified hydropower technologies, which must be placed in service before 2018). Under the extenders package, those dates would all be extended out to the end [...]

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IRS Issues Additional Guidance on Beginning of Construction Rules for Renewable Projects

On December 15, 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the “beginning of construction” requirements for wind and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes. The Notice (1) extends the “Continuity Safe Harbor” placed in service date for projects that started construction before 2014; (2) provides that the “combination of methods” rule set forth in prior guidance only applies to facilities on which construction begins after June 6, 2016; and (3) clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.

Read the full article here.




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