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Congress Updates US Energy Policy, Incorporates Energy-Related Tax Provisions Through Consolidated Appropriations Act, 2021

December 29, 2020

The US Congress has adopted the first extensive update to US federal energy policies in over a decade in the Energy Act of 2020 (Energy Act), which President Donald Trump signed into law on December 27 as part of the Consolidated Appropriations Act, 2021. The Consolidated Appropriations Act also includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Taxpayer Act), which includes tax provisions important to the energy sector.

Taxpayer Act

The Taxpayer Act helpfully extends the sunset or phasedown periods of federal tax credits related to the development and operation of certain renewable energy electric generating facilities, and provides new tax credit extension rules specifically applying to offshore wind power electric generating facilities. The Act also provides eligibility extensions for tax benefits applying to other “green” technologies, including the carbon capture and sequestration tax credit.

The Act extends by one year (from January 1, 2021, to January 1, 2022) certain time-based eligibility requirements of the production tax credit (PTC) under Section 45 of the Internal Revenue Code of 1986, as amended (the Code), for wind and certain other qualifying renewable energy production technologies.[1] Of particular interest, the Act extends the 40%-reduced (i.e., 60% of maximum credit) PTC for eligible wind power facilities that are considered to begin construction after December 31, 2019, and prior to January 1, 2022 (extended from January 1, 2021). The Act makes corresponding one-year eligibility extension changes to the investment tax credit (ITC) rules of Section 48 of the Code to permit wind power facilities beginning construction prior to January 1, 2022 (extended from January 1, 2021) to elect to apply the 40%-reduced-ITC (i.e., 18% of eligible tax basis) in lieu of the PTC.

The Act separately provides a two-year extension of certain time-based requirements or amount limitations pertaining to the ITC for solar and certain other qualifying renewable energy production technologies[2] under Section 48 of the Code. For eligible solar energy facilities, the Act extends the ITC phasedown schedule by two years, such that the 26% ITC (applied to eligible tax basis) now applies to property that begins construction after December 31, 2019, and prior to January 1, 2023 (extended from January 1, 2021) and the 22% ITC now applies to property that begins construction after December 31, 2022, and prior to January 1, 2024 (extended from January 1, 2022). The placed-in-service-related deadline for otherwise increased ITC percentage amounts to be reduced to 10% is likewise extended two years from January 1, 2024, to January 1, 2026.

In addition, the Act creates new extended eligibility rules for applying the ITC to offshore wind facilities. These rules provide that the full 30% ITC applies to a “qualified offshore wind facility” (an otherwise PTC/ITC eligible wind facility located in the inland navigable waters of the United States or in the coastal waters of the United States) that begins construction prior to January 1, 2026.

The Act further provides extensions for tax benefits applying to a host of additional “green” technologies, including the energy efficient commercial buildings deduction, the alternative fuel refueling property credit, the energy efficient homes credit and the residential energy-efficient property credit. Notably, the Act extends the development-and-construction-related eligibility deadline for the Code Section 45Q carbon capture and sequestration tax credit by two years, so that the credit now generally applies to a qualified facility beginning construction before January 1, 2026 (extended from January 1, 2024).

Energy Act

The Energy Act establishes and funds programs that promote energy efficiency, carbon reduction, and grid modernization; supports research and development of new energy technologies, renewable energy, and electric vehicles; funds research and development for carbon capture, utilization, and sequestration; and includes initiatives that promote nuclear energy, reductions in industrial emissions, and other innovations through the US Department of Energy (DOE).

The Energy Act is divided into 11 titles, each discussed below.

Title I – Efficiency

Title I establishes a number of programs with the goal of increasing energy efficiency, including the “Federal Smart Building Program” to implement “smart building” technology (i.e., efficient energy systems that are automated and allow remote monitoring and analysis of building functions) in federal buildings, and a research, development, and demonstration (RD&D) program for the advanced integration of buildings onto the electric grid. It also authorizes the “Smart Energy and Water Efficiency” pilot program, which will fund entities that demonstrate advanced solutions related to water, wastewater, and water reuse systems – for example, by “improve[ing] the net energy balance of” those systems.

Title I further addresses a variety of other topics, including energy retrofitting assistance for schools, energy and water efficiency in federal buildings, energy efficient data centers, energy-efficient and energy-saving information technologies, and several rebate programs.

