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Biden Administration Explores Offshore Wind Development in the Gulf of Mexico

Earlier this week, the Biden Administration announced its intent to consider further expansion of offshore wind development in the Gulf of Mexico. This announcement comes two weeks after the Biden Administration announced an agreement to lease almost 400 miles off California’s northern and central coasts for wind development. Potential offshore wind leasing in the Gulf of Mexico may play an integral role in the administration’s goal of installing 30 gigawatts of offshore wind by 2030.

To continue its exploration into offshore wind development in the Gulf of Mexico, the US Department of the Interior’s Bureau of Ocean Energy Management (BOEM) will publish a Request for Interest (RFI) in the Federal Register on June 11 to evaluate development interest, potential environmental consequences and other possible uses of the proposed area. Interior Secretary Deb Haaland acknowledged that, “Offshore wind development has the potential to create tens of thousands of good-paying, union jobs across the nation. This is an important first step to see what role the Gulf may play in this exciting frontier.”

The RFI will focus specifically on the Gulf of Mexico’s Western and Central Planning Areas offshore to Louisiana, Texas, Mississippi and Alabama. Although the emphasis is on wind energy, BOEM is also seeking information on other renewable energy technologies, according to the Interior Department. Publishing the RFI will open a 45-day comment period, after which the agency will review comments and data received to determine the next steps in the renewable energy leasing process in the Gulf.

“The Gulf of Mexico has decades of offshore energy development expertise,” Mike Celata, regional director of BOEM’s Gulf of Mexico office in New Orleans, said. “Working directly with our partners in the Gulf, we will make sure that offshore renewable energy development proceeds in an orderly, safe, and environmentally responsible manner.”

Developing offshore wind projects in the Gulf may prove more difficult than projects on the east coast (or even deepwater projects in California) for a few reasons. First, other than the Electric Reliability Council of Texas (ERCOT), wholesale power markets are generally not developed in the region. Second, the wind resource (with some exceptions) is not as strong as the wind resource on the east coast. Finally, it is unclear whether states will provide the necessary incentive programs (in the form of offshore wind renewable energy certificate (OREC) programs or otherwise) to support development. There are a few mitigating counterfactors however, including the historic presence of major oil developers in the region that are collectively looking to “go green,” vocalized support from leadership—including the Governor of Louisiana—the declining price of offshore wind technology and the recently expanded offshore investment tax credit (ITC).

Currently, BOEM has leased approximately 1.7 million acres in the Gulf of Mexico’s Outer Continental Shelf for offshore wind development and has 17 commercial leases on the Atlantic— from Cape Cod to Cape Hatteras. After the comment period concludes on the RFI, information on offshore wind development in the Gulf is expected to [...]

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Key Takeaways | The Energy Market in 2021: Legislative Update on Renewable Energy Tax Incentive

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 McDermott partners Philip Tingle and Heather Cooper and Carol Wuerffel, Senior Director, Tax at Ameren.

Below are key takeaways from the webinar:

  1. Tech Neutral Credit. The Clean Energy for America Act introduced by Senator Ron Wyden (D-OR) would replace existing renewable energy incentives with technology-neutral tax investment and production credits for facilities with zero net or net negative carbon emissions. In coordination with the Environmental Protection Agency, the US Department of the Treasury would be responsible for promulgating regulations specifying qualifying technologies. The credit would be provided to partnerships and not individual partners for renewable investments made by pass-through entities.
  2. Direct Pay. In early 2021, House Democrats reintroduced the Growing Renewable Energy and Efficiency Now (GREEN) Act. In addition to extending and expanding the existing investment tax credit (ITC) and production tax credit (PTC), the GREEN Act would permit taxpayers to elect to claim 85% of the expanded ITC and PTC amounts as a refundable credit, even if they do not have sufficient tax liabilities to otherwise use the credits. The Wyden bill likewise would offer a direct pay election but without any discount against the tax credit. The timing of payments under the refundable credit may impact whether developers will shift from current tax-equity structures. If a developer must file a return and wait to resolve any examinations or other ongoing proceedings to receive the benefit, the refundability could be of limited value.
  3. Net Zero 2050. US President Joe Biden has set an aggressive climate goal of reducing greenhouse gas emissions by at least 50% below 2005 levels by 2030 and to net zero by 2050. Developers and utilities need additional certainty around the scheduled phaseouts in the ITC and PTC in order to build renewable resources to meet climate goals. While the White House has yet to back a specific package of renewable tax incentives, the proposals introduced by congressional Democrats are a likely starting place for negotiations.

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




Why 2030 is the New 2050 after the Leaders Climate Summit and What President Biden’s Accelerated Transition to a Sustainable Economy Means for Renewables Developers, Investors and Corporates

2030 is the new 2050 as US President Joe Biden has officially set a new goal for fighting climate change over the next decade in the United States. At the Leaders Climate Summit (the Summit) on Earth Day, he announced that America would aim to cut its greenhouse gas emissions at least 50% below its 2005 levels by 2030. If successful, this transition would lead to a very different America and would affect virtually every corner of the nation’s economy, including the way Americans get to work, the sources from which we heat and cool our homes, the manner in which we operate our factories, the business models driving our corporations and the economic factors driving our banking and investment industries. The effectiveness of this transition lies in the administration’s ability to pull on two historically powerful levers: Tax policy and infrastructure funding. However, tax policy will call upon multiple sublevers, such as increased tax rates, expanded tax credits, refundability, carbon capture, offshore wind, storage, transmission and infrastructure investment. All of this will be bolstered by the American corporate sector’s insatiable appetite for environmental, sustainability and governance (ESG) goal investment.

