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January 20, 2021

Stroock Client Alert

By: Michelle M. Jewett, Richard G. Madris, Raymond "Rusty" Pomeroy II, Daniel Martinez, Lauren W. Shandler

Following bipartisan approval by Congress, President Trump signed the Consolidated Appropriations Act, 2021 (the “Act”) into law on December 27, 2020.  Spanning 5,593 pages, the $2.3 trillion legislation is largely a government spending bill, but it also contains a number of provisions that are favorable to the continued growth of the renewable energy industry.[1]  These changes provide for the significant expansion and enhancement of research and development programs related to renewable energy, energy efficiency, energy storage, carbon capture, and grid resilience.  In addition, the Act includes important extensions of the phase-downs and sunsets of a number of energy-related tax incentives, with some tax incentives made permanent.  It should be noted that as the Biden administration takes office, it is expected that it will devote significantly more resources to renewables development and carbon reduction, both in terms of development incentives and research and development funding over the next four years.[2]

The following is a high-level summary of certain energy-related tax and spending provisions contained in the Act. 

Energy-Related Tax Provisions

The Act extends a number of renewable energy tax credits that were set to expire or be significantly reduced at the end of 2020.  Notably, however, the Act did not provide a tax credit for stand-alone energy storage facilities in spite of significant efforts by the renewable energy industry to advocate for its inclusion.  On the other hand, the offshore wind industry received a significant boost as a result of eligibility for a 30% investment tax credit under the Act.  Below is a summary of a number of the more important incentives that have been extended.

Production Tax Credit
Before the Act was passed, the Production Tax Credit (“PTC”) was due to expire for projects with respect to which construction commenced after the end of 2020.  Under the Act, the PTC is extended for one year for qualified wind facilities at the 2020 reduced rate as long as construction begins before the end of 2021.  Under the existing phase-out, the credit for 2020 is 60% of the statutory rate of 2.5 cents per kilowatt hour, adjusted for inflation.

The PTC is also extended for one year for qualifying closed and open loop biomass, geothermal energy, landfill gas and trash, certain hydropower, and marine and hydrokinetic facilities, as long as construction begins before the end of 2021. 

Investment Tax Credit
Similarly, the Investment Tax Credit (“ITC”), which is applicable to solar and certain other renewable energy projects, was scheduled to be reduced to 22% for projects started in 2021 and permanently to be reduced to 10% of the cost of construction for commercial and utility projects started after 2021.  Under the Act, the phase-out of ITC is extended.  The ITC phase-out percentages for solar projects are adjusted to (i) 26% for projects that begin construction in 2021 and 2022, (ii) 22% for projects that begin construction in 2023, and (iii) 10% for projects that begin construction after December 31, 2023. 

For fiber-optic solar, qualified fuel cell, qualified small-wind energy property and qualified energy recovery property, the latter of which is a new category added by the Act, a similar phase-out schedule applies, but no ITC is allowed for projects that begin construction after December 31, 2023, or that are placed in service after January 1, 2026.

Another extension allows renewable energy developers to elect, for one more year, to take the ITC in lieu of the PTC as long as construction begins before the end of 2021. The applicable percentage will be reduced from 30% to 18%.

Offshore Wind Tax Credit
The Act also extends the ability to elect to use the ITC for qualified offshore wind facilities that begin construction before 2026.  Moreover, offshore wind facilities that begin construction during 2017 to 2025 are not subject to the onshore wind facilities phase-out rates and are eligible for the full credit amount.  As a result, the ITC for offshore wind projects remains at the original 30%.

On December 31, 2020, in response to the changes introduced by the Act, the Internal Revenue Service (the “IRS”) issued Notice 2021-05, which provides relief for renewable energy projects constructed offshore or on federal land with respect to the “beginning of construction” requirements for projects eligible for the PTC or ITC.  Notice 2021-05 allows such projects to satisfy the applicable safe harbor under the rules for the start of construction if they are placed in service no more than 10 calendar years after the calendar year during which construction began (rather than the 4-year period applicable to projects that are not offshore or on federal land under previous IRS guidance).

