Archive: December 2017

1
Tax Reform Goes to the President: How Did Renewables Fare?
2
Federal Court Rejects California Public Utilities Commission’s Re-MAT Program as Non-Compliant with PURPA
3
Tax Reform Conference Bill Released: PTC and ITC Emerge Battered
4
K&L Gates Blockchain Energizer – Volume 19
5
New York Signals Continued Support for Energy Storage as Governor Signs Procurement Target Legislation
6
The Senate has passed the Tax Cuts and Jobs Act. Is this the next drop in the renewable energy roller coaster?
7
K&L Gates Blockchain Energizer – Volume 18

Tax Reform Goes to the President: How Did Renewables Fare?

By Charles H. Purcell, Rachel D. Trickett, and Elizabeth C. Crouse

On December 20, 2017, the U.S. House of Representatives voted to send the Tax Cuts and Jobs Act (the “Act”) to the president for his signature, which is the final step required to make the Act effective. What does the final bill mean for the renewable energy industry? The Investment Tax Credit (“ITC”) and the Production Tax Credit (“PTC”) appear to remain unchanged (for now) and the Base Erosion and Anti-Abuse Tax (aka, the BEAT or International AMT) in the final version of the Act is better for the renewables industry than in previous iterations. Nevertheless, a handful of other provisions may significantly impact the renewable energy industry.

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Federal Court Rejects California Public Utilities Commission’s Re-MAT Program as Non-Compliant with PURPA

By Buck B. Endemann, William M. Keyser, Molly Suda, and Toks A. Arowojolu

On Wednesday, December 6, 2017, the United States District Court for the Northern District of California (“the Court”) issued a decision in Winding Creek Solar LLC v. Peevey (“Winding Creek decision”),[1] finding that the California Public Utilities Commission’s (“CPUC”) Renewable Market-Adjusting Tariff (“Re-MAT”) program violated the federal Public Utility Regulatory Policies Act (“PURPA”). The Court also found that the CPUC’s “Standard Contract” for generators less than 20 MW failed to comply with PURPA, throwing into question the effectiveness and pricing associated with a significant amount of renewable energy generation currently under contract.

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Tax Reform Conference Bill Released: PTC and ITC Emerge Battered

By Elizabeth C. Crouse

Earlier this evening, the conference committee considering the tax reform bills previously passed by the U.S. House of Representatives and the U.S. Senate released legislative text for the much rumored conference bill. Although neither the Production Tax Credit (“PTC”) nor the Investment Tax Credit (“ITC”) are directly impacted, the Base Erosion and Anti-Abuse Tax (often referred to as the “BEAT” or “International AMT”) provides only partial relief for U.S. corporations subject to that tax that have PTCs or ITCs available to offset their U.S. federal income tax.

Under the conference bill, a U.S. corporation that is subject to the International AMT may use up to the lesser of 80% of the PTCs and ITCs available to them or the “base erosion minimum tax amount” only through 2025. The PTC and ITC cannot be used to eliminate any International AMT otherwise due.

As in previous iterations of the Tax Cuts and Jobs Act, the conference bill does not distinguish between PTCs and ITCs earned in respect of qualifying projects that have already been placed in service or begun construction. In addition, although the International AMT rate has been adjusted (5% for tax years beginning in 2018, 10% for tax years beginning between 2019 and 2025, and 12.5% thereafter), the rate applicable to U.S. corporations that are in an affiliated group with any bank or registered securities dealer will always be 1% higher than the generally applicable rate. In addition, the PTC and ITC cannot be used to reduce the International AMT due in any tax year beginning in 2026 or thereafter.

Thus, although the impact of the International AMT is somewhat reduced in the conference bill, the International AMT could still prompt some multinational investors in renewable energy projects to divest certain operating projects and projects under development as well as discourage investment in new projects.

