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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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Five Takeaways: An In-Depth Look at the Federal Legislative Game Plan to Support Renewables

On Thursday May 14, McDermott was joined by Gregory Wetstone, president and chief executive officer of the American Council on Renewable Energy (ACORE) to discuss the latest market updates on the severe disruption and uncertainty brought on the renewables industry by COVID-19.

Five takeaways from this week’s webinar:

      1. There is no clear insight yet into what a congressional relief package regarding renewable energy might look like, despite the fact that congress is discussing its fifth COVID-19-related response bill.
      2. Even though the outlook was already pessimistic, clean energy job loss has been worse than expected; there has been a loss of 94,000 jobs in the renewable sector between March and April and 600,000 additional unemployment claims across the clean energy sector.
      3. Renewables have a great potential to continue to be part of the nation’s economic recovery; two of the fastest growing job categories in the nation have been wind turbine technicians and solar panel installer.
      4. Senior Department of Energy officials have reassured that the recent bulk power executive order is a continuation of existing policies regarding transmission corridors and is not targeted at renewables, which are recognized as valuable for national security. See the Office of Electricity’s Q&A and contact email for a response to President Trump’s signed Executive Order, “Securing the United States Bulk-Power System” and join McDermott on May 21 for a legal analysis of the EO.
      5. The commerce department is undertaking an investigation which could lead to the imposition of additional tariffs, particularly in regards to transformers; the timing for these tariffs (if enacted) is likely right before the election.

Listen to the full webinar.

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COVID-19 and Wind Projects: A Legal and Commercial Checklist for Tax Equity, Debt Financing and Project Documentation

The Coronavirus (COVID-19) pandemic has severely disrupted the wind market’s supply chain and labor resources, resulting in significant project delay risk. This legal and commercial checklist is a comprehensive practitioner’s guide to help sponsors and borrowers review their tax equity, financing, offtake and material project documents to ensure compliance with obligations, prevent unnecessary default triggers, and manage relationships with banks, tax equity and other stakeholders.

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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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Federal Court Rules Maryland Scheme to Promote Investment in In-State Generation Unconstitutional

by Ari Peskoe

On September 30, a Federal District Court Judge for Maryland declared that the state’s incentive scheme to encourage the construction of new gas-fired generation capacity violates the Supremacy Clause of the Constitution.  By requiring incumbent utilities to supplement PJM’s market-clearing prices with payments to the developer of a new gas-fired generator, the Judge determined that Maryland’s incentive scheme impermissibly sets a wholesale rate.  The Judge’s ruling may complicate states’ efforts to ensure that FERC-jurisdictional electricity markets meet the goals of individual states.

In 1999, Maryland restructured its electricity industry, requiring its investor-owned utilities to divest their generation assets and purchase electricity in federally regulated, regional wholesale markets. In 2007, at the direction of the Maryland General Assembly, the state’s Public Service Commission (PSC) published a report that concluded that the state faced a critical shortage of generation capacity.   According to the PSC, Maryland was located in a highly congested portion of the regional PJM market and therefore paid higher than average prices for wholesale energy.  The PSC found that while the PJM markets are “structured ostensibly to create price incentives for [investment in] new generation and transmission,” the markets had not responded to the state’s “looming capacity shortage.”

Following several proceedings at the PSC, including the issuance of an RFP to construct new gas-fired capacity in Maryland, in April of 2012 the PSC issued an order directing the state’s three incumbent utilities to enter into contracts for differences (CfDs) with a developer that would construct 661 megawatts of new in-state generation capacity. Under the CfDs, the utilities would pay the developer the difference between set contract prices and the PJM clearing prices for energy and capacity.  When the PJM prices were lower than the contract prices, the utilities would pay the developer.  When PJM prices were higher than the contract prices, the developer would pay the utilities.

The plaintiffs – primarily existing generators – complained that the PSC’s order impermissibly regulated the price of wholesale energy sales.  Such sales, they argued, may not be regulated by states because the “scheme of federal regulation . . . [is] so pervasive as to make reasonable the inference that Congress left no room for the states to supplement it.”  The Judge agreed, concluding that the PSC is “establish[ing] the price ultimately received [by the developer] for its physical energy and capacity sales to PJM . . . under field preemption principles, the PSC is impotent to take regulatory action to establish the price for wholesale energy and capacity sales.”  In other words, the Judge concluded that the PSC set the rate and not merely that its order affected the rate by inducing the developer to bid into the PJM markets.

The Judge rejected the defendant’s argument that the CfDs merely finance construction and therefore do intrude on FERC’s ratemaking.  First, to get paid under the CfDs the developer’s bids had to clear the PJM market.  Payment required delivery of energy and not [...]