In Notice 2021-05, the IRS indicates that the more lenient 10-year safe harbor is based on the concern that projects located offshore or on federal land are subject to delays that result in longer development timelines as compared to other projects due to stringent permitting requirements, the difficulty of installing equipment offshore, heightened environmental regulation, and required transmission upgrades.  Such delays are often outside the control of developers and can result in project completion times of up to twice as long as those of similar projects not constructed offshore or on federal land.  In light of these concerns, the IRS guidance in Notice 2021-05 should provide additional certainty with respect to the start of construction safe harbor for offshore wind projects and projects on federal land.

Carbon Sequestration Tax Credit
The Act extends the beginning of the construction date for certain qualified facilities for two years, through 2025, for a credit to sequester qualified carbon oxide disposed of by the taxpayer in secure geological storage.

Commercial Energy Efficiency Deduction
The Act makes permanent a deduction under Section 179D of the Code[3] for building owners that install energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of qualified commercial buildings.  The Act indexes to inflation the amount of the $1.80-per-square-foot deduction limitation.

Renewal of Residential Tax Credits
The Act extends the effective date of two tax credits that are available for residential properties. The Residential Energy Efficient Property Tax Credit under Section 25D of the Code is commonly used for residential solar photovoltaic panels or water heating panels, as well as for fuel cell projects, small-wind energy projects, and geothermal heat pumps.  This tax credit was set to step down to 22% of the qualified expenditures for projects placed in service in 2021 and was scheduled to expire after 2021.  The Act extends this tax credit at 26% for property placed in service before January 1, 2023, and at 22% for property placed in service during 2023.  Under the Act, this tax credit is still scheduled to expire after December 31, 2023.  Additionally, the Act adds biomass fuel projects to the list of eligible expenditures.

The Nonbusiness Energy Property Tax Credit under Section 25C of the Code provides homeowners with a tax credit for investments in certain high-efficiency heating, cooling, and water-heating appliances, as well as tax credits for energy-efficient windows and doors.  The amount of the credit is generally 10% of the expenditure, but not more than $500.  The Act extends this credit until the end of 2021.

Energy Spending Provisions

The Act also provides a number of spending provisions designed to jointly promote renewable energy and/or carbon emissions reduction and stimulate the economy.  Below is an overview of the significant research and development programs contained in the Act and other provisions to improve energy efficiency and reduce carbon emissions.

Efficiency
The Act seeks to promote energy efficiency by creating programs to support the implementation of green energy technology and advancement of research and development for the development of such technology.  For example, the Act requires improved energy efficiency at schools (with assistance from the federal government), federal buildings and data centers.  The Act also requires federal agency coordination on energy-efficient and energy-saving information technologies at facilities owned or operated by federal agencies.  The Act extends rebate programs for qualifying electric motor systems and transformer technologies.  In addition, the Act reauthorizes a program to make dwelling units weatherization-ready.

Other energy efficiency programs and initiatives created by the Act include: (i) a program to implement smart building technology in certain buildings operated by federal agencies and a program to incentivize private sector property owners to develop smart building policies and approaches that will accelerate the transition to “smart” buildings; (ii) a research and development program to advance the integration of components of buildings to serve as dynamic energy loads on and resources for the electric grid; (iii) the creation of an office for research, development and demonstration to maximize coordination among federal agencies and state and local governments regarding the energy-water nexus, which is the relationship between the water needed to produce energy, and the energy needed to transport and treat water and wastewater; (iv) a program to facilitate cost-effective energy and water management and energy-related investment practices; and (v) a pilot program that will award grants to eligible entities that demonstrate innovative technology-based solutions for energy and water systems efficiency. 

Renewable Energy and Storage
The Act encourages more research, development, demonstration and commercial application to improve technologies and systems with respect to water power, hydropower, marine energy, hydrothermal, hydroelectric, geothermal, wind energy and solar energy.

