New Treasury Guidance On Energy Communities Adder Gives Meaningful Nod To Offshore Wind

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On Friday, the IRS and Treasury Department issued Notice 2024-30 ("the Notice") pertaining to the energy community "bonus" credit addition...
United States Energy and Natural Resources
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On Friday, the IRS and Treasury Department issued Notice 2024-30 (“the Notice”) pertaining to the energy community “bonus” credit addition to the Section 48 and 48E investment tax credit and Section 45 and 45Y production tax credit (the “EC Bonus”). The Notice serves to amend two prior notices1 announcing the Treasury Department's intent to issue proposed regulations relating to the EC Bonus, each of which provide specifics as to how taxpayers may qualify for the same. While the Notice is relatively light in terms of length and substance, as further explained below, the amendments therein may allow for a disproportionately impactful expansion of projects potentially eligible for the EC Bonus, particularly in the offshore wind space. 

Background

Under the EC Bonus, the ITC2 is increased by 10 percentage points, and the PTC3 is increased by 10% of the amount of the PTC otherwise generated, if the applicable project or facility giving rise to the ITC or PTC (the “EC Project”) is located in an “energy community.” There are three potential identifiers that will allow for qualification for an EC Bonus, which are based on the location of the EC Project, as evidenced in Notice 2023-29: (1) a brownfield site as defined in the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) (the “Brownfield Category”), (2) a metropolitan statistical area (“MSA”) or non-metropolitan statistical area (“Non-MSA”) that (i) at any time since 2010 has had at least 0.17% direct employment or 25% local tax revenues related to the extraction, processing, transport or storage of coal, oil, or natural gas; and (ii) had an unemployment rate at or above the national average unemployment rate for the previous year (the “Statistical Area Category”), and (3) a census tract in which a coal mine has closed since 2000 or a coal-fired electric generation unit has been retired since 2010, or a directly adjoining census tract thereto (the “Coal Closure Category”).

For purposes of determining whether an MSA or non-MSA is included in the aforementioned Statistical Area Category based on Fossil Fuel Employment, the relevant direct employment is determined by the number of people employed in the industries identified by the 2017 North American Industry Classification System (NAICS). Statistical Area Category energy communities are based on specified employment datasets published by the Census Bureau (originally focusing on eight fossil fuels-related 2017 NAICS codes), unemployment datasets published by the Bureau of Labor Statistics (“BLS”), and delineations of MSAs and Non-MSAs from the 2010 Decennial Census and the BLS, respectively.

To be considered located or placed in service within an energy community, an EC Project must pass one of two tests – specifically, the Nameplate Capacity Test or, in cases where an EC Project has no nameplate capacity, the Footprint Test. Under the former, at least 50% of an EC Project's nameplate capacity must be located or placed in service in an energy community, whereas the latter looks to whether at least 50% of an EC Project's square footage is located or placed in service in the energy community.

For offshore EC Projects with nameplate capacity but no energy-generating units in a census tract, the “Nameplate Capacity Attribution Rule” introduced by Notice 2023-29 provided for attribution of all of the nameplate capacity of the EC Project to the land-based power conditioning equipment that conditions energy generated by the EC Project for transmission, distribution, or use, and that is closest to the point of interconnection.

Changes under the Notice

Expansion of Eligible Offshore Wind EC Projects under the Nameplate Capacity Attribution Rule

As mentioned above, the Nameplate Capacity Attribution Rule allowed certain otherwise-ineligible offshore wind projects to benefit from the EC Bonus by allowing for attribution of all the nameplate capacity of an EC Project to the land-based power conditioning equipment that conditions energy generated by the project for transmission, distribution, or use, and that is closest to the point of interconnection. The Notice meaningfully expands this standard by (i) removing the requirement that the attributed power conditioning equipment be “closest to the point of interconnection”, and (ii) also attributing to an EC Project any Project supervisory control and data acquisition (SCADA) equipment located in a so-called “EC Project Port.” For these purposes, EC Project SCADA equipment is property owned by the taxpayer that owns the EC Project and is used to remotely monitor and control the EC Project's operations, and an “EC Project Port” is defined as a port used either full or part-time to facilitate maritime operations necessary for the installation or operation and maintenance of the EC Project, and with a significant long-term relationship with the EC Project at which staff employed by, or working as independent contractors for, the taxpayer that owns the EC Project are based and perform functions essential to the EC Project's operations.

Comment

The latest guidance appears to evidence a clear intent to expand allowance of the EC Bonus to offshore wind projects by not just effectively removing the “closest to the point of interconnection” requirement, but also effectively providing for an alternate test that offshore wind projects with nameplate capacity can utilize. 

Expansion of EC-Eligible Projects under the Statistical Area Category

As mentioned above, Statistical Area Category energy communities look to specified employment datasets published by the Census Bureau (originally focusing on eight fossil fuels-related 2017 NAICS codes). The Notice adding two NAICS codes to the list of fossil fuel industries considered for these purposes, specifically, NAICS Code 2212 (Natural Gas Distribution) and NAICS Code 23712 (Oil and Gas Pipeline and Related Structures Construction) resulting in a total of ten fossil fuels-related 2017 NAICS codes, as shown in the table below. 

2017 NAICS code

Description

211

Oil and Gas Extraction

2121

Coal Mining

213111

Drilling Oil and Gas Wells

213112

Support Activities for Oil and Gas Operations

2212 (New)

Natural Gas Distribution

23712 (New)

Oil and Gas Pipeline and Related Structures Construction

32411

Petroleum Refineries

4861

Pipeline Transportation of Crude Oil 

4862

Pipeline Transportation of Natural Gas 


Appendix 2 to the Notice shows the expanded universe of EC Projects eligible for the EC Bonus in a concrete manner by providing a list of MSAs and non-MSAs that qualify as energy communities after including the two additional NAICS codes, further highlighting the significance of the Notice. 

Comment

We had previously noted the conspicuous omission of NAICS Codes for Oil and Gas Pipeline and Related Structures Construction (237120), Pipeline Transportation of Refined Petroleum Products (486910), and Other Warehousing and Storage (493190, described as “Bulk petroleum storage”) from the list of fossil fuel industries considered in the Statistical Area Category. After the Notice, the latter two items still remain absent. 

Footnotes

1. The two prior notices are IRS Notice 2023-29 and IRS Notice 2023-45. IRS Notice 2023-29 is the more relevant predecessor in this case, with IRS Notice 2023-29 focusing specifically on clarification to the abovementioned Brownfield Category and clarification regarding a special rule allowing for energy communities to effectively “grandfather” their energy community status as of an EC Project's beginning of construction date. For more detail on Notice 2023-29 see our  prior alert

2. “ITC” for these purposes refers to both the Section 48 and 48E credits. 

3. “PTC” for these purposes refers to both the Section 45 and 45Y credits. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

New Treasury Guidance On Energy Communities Adder Gives Meaningful Nod To Offshore Wind

United States Energy and Natural Resources

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Linklaters
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