Final Carbon Sequestration Tax Credit Regulations Shorten Recapture Period, Provide Guidance on “Utilization”
The U.S. Department of the Treasury (“Treasury”) and the Internal Revenue Service (the “IRS”) issued final regulations for the carbon sequestration tax credit under section 45Q of the Internal Revenue Code on January 6, 2021. The regulations make a number of important clarifications and technical changes, including by (1) shortening the tax credit recapture period from five years to three, and (2) providing needed guidance on tax credit eligibility for carbon oxide that is “utilized” in a chemical process or put to commercial use.
The regulations finalize, with modifications, an initial set of proposed regulations that was issued in May 2020 and leave project sponsors and investors with a much clearer and complete set of rules than they had in January 2020. (Continue reading)
IRS Relaxes Tax Credit Qualification Rules for Renewable Energy Projects Located Offshore or on Federal Land
IRS guidance released on December 31, 2020, makes it easier for developers of renewable energy projects located offshore or on federal land to qualify for tax credits by giving them an extended 10-year runway to place the projects in service after construction begins. Prior guidance required such projects to be placed in service within four years after the year in which construction began unless the developer could show that it continuously incurred costs and/or performed physical work on a project throughout the construction period.
The extension provides welcome certainty to developers of large-scale projects offshore or on federal lands, particularly offshore wind projects that have been facing permitting and other delays and were pushing up against a four-year deadline. (Read more)
Sweeping Energy and Infrastructure Provisions and Incentives in COVID-19 Relief Bill Signal Important Changes Coming in 2021
On December 27, 2020, President Trump signed into law a massive omnibus appropriations and $900 billion COVID-19 relief bill (the “COVID-19 Relief Bill”). This post explores the implications of the COVID-19 Relief Bill for energy and infrastructure market participants and investors. (Continue reading)
Coronavirus Relief Package Implications for Renewables: Offshore Wind Wins Big and Other Renewable and Carbon Capture Projects See Extensions
Congress passed a $900 billion COVID-19 relief package late Monday night that included multiple tax extension provisions designed to spur investment in solar, wind, carbon capture, and a host of other renewables projects. The legislation – housed in what is titled the Taxpayer Certainty and Disaster Tax Relief Act of 2020, is expected to be signed by President Trump. In this blog post, we discuss the key energy and infrastructure-related provisions in the legislation. (Read more)
Webinar Recording: Energy, Climate and Environmental Matters in a Biden Administration
Kirkland recently hosted this webinar addressing energy, climate and environmental matters in a Biden administration. Kirkland attorneys Scott Cockerham, Alexandra Farmer, Robert Fleishman, Nicholas Gladd, Brian Greene and Jonathan Kidwell discussed what they expect to see in executive orders, federal regulatory actions and legislation.
View a full recording here.
Webinar Recording: A Proposal for Sustainable Investment in the E&P Sector: A Conversation with Kimmeridge Energy
- Trends and opportunities in E&P industry
- Current investor landscape for E&P sector and public E&P companies
- Ability of current investor base to effect industry-wide change
- Perspective on corporate financial management in the E&P industry
- Impact of other industry precedents on the financial management vision of the E&P sector
- Role and effect of global demand for oil and gas on investment
- Near-term industry objectives to mitigate investors' environmental concerns
- Potential impact of environmentally-conscious asset managers and pension funds
- Management alignment and role of compensation in perspectives on financial management and consolidation
- Response to compensation concerns in market
- Key governance concerns for E&P companies
- Characteristics of E&P companies with potential investor engagement
Carbon Sequestration Tax Credit FAQ #4: What are Qualifying Emissions Sources for Section 45Q Tax Credit Projects?