K&L Gates Blockchain Energizer – Volume 19

By Molly SudaBuck B. Endemann, and Ben Tejblum

There is a lot of buzz around blockchain technology and its potential to revolutionize a wide range of industries from finance and health care to real estate and supply chain management. Reports estimate that over $1.4 billion was invested in blockchain startups in 2016 alone, and many institutions and companies are forming partnerships to explore how blockchain ledgers and smart contracts can be deployed to manage and share data, create transactional efficiencies, and reduce costs.

While virtual currencies and blockchain technology in the financial services industry have been the subject of significant debate and discussion, blockchain applications that could transform the energy industry have received comparatively less attention. Every other week, K&L Gates Blockchain Energizer will highlight emerging issues or stories relating to the use of blockchain technology in the energy space. To subscribe to the Blockchain Energizer newsletter, please click here.

IN THIS ISSUE

  • Blockchain-Powered Retail Loyalty Program to Incentivize “Eco-Friendly” Behavior
  • Blockchain Technology Being Deployed to Optimize the Oil and Gas Industry
  • P2P Energy Trading Comes to South Korea

To view more information on theses topics in Volume 19 of the Blockchain Energizer, click here.

New York Signals Continued Support for Energy Storage as Governor Signs Procurement Target Legislation

By Buck Endemann, Bill Holmes, and Mike O’Neill

On November 29, 2017, New York Gov. Andrew Cuomo (D) signed Assembly Bill A6571.  Passed by the New York legislature in June 2017, this legislation directs the New York Public Service Commission (PSC) to undertake two efforts: (1) institute a proceeding to establish the Energy Storage Deployment Program within 90 days; and (2) set a target by January 1, 2018, for the installation of qualified energy storage systems across the state by 2030.

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The Senate has passed the Tax Cuts and Jobs Act. Is this the next drop in the renewable energy roller coaster?

By Elizabeth C. Crouse

Early in the morning of Saturday, December 2, the U.S. Senate voted along party lines to approve its version of the Tax Cuts and Jobs Act (the “Act”). The U.S. House of Representatives approved its rather different version of the bill on Thursday, November 16, 2017. Although the two bills now must proceed through the conference process to reconcile their differences, many predict that any bill ultimately sent to the President will largely resemble the Senate version. It is not clear how long the conference process may take, but Congressional Republicans have indicated that they intend to send a final bill to the President before Christmas, perhaps as early as December 15. Ultimately, while it appears that the investment tax credit (“ITC”) and production tax credit (“PTC”) provisions likely will not be changed in the reconciliation bill, the net effect of other provisions, particularly a new “International AMT,” may significantly chill the tax equity market that supports much of the renewable energy industry.

The PTC and ITC Provisions Are Not Expected to Change

The tax reform measure approved by the full Senate includes several changes compared to the version approved by the Senate Finance Committee and also differs in some significant ways compared to the House bill. It is important to note that while the House bill includes dramatic cuts to the PTC and more limited revisions to the ITC, the Senate bill would not change either credit program. During the Senate Finance Committee mark-up, Republicans indicated their intent to address the availability of the ITC and PTC for certain “orphan” technologies before the end of the year. Addressing energy provisions in a different tax package would relieve some of the pressure on revenues in the tax reform bill as lawmakers must stay within the budget reconciliation instruction constraints, including that the deficit may not be increased by more than $1.5 trillion over a ten-year period.

Provisions That May Suppress Tax Equity Investment

However, both bills include radical changes to corporate and international taxation that may suppress investment in renewable energy projects that qualify for the ITC and PTC.