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Massachusetts DOER Finalizes Rules for Solar Carve-Out Program

by William Friedman

The Massachusetts Department of Energy Resources (DOER) announced that it re-filed its Solar Carve-Out Emergency Regulation without any changes, thereby finalizing the temporary regulations that had been in effect for the past three months and bringing stability to the existing Solar Carve-Out program.  The Solar Carve-Out program enables participating solar units to produce valuable Solar Renewable Energy Credits (SRECs), which can be sold on the open market or at auction.  Earlier this year, DOER announced that applications exceeded the Solar Carve-Out program’s 400 MW cap.  In late June, DOER released the Emergency Regulation to deal with the program’s oversubscription and to offer a path forward for projects that were uncertain as to whether they would still qualify for incentives under the Solar Carve-Out. 

Under Massachusetts law, however, the Emergency Regulation could only remain in effect for three months if not finalized into law.  Finalizing the regulations gives all projects relying on the terms of the Emergency Regulation certainty that the previously announced requirements and construction timeline will remain in force.

Along with its announcement of the re-filed regulations, DOER released a draft guideline for qualified Solar Carve-Out units seeking an extension of the December 31, 2013 construction deadline.  Under the regulations, in order to qualify for the Solar Carve-Out, a solar project must be completely installed and receive authorization to interconnect from the local distribution company by December 31, 2013.  If a project does not meet the December 31 deadline, it may receive an extension until June 30, 2014, if it can demonstrate that it expended at least 50 percent of its total construction costs by December 31, 2013. 

The draft guideline explains that DOER will only consider costs associated with building the generating units as construction costs, and will not take into account legal fees, permitting, or financing costs.  The guideline provides two alternative methods for calculating the total construction costs of a generation unit.  First, the owner or operator can multiply the solar unit’s direct current capacity by the corresponding dollar per watt cost, as set out in the table below.  Second, the owner or operator of the generation unit can provide DOER with actual demonstrated costs.  All eligible costs must be incurred no later than December 31, 2013.

No later than January 6, 2014, all generation units seeking an extension must submit their applications for extension to DOER. DOER will notify applicants of its decision within 30 days.

Finally, if a project can demonstrate that it is ready to begin operations and is only waiting for a distribution company to issue its authority to interconnect, the interconnection deadline is extended indefinitely.




Solar Energy Industries Association Proposes Compromise Plan for U.S. – China Solar Conflict

by Raymond Paretzky and Melissa Dorn

The Solar Energy Industries Association (SEIA) has announced a proposal to address the trade dispute between the United States and China regarding solar generating equipment.  Both China and the U.S. have imposed duties on imports of solar equipment: (i) the U.S. Commerce Department found that certain Chinese solar companies had benefited from government subsidies and “dumped” their products into the U.S. market at prices below fair value, and (ii) in July, China began imposing duties as high as 57 percent on imports of polysilicon, a main ingredient in solar cells, from the U.S.  SEIA’s proposal would result in the termination of current disputes, a prohibition on new trade actions, and the establishment of funds to support the U.S. solar industry.

The U.S. trade remedy orders on Chinese solar cells and modules have resulted in Chinese manufacturers attempting to circumvent the antidumping and countervailing duty (AD/CVD) orders by assembling third-country cells into modules in China and then legally importing those modules into the U.S. free of AD/CVD duties.  (See McDermott’s Energy Business Law blog post on the AD/CVD orders.)  SEIA contends that the U.S. and Chinese trade remedy orders currently in place are causing adverse effects in the global solar industry without ultimately addressing the causes of unfair trade competition.

SEIA has been actively involved in the trade proceedings both in the U.S. and in China, and through its proposal hopes to provide a solution that is a “win-win” for both countries, the industry and consumers.  The SEIA proposal would:

  • Establish a U.S. Solar Manufacturing Settlement Fund (Fund) and a U.S. Solar Development Institute (Institute), both funded by Chinese solar manufacturers.  The Fund would help finance the production of solar equipment in the U.S. through investments in capital equipment, facilities, research and development, worker training and other areas.  The Institute would work to expand the U.S. solar market and grow the U.S. solar manufacturing base. Money for the Fund and the Institute would come from Chinese companies contributing a percentage of the price premium they currently pay to third-country cell producers to avoid the U.S. AD/CVD orders.  The U.S. entered into a similar settlement arrangement regarding the Brazilian cotton industry.
  • Require both the U.S. and China to revoke all AD/CVD orders and terminate all regulatory and judicial proceedings related to U.S. imports of solar cells and modules from China and Chinese imports of polysilicon from the U.S.
  • Prohibit the initiation of any new trade remedy investigations or other actions between the U.S. and China regarding imports of polysilicon, solar cells, or modules for the five-year term of the proposed agreement plus 12 additional months thereafter.

While the proposal has not met with an entirely positive response from the U.S. solar manufacturing industry, certain U.S. Senators, including Senators Patty Murray and Maria Cantwell, have expressed support for the proposal.   In the meantime, China recently announced additional tax breaks, in the form of refunds of 50 percent [...]

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IRS Issues Additional Guidance on When Construction Begins for Purposes of Production Tax Credit, Investment Tax Credit

by Gale E. Chan, Martha Groves Pugh, Philip Tingle, Madeline Chiampou Tully and Amy E. Drake

The Internal Revenue Service (IRS) has issued additional guidance relating to when construction begins with respect to wind and other qualified facilities for purposes of the production tax credit and investment tax credit. This guidance focuses on the continuous construction and continuous efforts tests and the effects of ownership transfers of a facility after construction has begun.