To qualify for carbon capture tax credits, the tax rules require that a “qualified facility” be the source of carbon oxide emissions. Subject to minimum capture requirements described in this post, a “qualified facility” can be any industrial facility, electricity generating facility or direct air capture facility, as long as (i) the construction of the facility begins before 2024, and (ii)(A) either the construction of the carbon capture equipment at the facility begins before 2024 or (B) the original planning and design for the facility includes the installation of carbon capture equipment. (Continue reading)
Dealmaking for the Bridge and Tunnel Crowd — Infrastructure M&A in the Current Environment and Beyond
While some pockets of the M&A market have shown inconsistency in the wake of COVID, interest in the infrastructure sector remains strong. The factors that incubate a healthy dealmaking environment in this asset class remain favorable, and continued interest in the sector should be expected. But infrastructure M&A presents its own set of unique dynamics that must be skillfully navigated to create successful outcomes. (Continue reading)
House’s Clean Economy Jobs and Innovation Act Would Create Opportunities and Impose Restrictions on Different Segments of the Energy and Infrastructure Sectors
On September 24, 2020, the U.S. House of Representatives passed the Clean Economy Jobs and Innovation Act, H.R. 4447 (“CEJIA” or the “Bill”) by a vote of 220-185, largely on party lines. The Bill would authorize new research and development initiatives at the Department of Energy (“DOE”) and new funding for electric vehicle infrastructure, electric grid modernization, energy efficiency programs and environmental justice programs. We summarize the CEJIA provisions that have the strongest potential to impact the energy and infrastructure sectors. (Continue reading)
Listen: 2020 Kirkland DOE Energy Storage & Financing Summit
This recent two-part event focused on valuing individual systems and entire portfolios of energy storage projects, providing greater transparency to financial institutions, and promoting deeper insights into this emerging asset class to facilitate further investment. Workshops, panels and keynotes featured topics including “Energy Storage — Towards Resilience and Bankability,” “Energy Storage Vision and Outlook” and more.
USMCA Energy & Environmental Takeaways
Energy and infrastructure investors are eager to understand how the United States-Mexico-Canada Agreement (“USMCA”), which recently replaced the North American Free Trade Agreement (“NAFTA”), will affect their investment and cross-border trade. Our view is that the USMCA’s modest reforms likely will not materially disrupt energy trade among the U.S., Canada and Mexico. However, market participants should be aware of the rule changes and note that, depending on the circumstances, discrete aspects of the USMCA may produce advantages or disadvantages at the margin. (Continue reading)
Bloomberg Launches Data-Driven ESG Scores for the Oil & Gas Sector
Bloomberg recently launched its proprietary environmental and social scores (the “ES Scores”), starting with the oil & gas sector. The Bloomberg scores are noteworthy for their transparency and industry-specific peer comparisons, providing companies with an opportunity to analyze the scoring methodology and underlying data and therefore to better understand where they are perceived to be relatively low-performing. This may ultimately enable companies to strategically improve their environmental, social and governance (“ESG”) ratings, if desired and consistent with their business objectives. (Continue reading)
Carbon Sequestration Tax Credit FAQ #3: How do the Recapture Rules Work?
Carbon capture tax credits are subject to clawback by the IRS if the carbon oxide for which the credits are claimed leaks into the atmosphere (a “recapture event”) during a five-year period after the initial storage, injection or use of the carbon oxide in a commercial process. The taxpayer would be required to repay the credits as additional tax due for the year in which the recapture event occurs. (Continue reading)
Update: The final regulations for Massachusetts' Clean Peak Standard took effect on August 7, 2020. The Clean Peak Application portal is anticipated to be made available on September 9, 2020, and prospective applicants can register in advance for a Clean Peak Standard ID at www.neepoolgis.com.
Massachusetts Pushes Its Renewable Energy Program into New Territory by Issuing Final Regulations for Its Clean Peak Energy Portfolio Standard
On March 20, 2020, the Massachusetts Department of Energy Resources (“DOER”) finalized its regulations to implement a new Clean Peak Energy Portfolio Standard (“Clean Peak Standard”). The Clean Peak Standard is a first-of-its-kind state policy designed to provide incentives to clean energy technologies that can either supply electricity or reduce demand during peak demand periods. (Continue reading)
Q&A: Energy Transition and the Changing Private Equity Landscape
Kirkland partners Shubi Arora and Rahul Vashi held a discussion with Chris Manning of Trilantic North America and Ryan Turner of Stronghold Resource Partners on energy transition and the changing private equity investment landscape. Download the full webinar or browse by segmented topic discussion.
- Impact of COVID on sponsors and energy companies
- Impact of dislocation on traditional private equity and the emergence of new investment models
- Emerging and potentially overlooked investment opportunities
- M&A opportunities and creative solutions to bridge a bid-ask spread
- De-risking capital projects and PE's role in providing capex solutions
- Energy transition generally and the changing investor base
- Convergence of PE and hedge fund investment opportunities and impact on deal landscape
- LP reaction to downturn and increased emphasis on ESG
- Impact of upcoming elections on investment strategies
Managing PFAS Liability Risk
Federal and state legislative and regulatory initiatives targeting per- and polyfluoroalkyl substances (“PFAS”) are continuing to move forward notwithstanding the COVID-19 pandemic and could have significant consequences — particularly for the energy and infrastructure sector. The rapidly changing PFAS landscape impacts companies in the energy and infrastructure space specifically as potential PFAS “sources” and “receivers," and understanding the current trends can help energy and infrastructure companies position themselves to manage PFAS liability risk going forward. (Continue reading)
Dakota Access Pipeline Shutdown Order: What Happened and What’s Next
This post describes the Shutdown Order and subsequent court action and lays out some considerations for North Dakota crude oil producers in view of the resulting uncertainty. (Continue reading)
The Prospect of a Biden Administration: What Does it Mean for the Electricity Sector?