  • First, the change in the corporate income tax rate to a flat 20% rate (or perhaps a 22% rate, based on recent statements from the President), temporary renewal of 100% bonus depreciation and increased expensing of capital investments are expected to reduce appetite for tax credits because of generally reduced corporate exposure to U.S. federal income taxes. In addition, the Senate bill would not repeal the corporate Alternative Minimum Tax. (Under current law, a corporation that is subject to the Alternative Minimum Tax may be required to pay tax on income that would otherwise be sheltered by the PTC or ITC under certain circumstances. However, there is a significant effort to at least reduce the corporate Alternative Minimum Tax in the reconciliation bill.).
  • Second, in the course of changing the United States from a “worldwide” to a “territorial” tax system, the bills would add “base erosion” provisions that may inhibit investment by multinational corporations in the United States generally and specifically in PTC and ITC projects. In other words, under the bills, a person would be required to pay U.S. federal income tax on the income it earns in the United States, but not outside of the United States. The base erosion provisions are intended to limit the ability of a taxpayer to reduce its U.S. income through certain transactions and arrangements with non-U.S. affiliates. One of these rules would discourage a U.S. company from financing its operations with debt from a non-U.S. affiliate beyond a certain point.

Another base erosion provision would require a U.S. corporation to pay tax on 10% (11% if it is a bank) of (x) its “modified” taxable income, less (y) the tax it would otherwise pay without taking into consideration its U.S. federal income tax credits other than the research and development credit. A U.S. corporation is subject to this rule if it pays non-U.S. affiliates for a threshold amount of goods and services, e.g., component parts or administration, and the multinational group has gross receipts of more than $500 million on average over the prior three years (the “International AMT”). Although generally applicable, this rule would require a calculation of adjusted income that would not account for the PTC or ITC, regardless of when the PTCs or ITCs were earned. Thus, a company that is subject to the International AMT will likely be required to pay tax on income that would otherwise be sheltered by the PTC or ITC, including income that may be sheltered under the existing Alternative Minimum Tax rules. There are reports that a coalition of Republican Senators are attempting to exclude the PTC and ITC from the adjusted income calculation for the International AMT, but it is not clear that will be accomplished during the reconciliation process.

What does this mean for the renewable energy industry?

If the bill that ultimately crosses the President’s desk largely mirrors the Senate bill, it is likely that many of the very large tax equity investors will become subject to the International AMT (since many of those investors are banks, they are also likely to become subject to the higher International AMT rate). Some of those investors have indicated that they will attempt to sell their PTC and ITC holdings and will pull back from further investment. While it seems unlikely that the largest investors will completely exit the PTC and ITC market, even a partial withdrawal seems likely to cause significant turbulence in the market. While the provisions applicable to the tax equity investors that are not subject to the International AMT are more of a mixed bag, the reduction in the corporate income tax rate and increase in bonus depreciation may curb their PTC and ITC appetite.

There is a reasonable possibility that the reconciliation bill will diverge from the bills in material ways, particularly if the President’s recent statements considering a 22% corporate income tax rate are taken seriously. In any event, it seems likely that negotiations over the tax bills may convert the Suniva Section 201 proceeding into just one among several concerns for those riding the “solarcoaster” in the months ahead; at the same time, the uncertainty that the Senate and House bills create with respect to the PTC will occupy the attention of the wind industry.

K&L Gates Blockchain Energizer – Volume 18

By Molly Suda, Buck B. Endemann, and Ben Tejblum

There is a lot of buzz around blockchain technology and its potential to revolutionize a wide range of industries from finance and health care to real estate and supply chain management. Reports estimate that over $1.4 billion was invested in blockchain startups in 2016 alone, and many institutions and companies are forming partnerships to explore how blockchain ledgers and smart contracts can be deployed to manage and share data, create transactional efficiencies, and reduce costs.

While virtual currencies and blockchain technology in the financial services industry have been the subject of significant debate and discussion, blockchain applications that could transform the energy industry have received comparatively less attention. Every other week, K&L Gates Blockchain Energizer will highlight emerging issues or stories relating to the use of blockchain technology in the energy space. To subscribe to the Blockchain Energizer newsletter, please click here.

IN THIS ISSUE

  • P2P Energy Trading Comes to the United Kingdom
  • Blockchain Technology Pilot Program Raises AU$8 Million in Funding to Australian Developer of Smart Energy and Water Systems
  • Blockchain for Energy Continues to Attract Investment Interest

To view more information on theses topics in Volume 18 of the Blockchain Energizer, click here.

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