In addition, the Act emphasizes the need to improve long-duration energy storage by creating a research program to build better energy storage systems, components and materials and an assistance program which will award grants for designing energy storage technology and microgrid projects that utilize energy from renewable energy resources.

The Act also calls on the Secretary of the Interior to set national goals for renewable energy on  federal land, and to establish a national office to improve interagency renewable energy permit coordination on federal land.

Carbon Management
The Act prioritizes activities and strategies that will significantly reduce greenhouse gas emissions and develop carbon removal and utilization technologies, as well as improve the conversion, use and storage of carbon dioxide produced from fossil fuels.  In furtherance of these priorities, the Secretary of Energy is required to establish a program for the development of “transformational” technologies that will significantly improve the efficiency, effectiveness, costs, emissions reductions and performance of coal and natural gas use through research and development, large-scale pilot projects and a front-end engineering and design program.  Grants will also be awarded to certain centers that provide testing capabilities for innovative carbon capture technologies.

The Secretary of Energy is also responsible for establishing and funding programs for (i) research, development and demonstration for carbon storage in a variety of onshore and off-shore geologic settings; (ii) demonstration projects that collect and validate information on the cost and feasibility of commercial development of large-scale carbon sequestration technologies; and (iii) research, development and demonstration for carbon utilization, including assessing potential changes in lifecycle greenhouse gases, and finding novel uses for carbon and alternative uses for raw and processed coal. 

With respect to carbon management, the Act also provides for (i) a multiyear, multiphase program for the research, development and technology demonstration to improve the efficiency of gas turbines used in power generation systems and aviation; (ii) a study to be conducted by the Secretary of Energy to examine opportunities for research and development in integrating blue hydrogen technology in the industrial power sector and the impact on carbon capture and storage; and (iii) a program for research and development of new technologies and practices that reduce the environmental impact of produced water and opportunities for reprocessing at natural gas or oil development sites. 

Carbon Removal
The Secretary of Energy, in coordination with the Secretary of Agriculture, is also responsible for establishing a research, development and demonstration program to test, validate or improve technologies and strategies for large-scale removal of carbon dioxide from the atmosphere.  The Secretary of Energy is also required to create a task force to identify barriers to carbon dioxide removal methods and assess policy tools that will help advance carbon dioxide removal methods.  The Secretary of Energy and the task force must prepare a report that analyzes how much excess carbon dioxide is in the atmosphere that will need to be removed by 2050 in order to achieve net-zero emissions and recommend a path forward for removal methods.  

Industrial and Manufacturing Technologies
In an effort to encourage the technological and economic competitiveness of industry and manufacturing, as well as reduce the emissions of nonpower industrial sectors, the Act calls for programs addressing technology development and providing technical assistance for reducing industrial emissions, as well as creating an industrial technology innovation advisory committee that will develop a strategic plan to improve the productivity and energy efficiency of the industrial and manufacturing sectors.

Grid Modernization
The Act includes various provisions to direct federal research and development on grid modernization and resilience, and appropriates more than $400 million annually for programs and initiatives, including with respect to expansion of the smart grid, integration of distributed energy resources, and net metering initiatives.

Stroock’s Energy Group is available to discuss the impact of the CAA and ongoing legislative and administrative developments with respect to energy, including renewables and tax incentives.  Please contact any member of the Stroock Energy Group to discuss these or other developments and how they will affect your business.

______________________________

For More Information:

Michelle M. Jewett

Richard Madris

Raymond N. Pomeroy

Daniel Martinez

Lauren W. Shandler

[1] For an overview of the Act, see Stroock Client AlertBusiness-Related Tax and Employee Benefits Provisions in the Consolidated Appropriations Act,” dated December 31, 2020.

[2] For more insight, see Stroock Client AlertRenewable Energy Under a Biden Administration,” dated December 22, 2020.

[3] References to the “Code” in this client alert are to the Internal Revenue Code of 1986, as amended.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.