Title II - Nuclear

Title II establishes a number of new programs affecting the nuclear industry, including, notably, a program to support the availability of high assay, low-enriched uranium (HALEU) for civilian domestic research, development, demonstration, and commercial application (RDD&CA). It directs the Secretary of Energy to “consider options for acquiring or providing HALEU from a stockpile of uranium owned by the Department [of Energy], or using enrichment technology, to make [HALEU] available [to members of a consortium established under the program] for commercial use or demonstration projects.” The Act also requires the Secretary to work closely with the Nuclear Regulatory Commission (NRC), for example, on various aspects related to HALEU transportation packages. Importantly, DOE will retain title to all HALEU made available for demonstration projects, which means DOE will remain responsible for “storage, use, and disposition of all radioactive waste and spent nuclear fuel created” by the projects. Both DOE and the NRC are tasked with various reporting requirements to Congress.

Title II also establishes and reauthorizes a variety of other RDD&CA programs, including a sustainability program for light water reactors and programs for advanced reactor technologies, nuclear integrated energy systems, and fuels and fuel cycles. It also authorizes programs already in effect, including DOE’s Advanced Reactor Demonstration Program, which kicked off earlier this year and on which Morgan Lewis previously reported, and certain educational and research initiatives, such as the Gateway for Accelerated Innovation in Nuclear (GAIN) program.

Title II amends other laws, including updating the definition of “advanced nuclear reactor” in Section 951(b)(1) of the Energy Policy Act of 2005; amending the USEC Privatization Act to extend and expand limitations on importation of uranium from Russia; and amending the Department of Energy Research and Innovation Act to authorize a fusion energy research and development program.

Title III – Renewable Energy & Storage

Title III reauthorizes several of the DOE’s RDD&CA programs, including its marine, hydropower, geothermal, wind, and solar programs. These programs are intended to promote grid reliability and resilience, advance and integrate new technologies, improve energy efficiency and cost effectiveness, mitigate potential environmental impacts and identify environmental benefits, and facilitate new market opportunities.

Title III also directs the Secretary of Energy to establish several programs and demonstration projects to promote the development of energy storage technologies. The Energy Storage System Research, Development, and Deployment Program will focus on researching, developing, and deploying energy storage systems and technologies, distributed energy storage technologies and applications, transportation energy storage technologies and applications (including vehicle-grid integration), and pumped hydroelectric energy storage systems. The Secretary of Energy will carry out three energy storage system demonstration projects and will award grants to electric utilities (which includes electric cooperatives, political subdivisions of a state, investor-owned utilities, and private energy storage companies) and other eligible entities to carry out demonstration projects for pilot energy storage systems. In addition, in consultation with the Secretary of Defense, the Secretary of Energy will establish a joint program to carry out projects to demonstrate promising long-duration energy storage technologies at different scales and help new, innovative long-duration energy storage technologies become commercially viable.

The Secretary of Energy will also establish an energy storage technology and microgrid assistance program to provide grants and technical assistance to eligible entities, including rural electric cooperatives, for identifying, evaluating, designing, and demonstrating energy storage technology and microgrid projects that utilize energy from renewable energy sources. The Secretary of Energy is also tasked with establishing an RD&D program for critical material recycling and reuse of energy storage systems containing critical materials. Title III also extends the availability of incentive payments to hydroelectric facilities generating and selling electric energy through fiscal year 2036. Small hydropower facilities with no more than 20 MW of generating capacity that are constructed in areas with inadequate electric service will now be eligible for incentive payments.

In addition, Title III directs the Secretary of the Interior to establish a program to improve interagency federal permit coordination for solar, wind, and geothermal permits on federal land. The Secretary of the Interior is required to set national goals for renewable energy production on federal land no later than September 1, 2022, and to issue permits that authorize production of at least 25 gigawatts of electricity from wind, solar, and geothermal energy projects by 2025. The Secretary also has the discretion to reduce acreage rental rates and/or capacity fees for wind and solar authorizations if the Secretary determines that existing rates are not competitive or if reduced acreage rental rates and/or capacity fees are necessary to promote the greatest use of wind and solar energy resources.

