IRS Guidance on the IRA

We have been very excited about the Inflation Reduction Act (IRA) and its incentives for hydrogen production (up to $3/kg), carbon capture, sequestration and utilization ($60–85/ton), clean energy ITC / PTC extensions and expansions (up to 30% ITC and 1.5c/kWh plus various bonuses, including biogas and RNG applications), Direct Air Capture (up to $180/ton) and more. But as they say, the devil is in the details and the devil here is the implementation of the Act via the IRS tax code — the three bone chilling letters!

On June 14th, the IRS released guidance (see and ) — subject to final rules, but should be final as far as we are concerned — around two less-sung but incredibly important elements introduced in the IRA: Direct Pay and Transferability.

• Direct Pay allows tax-exempt entities to get direct payments from the IRS in lieu of a tax equity credit (since they could not offset a tax liability) — said entities are not eligible to transfer their credits to a third party.
• Transferability allows tax paying entities to elect to transfer (i.e. sell) their tax equity without the complex partnership structures and tax code calisthenics that were key to the development of renewable energy, bringing Wall Street finance into the fold.

These are key concepts that dramatically help a project developer take advantage of the IRA tax credits. Until now, project developers would have to partner with taxable entities with enough appetite for tax write-downs to sell their tax equity (since usually their own tax liability would not be large enough to take full advantage of the tax credit). This involved using complex ownership structures that required sophisticated financial intermediaries and concessions of part of the income coming from the project. This process took time, required scale (smaller projects would hardly attract the attention of large corporate buyers) and was expensive, ultimately reducing the benefit that the project generated and splitting the pie to multiple parties. With transferability, project developers can more easily monetize their tax credits by selling it to (almost) any corporation with a tax liability, a much simpler process than the partnership structure that was required before. With direct pay, tax-exempt institutions that were previously not eligible for tax credits can get a cash payment directly from the government, expanding the pool of eligible entities for clean energy tax credits. These two provisions effectively reduce the “barriers to entry” to receive the promised IRA tax benefits. More liquid markets and lower barriers to entry, on top of enhanced incentive structures of course, should increase the market activity.

Let’s take a closer look at those provisions and how the IRS is going to implement them.

Direct Pay key points (or “” in IRS lingo)

• Eligible entities are “applicable entities” which include tax-exempt organizations, States, and political subdivisions such as local governments, Indian tribal governments, Alaska Native Corporations, the Tennessee Valley Authority, rural electric co-operatives, U.S. territories and their political subdivisions, and agencies and instrumentalities of state, local, tribal, and U.S. territorial governments.

Why it matters: this is a big expansion to entities that previously were not able to capture tax credits for clean energy

• To be eligible for direct pay, entities “must own the underlying eligible credit property”

Why it matters: purchasing stakes in projects or partnering with an entity eligible for direct pay won’t qualify a project, it must be fully owned. Project developers who intend to flip assets to “applicable entities” will need to do so well before direct pay is applied for.

• Bonuses apply to direct pay recipients, starting in 2024. Note that bonuses can be added together!
• 5X multiplier for prevailing wage and apprenticeship requirements — remember those $3/kg for clean hydrogen? They are actually $0.60/kg which are multiplied by a factor of 5 if projects meet local labor requirements.
• 10% adder for domestic content
• 10% adder for energy communities (areas that were sites of coal production or that depended on fossil fuels for local tax revenues)
• 10–20% adder for low income communities (either located in or serving low income communities)

Why it matters: Bonuses can be stacked and added to the already existing PTCs and ITCs, targeting investments to communities that most benefit from them. In addition, bonuses cannot be disentangled from the underlying project, meaning that an applicant gets direct pay for all of the project value or nothing.

• Pre-approval requirements part 1: direct pay requires entities to obtain a “registration number” prior to applying for the credits in the applicable tax year.

Why it matters: No registration number, no direct pay. Do the paperwork!

• Pre-approval requirements part 2: To qualify for the 20% low income bonus, an entity needs to pre-apply to secure a tax allocation or won’t be eligible for the adder

Why it matters: Don’t forget to do all your paperwork ahead of time!

• Direct payments will be made by the IRS after taxes are filed, and generally “the deadline is the due date (including extensions of time) for the tax return for the taxable year for which the election is made” i.e. when the entity files its tax return. In addition, projects will need to be complete and “in service” for ITCs or “in production” for PTCs prior to filing.

Why it matters: Timing of cash flows is important, and failing to meet a project completion deadline that falls close to a tax deadline might mean waiting for a whole year to receive payments, affecting the NPV of projects that tend to have large initial outflows and a “long tail” of benefits. Plus, don’t forget commissioning times especially for newer technologies that will take more time to get up and running.

• Other grants can be added up, up to 100% of the cost of the eligible projects. The same is true for debt or bridge financing.

Why it matters: an entity (e.g. a school) that might apply for grants to pay for a portion of a project can still claim tax credits all the way up to 100% of the project cost, expanding the pool of eligible projects and applicants.

key points:

Eligible entities are “non-applicable entities” i.e. everyone that cannot apply for direct pay. This includes most of the traditional project developers, energy companies, utilities (but not most munis and co-ops that are exempt from federal taxes), and other taxable entities.