QUICK TAKEAWAYS

There were six key announcements at the Summit for renewables developers, investors and corporates to take note:

  1. The United States’ commitment to reduce its greenhouse gas emissions by 50% – 52% below its 2005 emissions levels by 2030
  2. The United States’ economy to reach net-zero emissions by no later than 2050
  3. The United States to double the annual climate-related financing it provides to developing countries by 2024
  4. The United States to spend $15 billion to install 500,000 electric vehicle charging stations along roads, parking lots and apartment buildings
  5. A national goal to cut the price of solar and battery cell prices in half
  6. A national goal to reduce the cost of hydrogen energy by 80%

President Biden’s goals are ambitious. It is clear from the history of renewable incentives in the United States as well as current developments that moving forward, the green agenda will predominately rely on two primary levers being pulled at the federal level: Tax policy and infrastructure funding. The federal tax levers mentioned above will not be pulled in a vacuum. Instead, they will be pulled in the midst of a tectonic shift among individual investors that now demand that institutional investors and corporations begin to create and meet ESG goals as individual customers are beginning to take a corporation’s climate goals and footprint into account when making purchasing decisions.

As a result, we discuss the following areas in greater detail below:

  1. Tax policy
    1. increased tax rates
    2. expanded tax credits
    3. refundability
    4. carbon capture
    5. offshore wind
    6. storage
    7. transmission
  2. Infrastructure bill
  3. ESG environment

DEEPER DIVE: BREAKING DOWN EACH LEVER AS WELL AS ITS OPPORTUNITIES AND CHALLENGES

  1. Tax Policy: The consistent message from the Biden Administration, at the Summit and elsewhere, makes clear that tax policy will likely play a significant role in the administration’s ambitious climate agenda. At [...]

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IRS Extends Deadline for ITC and PTC Projects

The IRS yesterday released anticipated guidance extending the placed-in-service deadline for the Investment Tax Credit (ITC) and Production Tax Credit (PTC). Under Notice 2020-41, the “Continuity Safe Harbor” was extended to five years for any project that otherwise began construction in 2016 or 2017.

As background, the applicable credit rate for the ITC and PTC turns on when a project begins construction. The IRS has issued a series of Notices providing guidance on when a project begins construction for these purposes. Under the guidance, taxpayers can either satisfy the “Five Percent Safe Harbor” or “Physical Work Test”. In addition to requiring certain activities in the year construction begins, both methods include a second prong, requiring certain continuous work until the project is placed in service. The IRS has previously provided the Continuity Safe Harbor, under which a project will be treated as having met the second prong so long as it is placed in service by the end of the fourth year after which construction begins on the project. If the project cannot meet the Continuity Safe Harbor, the taxpayer must satisfy the continuity requirement through facts and circumstances.

In the case of the Five Percent Safe Harbor (which requires continuous efforts), demonstrating facts and circumstances is time-intensive and challenging, and is inherently uncertain. In the case of the Physical Work Test (which requires continuous physical work), demonstrating facts and circumstances is likely impossible across four years, leaving many of these projects economically unviable in the absence of IRS relief.

The new Notice extends the Continuity Safe Harbor by one year – from four years to five years – for any projects that began construction in 2016 or 2017. This is welcomed relief for projects that have experienced delays related to COVID-19. The relief is particularly helpful in that it is a blanket extension for any projects that otherwise began construction in 2016 or 2017, without requiring taxpayers prove that delays were specifically related to COVID-19. If the extension were only available for COVID-19 delays, the relief would have had limited value, as taxpayers would have simply gone from trying to demonstrate facts and circumstances relating to continuous work, to having to demonstrate facts and circumstances relating to the nature of the delays. This blanket relief was particularly important, given the cascading impact of COVID-19 through the economy and the renewables industry – which experienced delays relating to supply chains, and also relating to financing and regulatory issues, among others. The extension of the safe harbor provides needed economic certainty for all of these projects.

Notice 2020-41 also provides relief for projects that intended to satisfy the Five Percent Safe Harbor in late 2019 but where equipment has been delayed. Under the existing guidance, costs are taken into account in 2019 under the Five Percent Safe Harbor if they are paid before December 31, 2019 and the property or services are delivered within 105 days of payment (the “105 Day Rule”).  Under the new guidance, if a taxpayer made payment on [...]

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What COVID-19 Means For Renewable Projects And Financing

The world is facing a situation unprecedented in modern times with the global spread and impact of COVID-19. Its rapid spread has brought severe disruption and uncertainty to everyone’s personal lives, as well as to the wind, solar and storage industry supply chains, the renewable project financing market, and global markets at large.

