Energy transition attorneys are gearing up for an uptick in innovation investment and M&A activity spurred by the passage of the Inflation Reduction Act.
The Inflation Reduction Act, signed Tuesday afternoon by President Joe Biden, contains $369 billion of climate and clean energy incentives, as well as $60 billion for environmental justice initiatives and incentives for substantial investments in rural communities.
Significant to the Texas economy, the new law rewrites the tax incentives for renewable energy and climate change mitigation under the federal tax code, including the transferability of some credits as well as direct pay — allowing sponsors to receive the tax credit as a payment, forgoing the necessity of adding tax equity investors.
By focusing on incentives instead of penalties, or carrots instead of sticks, the law has earned the blessing of not only the renewable energy industry but of traditional oil and gas. Practitioners interviewed think it will be a boon for the Texas energy industry, especially for Houston, because of new incentives for carbon capture utilization and storage, hydrogen and stand-alone energy storage.
“I think it has a little bit for everybody — which is great,” said Trevor Pinkerton, partner at King & Spalding’s corporate, finance and investments practice. “I expect it to just be a boon for the transition. It’s something that will increase investment across the board in the renewable space.”
The bill takes a cradle-to-grave approach to the renewable energy industry, encouraging the vertical integration of the systems — from the mining of minerals up to the end products, Pinkerton said. For example, the bill focuses not only on electric vehicles, which is an end-use product, but on the critical minerals and incentivizes those too.
“Which is something somewhat new, but ramped up to a new level,” Pinkerton said.
While the industry has been expecting some type of legislation for over a year, whether it was the now defunct Build Back Better Act or the final Inflation Reduction Act, activity in the energy transition space has been robust.
Even before the passage of IRA, Texas lawyers were active in alternative energy transactions. Already this year, according to The Lawbook’s Corporate Deal Tracker database, law firms have reported their part in 95 M&A and capital markets transactions that involve the kinds of renewables, recyclables, alternative energy sources and storage projects covered under the IRA.
- The year began, for instance, with Blackstone’s $3 billion investment in Chicago-based Invenergy Renewables Holding, one of the largest such investments of its kind. Kirkland, Mayer Brown and Sidley advised on that deal.
- In July, Monolith Materials, a producer of clean hydrogen and carbon black, scored $300 million in series funding led by Fort Worth/San Francisco-based TPG Rise Climate. Kirkland advised.
- In July, Newlight Technologies and Long Ridge Energy Terminal announced a joint venture to produce aircarbon, a natural alternative to plastics. V&E advised on that deal.
- And just this month, California Resources Corp., an independent oil and natural gas company, announced their $500 commitment to the formation of a joint venture with Brookfield Renewable for the development of carbon capture and sequestration technologies. Latham lawyers in Houston advised.
The new law gives the industry certainty, incentives and flexibility, said Danielle Patterson, partner at Vinson & Elkin’s energy transactions and projects practice.
“Part of it is just finally knowing the rules to play by and, I think, seeing government support and incentives and greater flexibility,” Patterson said. “I think one of the good things about the IRA: It expanded a lot of credits, extended them and gave more optionality in how you can go and use them or acquire them.”
Direct pay would be especially beneficial to technologies like carbon capture and sequestration and hydrogen, Patterson said. Project developers are dealing with relatively new technology and new commercial arrangements. Throw in tax equity financing to an already complicated new structure and there’s a lot to figure out on the front end.
“What direct pay does is that it could take the tax equity financing off the table for at least a short term, because direct pay is going allow for up to about five years where the taxpayer could take the credit in a direct pay structure, and that just gives them a little more time to prove out the technology, prove out their commercial contracts, get through initial construction financing,” Patterson said.
The great flexibility does create more questions. It’s not rinse-and-repeating a tax equity structure, Patterson said. There might be structures that work better for clients, but that flexibility might also help move forward projects that were struggling to get done.
“Obviously, there’s a lot to unpack,” Patterson said. “I think there’s going to be a little bit of a ramp up time to sort of fully unpack the legislation, understand all the different options that are available for each client, each technology that they’re looking at, make sure the rules that you have to play by. There are definitely some new features in here, but once we get through that kind of initial hurdle, I think folks are excited and going to be ready to go.”
Stuart Zisman, a partner at King & Spalding’s corporate, finance and investments practice who focuses exclusively on energy work, said there’s a lot of interest in how to take advantage of the incentives.
“I’m getting two types of calls,” Zisman said. “One is, ‘Tell me what the IRA says,’ and we’ll provide them with a summary. Then, I’m also getting, ‘Tell me specifically how it plays into the projects that I’ve been envisioning and the ways in which I could play, what are the kind of limitations and what are the things that I need to be mindful of?’”
In most instances, the new law does apply, Zisman said. “We were busy before, but my sense is we’re going be even busier now, which is great.”
There were a number of technologies that had been proven and doing really well, but there were question marks around whether the subsidization and the incentives were going to continue, like solar and wind, according to Zisman. There were also questions on how to take advantage of carbon capture-related incentives, commonly referred to as “45Q” — its place in IRS code.
“What I would say is this legislation goes a long way towards clarifying and providing kind of prospective clarification around how to take advantage of them,” Zisman said. “So if the carrot’s out there, but it’s too difficult to get at it [or] you’re not sure if it’s still going to be there when you finally arrive at the right place, you struggle as an investor.”
Zisman’s groups represents a number of sponsors and energy investors, and he said the new law provides them a lot of clarity.
“Solar projects know now that when they start construction, the next few years are going to be fine,” Zisman said. “The 45 Q, not only did it kind of tweak some things, but the value of the credits is due to go up, which is a big help for carbon capture and sequestration. So, I view this as an advantageous piece of legislation for nearly every type of renewable energy.”
The second the bill was announced, the energy lobby and industry groups were keeping their constituents informed of what was in the bill. While the bill was being finalized, trade groups communicated confidence that the deal would get done.
“People already started talking with their advisors about how to capitalize on this quickly,” said Travis Wofford, corporate department chair at Baker Botts in Houston. “Last week and the week before that were those conversations of: What are we going to be doing; how exactly are we going to do exactly what we’re being incentivized to do?”
As Houston-based attorneys, Wofford and his colleagues have been speaking to a lot of oil field services companies and larger integrated oil and gas companies.
These companies have in recent years faced pressure from their shareholders to have a more sustainable business, Wofford said.
“When looking at the capital projects to actually accomplish those things, many of them didn’t cash flow. They would still take those actions and it would just be a cost of doing business,” Wofford said. “But now with these enhanced credits, they can do what those stockholders are already asking them to do in a way that benefits their bottom line.”
The incentives in the new law for carbon capture and storage is a major driver for that. Wofford expects to see a dramatic increase in carbon capture and associated technologies, which means patent licensing will also be a big winner.
The IRA is going to change the entire energy value chain: upstream, midstream and downstream, chemicals and the CCUS providers, Wofford said. While investors historically underestimate the impact that these types of tax bills have on behavior — on developers that are just going to build new electric generation, as well as everybody else throughout the energy value chain — the IRA is a solution to one of the big problems: lack of certainty, both for developments, but also deals, Wofford said.
“When you think about renewable energy, storage or those types of things, people ask: ‘Are they going to extend the existing tax credits, what’s that going to look like?’,” Wofford said. “Well, now we know most of these credits have been extended, they’ve been enhanced, they’ve been expanded, and there are new credits. It’s specifically addressed a lot of the uncertainty that were creating discrepancies between buyers and sellers, private equity and investments, so this is great. This means that deals can get done.”