Title IV – Carbon Management

Title IV focuses on reducing carbon emissions through RD&D projects of carbon capture, utilization, and sequestration technologies, through identifying alternate non-polluting uses for coal, and to assess production of hydrogen as an alternative fuel source.

One key provision requires the Secretary of Energy to establish a carbon capture technology program to develop “transformational technologies” focused on improving the environmental performance (i.e., reducing carbon emissions) of facilities that use coal or natural gas. The program must include a research and development program, large-scale pilot projects, demonstration projects, and a front-end engineering and design program. The program must also consider carbon capture, utilization, and sequestration technologies for coal and natural gas electric generation facilities and requires the Secretary to establish, through a competitive process, cooperative agreements for six carbon capture facilities and at least one carbon capture test center that provides testing for “innovative carbon capture technologies.”

Another provision directs the Secretary of Energy to establish an RD&D program for carbon utilization, to include use for commercial and industrial applications. The program seeks to identify alternative uses for raw and processed coal that results in no significant emissions of pollutants. The Secretary is also to establish a national carbon utilization research center.

To reduce carbon emissions, the Energy Act directs the Secretary to establish a multiyear research and development program to improve the efficiency of gas turbines for electric generation and aviation uses. The goal is turbines that achieve a combined cycle efficiency of at least 67%, a simple cycle efficiency of at least 50%, and a 25% fuel reduction for aviation turbines.

A final provision takes a step towards the use of hydrogen as an alternative fuel. The Secretary must initiate a study on “blue” hydrogen, i.e., hydrogen gas generated from non-renewable energy sources.

Title V – Carbon Removal

Title V has two main provisions to promote carbon removal from the atmosphere. First, the Secretary of Energy must establish an RD&D program for technologies and strategies for the “large scale” removal of atmospheric carbon. The program includes a competitive prize of up to $180 per metric ton of carbon captured for pre-commercial carbon capture and commercial applications of direct air capture. Second, the Secretary must prepare a report assessing the amount of atmospheric carbon dioxide that must be removed by 2050 to “achieve net-zero emissions and stabilize the climate” and must evaluate the report findings every two years. Additionally, the Secretary must establish a Carbon Dioxide Removal task force to both identify barriers to carbon removal methods and deployment and advise the Secretary on carbon dioxide removal.

Title VI – Industrial & Manufacturing Technologies

Title VI seeks to encourage technological developments that foster technological and economic competitiveness of the US industry while reducing industrial greenhouse gas emissions. These programs focus on research and development efforts, including an emissions reduction technology development program progressing to commercial applications of technologies that reduce greenhouse gas emissions in nonpower industrial sectors. This program will focus on “high emissions” industries such as iron, steel, aluminum, cement, glass, and paper, among others. Additionally, the program will examine electrification of heating, use of renewable heat generation and combined heat and power, switching to alternative fuels to include hydrogen and nuclear energy, and the development of net-zero emissions fuels, emissions reductions in commercial transportation, and carbon capture technologies. Another program would provide technical assistance to entities to promote commercial application of emission reduction technologies.

The Secretary of Energy is also required to develop a “national plan for smart manufacturing technology development and deployment” that promotes energy efficiency in manufacturing within three years.

Title VII – Critical Minerals

Title VII seeks to promote a better understanding of the availability of critical minerals, namely, those necessary for energy technologies and that face a high risk of supply disruption. This title also aims to find alternative ways to extract critical minerals from coal and to understand better China’s control of and strategy for critical minerals. One provision requires the Secretary of Energy to conduct a research and development program for technologies enabling extraction and recovery of rare earth elements and other critical minerals from coal and coal byproducts. Another creates several initiatives to promote a secure supply of critical minerals by, for example, creating a program to develop alternatives to critical minerals that do not occur readily in the United States; to promote efficient production, use, and reuse of critical materials; and to assess the domestic availability of technically trained people necessary to explore for, develop, assess, produce, and research critical minerals. Additionally, Title VII requires the Director of National Intelligence to report on China’s Belt and Road Initiative specific to its investment in and control over critical minerals, and China’s strategy regarding these minerals.