Why it matters: pretty much everyone that pays taxes can transfer credits, making projects much more liquid to the financial system

• Taxpayers can transfer a portion of the project, but cannot separate the bonuses / adders from such apportionment.

Why it matters: project developers can get early cash injections by transferring future tax credits at a discount, for example, to help fund the project development work. Or multiple entities can purchase portions of the project, enabling smaller companies to participate in the tax equity bonanza.

• Like with direct pay, project developers need to request a registration number in advance, which becomes the project ID for tax credit purposes. Unlike direct pay, using the same registration number, companies can purchase tax credits and file on their own tax returns in place of the project developer / owner.
• Why it matters: once again, paperwork is key. The same registration number can be used with multiple buyers, which is a simpler process than, say, filing a registration number for each buyer.

Tax credits can be applied to tax liabilities prior to filing taxes

Why it matters: this is reducing the tax liability before taxes are filed and is thus accelerating the cash flow associated with the project. Unlike direct pay, where the payment occurs after the filing and with the tax return, companies that purchase tax credits can apply them to their liability and avoid payments prior to filing, effectively gaining an extra WACC turn for up to a year.

• Depreciation benefits cannot be transferred

Why it matters: this is very important! Accelerated depreciation can bring significant benefits to project owners, and it means that most large projects will still elect to go the “traditional” tax equity route, partnering with corporations to create ownership structures that allow for a preferential treatment of depreciation and claim tax-reducing expenses earlier on.

Funding News

Above: Highwood Emissions Management team based in Calgary, Canada

in , with participation from

We are incredibly excited to partner with the uber-talented team at Highwood Emissions Management to help companies across the oil and gas value chain understand, manage and reduce their methane and carbon emissions. Since meeting the team earlier last year, we have been continuously impressed with their ability to execute and expand their reach, counting top notch organizations and initiatives such as , and as partners, and a myriad of oil and gas companies, utilities, technology providers, industry groups and regulatory bodies as customers.

Highwood has developed a powerful and revolutionary Emission Management Software platform that allows companies to build asset-level, accurate emission inventories, prioritize capital spending initiatives to manage those emissions, and ultimately reduce their carbon footprint while generating economic value. We also welcome the participation of Veritec Ventures, a new firm based in Houston and founded by industry veterans that bring an incredible understanding of the oil and gas industry.

We look forward to working with Jessica, Thomas, their team and with Veritec on the next stage of growth for this amazing company, bringing a real solution to emissions management for oil and gas companies and continuing to innovate to lead the transformation of the energy industry.

For the full press release, click .

ECV Annual Summit

Energy Capital Ventures is pleased to host our second annual ECV Summit to take place on July 19 at our office in Chicago, IL. Last year’s inaugural Summit brought together some of the leading names from the energy, technology and venture capital industries. This year will be even bigger and better- and we’d love to have you! Space is limited, so If you haven’t already received an invitation and are interested in attending please contact us here.

WHO: Energy executives, technical leaders, utility board members, industry regulators, consultants, trade associations, venture investors, early and late-stage technology CEOs, leaders from academia, key service providers, national lab members and representatives from all of our Limited Partners

WHERE: Chicago’s Fulton Market District, 400 N. Aberdeen St. Chicago IL 60642

WHEN: Wednesday, July 19 10:00AM — 6:30PM, including a rooftop cocktail reception then private dinner to follow immediately after

Deals

Eavor, a geothermal energy company based in Calgary, Canada, $37 million in Series B funding. The funding round was supported by OMV AG, BP Ventures, Eversource Energy, and Vickers Venture Partners.

ClimateView, headquartered in Stockholm, Sweden, operates a climate transition planning and simulation platform recently $15 million in Series B funding. SEB Venture Capital, Sandwater, Polar Structure, Norrsken VC, NordicNinja VC, Hampus Jakobsson, CommerzVentures, and 2050 participated in the funding round.

GreenPlaces, a startup headquartered in Raleigh, North Carolina, has developed a platform that integrates a customer’s operational data with sustainability benchmarks through connections to numerous existing business tools. They recently a $13 million Series A funding round led by Redpoint Ventures, with Felicis, Tishman Speyer Ventures, and Bull City Venture Partners also participating in the round.

Helixintel, an online platform headquartered in Buffalo, New York, specializing in building and equipment maintenance and repair management, $11 million in Series A funding. National Grid Partners took the lead in the funding round, with participation from Munich Re Ventures, Stellifi, and Motivate Ventures.

Climate Vault, a Seattle-based company that focuses on purchasing carbon allowances from markets to decrease the available carbon supply, $9.4 million in Series A funding. The funding round was led by Inclusive Capital Partners Foundation, with King Philanthropies, Valor Siren Ventures, and ThirdStream Partners also joining as participants.

Reask, a climate risk modeling tools startup based in Sydney, Australia, successfully $6 million in Seed funding. Collaborative Fund, Hawktail Management, Macdoch Ventures, Mastry Ventures, SVA, and Tencent provided the funding.

HydGene, a synthetic biology hydrogen production company, $4 million in Seed funding from Agronomics.

Enersee, based in Brussels, Belgium, is an AI-driven energy management software provider that $1 million in Seed funding from Peak.

Raise Green, a Somerville, Massachusetts-based crowdfunding marketplace focused on climate solutions, $1 million in Seed funding. Connecticut Innovations and Sky Ventures Group were the main contributors.

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