To read the full article, click here.




DOE Announces Funding for Hydrokinetic Power Projects

by Bethany Hatef

The Department of Energy (DOE) announced last week that it will commit $16 million toward 17 projects to capture energy from waves, tides and currents.  In a press release, DOE stated that the commitment is “part of the Obama Administration’s all-of-the-above strategy to deploy every available source of American energy.”  Although DOE’s committed funds are relatively modest, they may spur the growth of a largely untapped but potentially significant clean source of domestic power.

Wave and tidal, or hydrokinetic, energy, a renewable fuel source, may be captured where large volumes of water are moved (e.g., changing tides and currents).  According to DOE, development of this resource may supply clean and reliable power to millions of homes, including in many coastal U.S. cities with high power demands.  DOE’s latest assessments found that wave and tidal energy could potentially generate up to 1,400 terawatt hours (or 1.4 billion megawatt hours) annually.  (One terawatt hour would be sufficient to power 85,000 homes.)

A hint of government support for hydrokinetic energy production first arose in 2009, when the Federal Energy Regulatory Commission (FERC) and the Bureau of Ocean Energy Management (BOEM) entered into a memorandum of understanding addressing their respective jurisdiction over hydrokinetic projects on the Outer Continental Shelf.  In January 2012, FERC issued its first pilot project license for a hydrokinetic project, which will generate power from the tidal flow of the East River in New York.  In August of this year, BOEM issued a Finding of No Significant Impact with respect to a proposed hydrokinetic power project off the Florida coast, giving the go-ahead for the first such BOEM-leased project.

DOE’s commitment consists of $13.5 million for eight projects to assist American companies with building wave and tidal devices to reduce production costs and maximize the harnessed energy.  These projects “will develop new drivetrain, generator and structural components as well as develop software that predicts ocean conditions and adjusts device settings accordingly to optimize power production,” according to DOE’s press release.  Additionally, DOE will provide $2.4 million to nine projects “that will gather and analyze environmental data from wave and tidal projects as well as potential development zones” to proactively handle environmental impacts and promote efficient development.




United Kingdom Government Confirms Change to Sustainability Criteria for Biomass

by Caroline Lindsey

The Department of Energy and Climate Change (DECC) in the United Kingdom published its response to its “Consultation on proposals to enhance the sustainability criteria for the use of biomass feedstocks under the Renewables Obligation (RO)” on 22 August 2013 (the Response). The original consultation was published on 7 September 2012.

In the Response, the UK Government confirms that it will proceed with its proposals to revise the content and significance of the sustainability criteria applicable to the use of solid biomass and biogas feedstocks for electricity generation under the Renewables Obligation (RO). The RO is currently the principal regime for incentivising the development of large-scale renewable electricity generation in the United Kingdom. Eligible electricity generators receive renewables obligation certificates (ROCs) for each megawatt hour (MWh) of renewable source electricity that they generate. Biomass qualifies as renewable source electricity, subject to some conditions.

Changes to the criteria

The sustainability criteria associated with the RO is broadly divided into greenhouse gas (GHG) lifecycle criteria, land use criteria and profiling criteria. There will be changes to all of the criteria, but the significant changes relate to the first two criteria, and will take effect from 1 April 2014.

In general terms, the GHG lifecycle criteria are designed to ensure that each delivery of biomass results in a minimum GHG emissions saving, when compared to the use of fossil fuel. The savings are measured in kilograms (kg) of carbon dioxide equivalent (CO2eq) per MWh over the lifecycle of the consignment (sometimes referred to as “field or forest to flame”). The UK Government has confirmed that all generating plants using solid biomass and / or biogas (including dedicated, co-firing or converted plants and new and existing plants) will be on the same GHG emissions trajectory from 1 April 2020 (200 kg CO2eq per MWh). In the meantime, new dedicated biomass power will be placed on an accelerated GHG emissions trajectory (240kg CO2eq per MWh). All other biomass power will remain on the standard GHG emissions trajectory (285kg CO2eq per MWh) until 1 April 2020.

Changes to the land use criteria will also be introduced. In particular, generating plants using feedstocks which are virgin wood or made from virgin wood will need to meet new sustainable forest management criteria based on the UK Government’s timber procurement policy principles.

The land use criteria set out in the European Union (EU) Renewable Energy Directive 2009 (RED) will continue to apply to the use of all other solid biomass and biogas, with some specific variations for energy crops. As is the current position, the land use criteria will not apply to the use of biomass waste or feedstocks wholly derived from waste, animal manure or slurry.

The new sustainability criteria will be fixed until 1 April 2027, except if the EU mandates or recommends specific changes to the sustainability criteria for solid biomass, biogas or bioliquids, or if changes are otherwise required by EU or international regulation.

Making compliance mandatory

Currently, whilst generators using [...]

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