Title VIII – Grid Modernization

Title VIII authorizes several RD&D programs and initiatives that are focused on the integration of cost-effective, advanced technologies in the electric grid. They include:

  • a smart grid regional demonstration initiative focused on cost-effective, advanced technologies for use in power grid sensing, communications, analysis, power flow control, visualization, distribution automation, industrial control systems, dynamic line rating systems, grid redesign, and the integration of distributed energy resources;
  • an RDD&CA program on electric grid modeling, sensing, monitoring, visualization, interoperability and compatibility, architecture development, and advanced operation and controls;
  • an RD&D program to develop cost-effective integrated energy systems and to research incorporating various technologies for integrated energy systems, including nuclear energy, renewable energy, storage, and carbon capture, utilization, and sequestration technologies;
  • an RD&D program for technologies that enable integration of renewable energy generation sources onto the electric grid. These technologies would include forecasting for predicting generation from variable renewable energy sources; cost-effective, low loss, long-distance transmission lines; and cost-effective advanced technologies for variable renewable generation sources to provide grid services;
  • an RD&D program to advance the integration of electric vehicles, including plug-in hybrid electric vehicles, onto the electric grid;
  • a grant program to carry out projects related to electric grid modernization, including the application of technologies to improve observability, advanced controls, and prediction of system performance on the distribution system; and
  • a program to promote the development of integrated microgrid systems for isolated communities and microgrid systems to increase the resilience of critical infrastructure.

Title VIII also directs the Secretary of Energy to designate an existing advisory committee to assist with identifying grid modernization technology needs, assess the process of research activities on grid modernization, and assist in updating grid modernization technology roadmaps on an annual basis. The Secretary of Energy is required to initiate development of voluntary model pathways for modernizing the electric grid through a collaborative, public-private effort. The pathways should facilitate achievement of objectives including improved integration of distributed energy resources, interoperability of the electric system, and predictive modeling and capacity forecasting; enhanced grid resilience, reliability, and robustness; and diversification of generation sources.

Next, Title VIII requires the Secretary of Energy to assess electricity access and reliability by households residing in tribal communities or on Indian land, as compared to neighboring states or in the state in which Indian land is located. The Secretary, in consultation with the Indian tribes, tribal organizations, the North American Electricity Reliability Corporation, and the Federal Energy Regulatory Commission, must prepare a report on the assessment.

Finally, Title VIII requires the Secretary of Energy to enter into an agreement with the National Academies of Sciences, Engineering, and Medicine to study the challenges associated with net metering, evaluate the medium- and long-term impacts of net metering, and report on developments in net metering, including the role of renewable resources in the electric grid, the role of net metering in developing future models for renewable infrastructure, and the use of battery storage with net metering.

Title IX – Department of Energy Innovation

Title IX makes administrative changes within DOE to improve efficiency and innovation. It establishes an Office of Technology Transitions, which aims to “expand the commercial impact of the research investments of the Department [of Energy]” and “focus on commercializing technologies that support the missions of the Department, including reducing greenhouse gas emissions and other pollutants.” It also establishes a “Lab Partnering Service” pilot program, intended to facilitate cooperation between the National Laboratories and other entities; reauthorizes a technology commercialization fund “to promote promising energy technologies for commercial purposes;” and establishes a program to “stimulate competitive research” in applied energy, environmental management, and basic science.

Title X – ARPA-E Amendments

Title X makes several amendments to the America COMPETES Act. Notably, the amendments authorize ARPA-E funding to support nuclear waste cleanup and management, and to improve the security of energy infrastructure. The amendments also include a reporting requirement, as part of the annual budget process, to describe projects that ARPA-E supported during the previous year and identify current, proposed, and planned projects.

Title XI – Other Matters

Title XI serves as a “catch-all” title for the Energy Act and includes multiple initiatives, including establishing a low-dose radiation research program, and amending the Uranium Mill Tailings Radiation Control Act of 1978 to authorize operation of the Cheney disposal cell in Mesa County, Colorado, through September 2031.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Washington, DC
J. Daniel Skees
Levi McAllister
Pamela Tsang Wu
Ariel E. Braunstein
Patrick R. Pennella

Philadelphia
Kenneth M. Kulak
Casey S. August

 


[1] These other technologies consist of closed-loop biomass, geothermal, landfill gas, trash to energy, qualified hydropower and marine and hydrokinetic energy facilities.

[2] These other technologies consist of fiber optic solar, ground thermal, qualified fuel cell, qualified microturbine property, certain “combined heat and power”, and qualified “small wind” energy facilities.