Electricity sector companies and investors should give careful consideration in the coming months to the implications of a potential Joe Biden presidency — possibly combined with a Democratic-controlled Congress — and the implications for their portfolios and business strategies. Over the course of the 2020 Democratic presidential primary season, candidates and party leaders have shaped what seems to be an emerging consensus Democratic Party view on electricity sector regulation and on the approach to energy policy more generally. (Continue reading)
Implications for the Energy Industry in Light of the U.S. Supreme Court Decision in McGirt v. Oklahoma
On July 9, 2020, the U.S. Supreme Court, in a 5-4 decision, held that land Congress had reserved for the Creek Nation in the 19th century remains “Indian country” for purposes of the Major Crimes Act. While many commentators within the oil and gas industry have paid close attention to the McGirt decision, the opinion is, on its face, narrow in scope as it only relates to the Major Crimes Act (“MCA”). However, the eventual implications of this decision could have a significant impact on taxation and regulation of energy companies operating on the land at issue — a portion of Northeastern Oklahoma that includes most of the city of Tulsa. (Continue reading)
Webinar Recording: Energy Innovation: Outlook, Opportunities and Challenges for U.S. Carbon Capture and Storage Projects Webinar
Significant developments in the technology and economics of carbon capture, usage and storage ("CCUS") have led to increasing interest in this topic among energy professionals. Panelists including Kirkland partners Alexandra Farmer and Scott Cockerham discussed developments in the CCUS industry following the most recent issuance of 45Q tax credit guidance by the IRS, including perspectives on:
- The global and U.S. outlook for CCUS
- Recently issued IRS guidance for the 45Q tax credit
- Investor interest in and key implementation considerations of CCUS
- Strategies for managing the challenges associated with CCUS, including regulatory requirements, potential liabilities and financial assurances
To listen to a recording of the event, click here.
FERC Establishes New ROE Policies for Jurisdictional Electric Utilities and Natural Gas and Oil Pipelines(Continue reading)
Update: DFC-DPA Loan Picture Comes into Focus; Kodak Gets the First Take
We covered in June the nascent domestic loan program — administered by the U.S. International Development Finance Corporation (“DFC”) — intended to bolster domestic supply chain weaknesses in light of global trade stresses created by the COVID-19 pandemic. On Tuesday, we got word of the first test case: The Wall Street Journal scooped (and the DFC later confirmed), the execution of a letter of interest by the DFC for a $765 million, 25-year loan to Kodak to bridge the multi-decade photo-chemical expertise of the company into the manufacturing of raw materials used in drug manufacturing.
According to the Journal, China produces the world’s largest supply of active pharmaceutical ingredients used in the manufacture of common medicines, and the U.S., as the world’s largest consumer of such materials, produces only 10% of its domestic needs. According to the DFC, Kodak will by itself be able to produce a quarter of domestic needs after using loan proceeds to retool manufacturing facilities to produce the ingredients. This use of proceeds satisfies the DFC financing condition that the funds be spent to build out the U.S. industrial capabilities strained by the COVID-19 outbreak and response.
Reduced Speed Ahead: New LNG and Interstate Natural Gas Pipeline Facilities Likely To Face Construction Delays Following Recent D.C. Circuit Opinion and FERC Rule
It is likely that a recent D.C. Circuit opinion and the Federal Energy Regulatory Commission’s ("FERC") Order No. 871 will combine to delay construction and ultimately increase the cost of FERC-approved gas pipelines and LNG facilities, which could create uncertainty for project developers and investors. In addition to the implications for LNG and interstate natural gas pipeline proceedings, the opinion could have significant impacts in FERC proceedings under its Federal Power Act jurisdiction. (Continue reading)
The Prospect of a Biden Administration: What Does it Mean for Oil and Gas?