While the speed and complexity of the virus make it impossible to know the full effects it will ultimately have on the world, what follows is what we know today about the impact of COVID-19 on the supply chains for solar, energy storage and wind developers, as well as the project finance market.

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IRS Releases Initial Section 45Q Carbon Sequestration Credit Guidance

Treasury and the IRS released initial guidance on the amended Section 45Q carbon oxide sequestration credit on February 19, 2020. Notice 2020-12 and Revenue Procedure 2020-12 provide guidance relating to the beginning of construction and tax equity partnership allocations.

This is the first Section 45Q guidance since Treasury issued a request for comments in Notice 2019-32 last year. That Notice sought input on a number of issues raised by amendments to Section 45Q that expanded the scope and enhanced the amount of the Section 45Q credit pursuant to the Bipartisan Budget Act of 2018, P.L. 115-123. The new guidance in Notice 2020-12 and Revenue Procedure 2020-12 is effective March 9, 2020.

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Court Rules That Wind Farm Did Not Provide Proof of Development Fee to Receive 1603 Cash Grant

On June 20, 2019, the United States Court of Federal Claims published its long-awaited opinion in California Ridge Wind Energy, LLC v. United StatesNo. 14-250 C. The opinion addressed how taxpayers engaging in related party transactions may appropriately determine the cost basis with respect to a wind energy project under the Internal Revenue Code (IRC). Central to the case was whether the taxpayer was allowed to include a $50 million development fee paid by a project entity to a related developer in the cost basis of a wind project for purposes of calculating the cash grant under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 (Section 1603). Section 1603 allowed taxpayers to take a cash grant in lieu of the production tax credit of up to 30% of the eligible cost basis of a wind project. The eligible cost basis under Section 1603 is determined in the same manner as under Section 45 for purposes of the investment tax credit (ITC). The Justice Department disagreed with the taxpayer’s position that the development fee should be included in the cost basis for calculating the Section 1603 cash grant. The Justice Department argued that the development fee was a “sham.”

The court agreed, and held for the government. The court’s opinion focused on the taxpayer’s failure to provide evidence that the payment of the development fee had “economic substance.” Indeed, the court was troubled that none of the taxpayer’s witnesses could explain what was actually done to earn the $50 million development fee. Other than a three‑page development agreement and the taxpayer’s bank statements identifying the wire transfers for payment of the development fee, which started and ended with the same entity, the court found that the taxpayer provided no other factual evidence to support the payment of the fee. Indeed, the court pointed to the taxpayer’s trial testimony, which the court found lacked the specificity needed to support the development fee. Because the taxpayer failed to carry its burden of proof and persuasion, the court concluded that the taxpayer was not entitled to include the $50 million development fee in the cost basis of the wind project for purposes of computing the Section 1603 cash grant.

Importantly, the court did not, however, rule that a development fee paid to a related party is not permitted to be included in the cost basis of a facility for purposes of determining the Section 1603 cash grant. Instead, the court simply ruled that the taxpayer failed to provide it with sufficient proof that in substance the taxpayer performed development services for which a development fee is appropriately considered part of the cost basis of a facility for purposes of determining the Section 1603 cash grant.

Practice Point: In court, the plaintiff has the burden of proving its entitlement to the relief sought. Before filing a case, it’s best to make sure that you have all of the evidence you need to prove your case. Without substantial and [...]

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The Senate’s New Base Erosion Tax: Highlights for Renewable Energy

On December 2, 2017, the Senate approved its version of the Tax Cuts and Jobs Act. The Senate Bill includes the base erosion and anti-abuse tax, a new tax intended to apply to companies that significantly reduce their US tax liability by making cross-border payments to affiliates. Given its potential to disrupt the financing of renewable energy projects, taxpayers in the renewable energy sector have been paying close attention to its developments.

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Analysis of Energy and Tax Proposals in the 2018 Budget Proposal

President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.

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Energy Tax Extenders in FAA Bill Unlikely

As discussed in our post on April 7, US Congress extended the Production Tax Credit (PTC) under Internal Revenue Code (IRC) Section 45 and the Investment Tax Credit (ITC) under IRC Section 48 in December 2015, but failed to include extensions for certain types of renewable energy property, including fuel cell power plants, stationary microturbine power plants, small wind energy property, combined heat and power system property, and geothermal heat pump property. Some congressional leaders had stated that the omission was an oversight that would be addressed in 2016.

In March, President Barack Obama signed an extension of certain Federal Aviation Administration (FAA) programs and revenue provisions through July 15, 2016. This legislation was apparently crafted with an intentionally short timeframe to allow inclusion of the omitted PTC and ITC provisions in long-term FAA reauthorization legislation.  However, Senate Finance Committee members have indicated that the long-term FAA legislation will not include energy tax incentives. According to Tax Analysts, Senate Finance Committee member John Thune (R-SD) recently indicated that the extenders will not make it into the FAA reauthorization bill. Senator Richard Burr (R-NC) also said that the most likely vehicle for energy tax incentives would be an end-of-the-year tax bill.




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