by Brooksany Barrowes, David Castro Jr., P.C., Kevin T. Crews, P.C., Robert S. Fleishman, Chris Heasley, Jonathan E. Kidwell, Anthony Speier, P.C., Paul D. Tanaka, P.C., Tyler Burgess and Madison Erin McMurray
Oil and gas industry companies and investors should give careful consideration over the next several months to the possibility of not only a Joe Biden presidency, but also a Democratic-controlled Congress — and the resulting impact to their business outlook and strategies. Over the course of the 2020 Democratic presidential primary season, candidates and party leaders have shaped what seems to be an emerging party consensus on oil and natural gas regulation and the approach to be taken to energy policy more generally. (Continue reading)
Carbon Sequestration Tax Credit FAQ #2: How do Tax Credit Transfers Work?
Carbon capture tax credits are normally available to the person who (1) owns the carbon capture equipment and (2) physically or contractually ensures the capture and disposal, injection or utilization of the carbon. The tax code also provides an alternative rule whereby the owner of the carbon capture equipment can elect to transfer the credits to someone that it contracts with to dispose, inject or utilize the carbon (a “carbon offtaker”). (Continue reading)
Four Key Steps to Assessing and Mitigating Climate Risk
Energy and infrastructure businesses and investors that tackle climate risk, potentially starting with physical risk, have a significant opportunity to create value by positioning themselves to take advantage of market changes that prioritize climate, in addition to mitigating risk to their investments and assets. In this post, we highlight four key steps to assessing and mitigating climate risk. (Continue reading)
DOE Requests Information to Secure the Bulk-Power System from “Foreign Adversaries”
Developers and sponsors have a soon-ending opportunity to make their views known to the U.S. Department of Energy (“DOE”) on its recent Request for Information (“RFI”) “to understand the energy industry’s current practices to identify and mitigate vulnerabilities in the supply chain for components of the bulk-power system (BPS).” Comments responding to the RFI are due by August 7. Later this year, it is expected that DOE will issue proposed rules to regulate this area, and the RFI provides insight into features those rules are likely to contain. (Continue reading)
EPA’s COVID-19 Enforcement Discretion Policy Will Terminate on August 31, 2020
On June 29, 2020, the U.S. Environmental Protection Agency (“EPA”) announced that its temporary policy regarding enforcement of environmental legal obligations during the COVID-19 pandemic (the “Enforcement Policy”) will terminate on August 31, 2020. Many companies in the energy and infrastructure space may be impacted by the termination of the Enforcement Policy. Any businesses that have taken advantage of EPA’s enforcement discretion under the Enforcement Policy should be prepared to resume compliance activities in the ordinary course when the Enforcement Policy terminates. (Continue reading)
The USMCA Offers Some Protections for U.S. Investments in Mexico’s Energy Sector
On July 1, the United States-Mexico-Canada Agreement (“USMCA”) entered into force, replacing the generation-old North American Free Trade Agreement (“NAFTA”) with a modernized trade agreement. Though the USMCA largely does away with the investor-state dispute settlement mechanism (“ISDS”) that was a central feature of NAFTA, a similar ISDS system is preserved for certain U.S. investments in Mexico’s energy sector. (Continue reading)
Carbon Sequestration Tax Credit FAQ #1: Who is Eligible for the Credit?
This is the first in an ongoing series of blog posts that will answer frequently asked questions about the carbon sequestration tax credit under section 45Q of the Internal Revenue Code. We have seen a significant uptick in interest in carbon capture projects since the release of additional IRS guidance this year, and we hope this series will be useful for those interested in learning more about the carbon capture market. This first post will explain eligibility for the credit. (Continue reading)
Special Considerations for Protecting Interests under Water Agreements in Bankruptcy
To protect the recoupment of upfront investments, it is customary for water midstream companies to attempt to fashion their contracts with exploration & production ("E&P") companies in a manner that insulates their risk in the event an E&P company becomes insolvent and declares bankruptcy. One common method used by the midstream companies to mitigate their risk and protect their investment in the gathering assets is to create (or attempt to create) a dedication of production from the E&P company structured as a covenant that runs with the land (“CRWTL”).
While the classification of a midstream agreement as a CRWTL has been tested in recent bankruptcies in the oil and gas context, water disposal and gathering agreements (“Water Agreements”) with similar language have not been tested and there is reason to believe that such agreements may be treated differently than their oil and gas counterparts. We discuss certain issues and considerations that are specific to Water Agreements and may affect whether such a Water Agreement is determined to contain a CRWTL that cannot be rejected under the Bankruptcy Code. (Continue reading)