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Climate Week is about to kick off in New York, so Lauren Collins and Michael Joyce, who are both partners at the law firm of Vinson and Elkins, join the show to talk about what to expect from Climate Week, what kinds of news and announcements they will be keeping an eye on and how the overall conversation about Climate Week — and climate coverage in general — has evolved over the years.
We also mark the one year anniversary of the Inflation Reduction Act with a deep dive on the impact that legislation, particularly the tax credits it contains, has had on the energy sector. Lauren and Michael discuss how the IRA will continue to reshape the energy mix and what to watch for as US government agencies continue to release related tax and regulatory guidance. They also share insights about Basel III and other headwinds that might slow the momentum of the IRA. Finally, Lauren and Michael offer their bold predictions about what lies ahead for the IRA in the next few years.
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Highlights
How the conversation around Climate Week has evolved – (3:14)
News to watch for coming out of Climate Week – (6:09)
How and where firms are investing in renewables – (10:21)
The IRA’s impact on specific energy sectors – (16:24)
Headwinds the IRA is facing – (20:23)
The threat Basel III poses to tax equity and renewables investing – (21:38)
US Treasury’s much-anticipated guidance on hydrogen – (25:53)
Questions developers are asking before closing deals – (29:09)
The need for more talent throughout the industry – (30:46)
Tax issues that continue to fly under the radar – (33:05)
‘Stacking’ tax credits takes off – (37:09)
Biggest takeaways from the first year of the IRA – (38:11)
Lauren and Michael’s bold predictions – (41:44)
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Transcript
(Note: This transcript was created using articifial intelligence. It has not been edited verbatim.)
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This episode of the Renewable Energy SmartPod is brought to you by ExxonMobil. The world needs ways to reduce carbon emissions. ExxonMobil is working on solutions in its own operations, like carbon capture and clean energy from hydrogen, that could also help other businesses like manufacturing, commercial transportation and power generation. Helping deliver heavy industry with low emissions. Find out more at ExxonMobil.com or click on the link in the show notes.
Sean McMahon 00:44
What’s up everyone, and welcome to the Renewable Energy SmartPod. I’m your host, Sean McMahon. And if you’ll pardon the pun, I’m gonna say we have a very taxing episode in store for you today. Climate Week is about to kick off in New York. So I’ve invited Lauren Collins and Michael Joyce, a pair of partners from the law firm of Vinson and Elkins to join me to talk about what to expect from that event, what kinds of news and announcements they will be keeping an eye on, and how the overall conversation about Climate Week and climate coverage in general has evolved over the years.
We are also going to mark the one year anniversary of the Inflation Reduction Act. With a deep dive from Lauren and Michael on the impact that ginormous piece of legislation has had on the renewable sector. We’ll discuss how the IRA will continue to reshape the energy landscape, and what to look for as policy guidance from US government agencies continues to be released. We’ll also spend a few minutes talking about headwinds that might slow the role of the IRA, and how developers and other market participants are trying to protect themselves from various sources of uncertainty. Lauren has been on this show before and this is Michael’s first visit. And they do a great job of teaming up to share a ton of expert level insights.
But before we hear from that dynamic duo, just a quick plug for another show that is part of the SmartBrief Podcast Network. The Sustainability SmartPod. The Sustainability SmartPod features experts from big time companies who are leading the effort to tackle sustainability challenges on a global scale. I’m talking about companies like Patagonia, Panasonic, at&t, Wendy’s, Marriott, Deloitte, American Airlines, and more. If you’re serious about sustainability, the Sustainability SmartPod is for you. You can find it on all the major podcast platforms, or just click on the link in today’s show notes.
Right now, let’s get ready for Climate Week and get things rolling with Lauren Collins and Michael Joyce from Vinson and Elkins.
Hello, everyone, and thank you for joining me today. My guests are a pair of partners from the law firm of Vinson and Elkins. We’ve got Lauren Collins and Mike Joyce. Lauren, how’re you doing today?
Lauren Collins 03:04
Doing well, good to see you and talk to you again.
Sean McMahon 03:07
Yeah, Lauren’s been on the show before but Mike, this is your first time how you doing today?
Michael Joyce 03:11
Thanks for having me. Sure. I’m doing well.
Sean McMahon 03:14
Great. Well, there’s a lot of things going on in the renewable space right now. Obviously, Climate Week is coming up next week. So like to talk a little bit about that. And then maybe we’ll get to some of the things going on, you know, the anniversary of the Inflation Reduction Act and things like that. It seems like when we read the news these days, every week is Climate Week, quite frankly. But this annual event pops up. So what have you noticed in terms of the discussion around climate, you know, is there more action centric conversations going on? Are we kind of still in the debate about policy and things like that? Mike, you want to kick us off?
Michael Joyce 03:42
Yeah, happy to shine, I would certainly say we are in a period of action. And we see that both in connection with the passage of the legislation that we’ll come to later. But more importantly, in the transition from what had been referred to his ESG. And the suggestion that these concerns are starting to change things and translate into the boardroom and to where these companies invested dollars. And for years, that was a lot of lip service, the term greenwashing was thrown around. And today that is markedly different, you know, we see new entrants in the market, we see folks that are focused and driven by their shareholders to invest in climate focused policies. We see private equity funds, raising new funds, with lower hurdle rates to focus on renewable investment that don’t necessarily have the same returns that some of their traditional target sectors had. So, you know, we heard about it for years, called a decade in the last 18 months to two years, we’ve seen the investment skyrocket, and the data backs that up so it really is the time of action. Is it going to be enough? And soon enough, that’s harder to tell. To your point. It’s you read in the news about the coverage of climate action, but that’s not just in terms of investments people are making that’s in terms of natural disasters, whether it be the recent floods and otherwise So the question remains as to Can we get in front of the tide, but the action is clearly kicking off, for reasons both principled as well as economic in terms of the incentives being there for investors to put their dollars behind these sorts of initiatives.
Lauren Collins 05:11
And as Michael mentioned, we’ve been seeing this accelerate over the last, you know, 18 months, two years. But with Ira, everything was really Supercharged. And just anecdotally, the end of last year, beginning of this year, a lot of our work, or a lot of the effort I was spending was, was more policy debate and more education. And now in the set past six months, we’ve seen that translate to real deal flow. And much more of my time is now spent on term sheets and transactions and getting folks up to speed. And we’re seeing that just like, as mentioned, in the news, there, there seems to be a new piece every day about the climate change and energy transition and manufacturing facilities opening in the US. So we’re seeing everything from the IRA really start to come to pass, which is exciting.
Sean McMahon 06:09
Yeah, definitely sounds like things are, you know, turning the corner towards action. So, again, looking at Climate Week, next week, for people who work in this industry in the renewable space, like the two of you, are there any ideas or proposals being put out there? Obviously, a lot of consumer brands kind of like to hype their efforts during next week and things like that. But is there any specific area around Climate Week? You know, whether it’s policy or finance or transportation or even energy itself? What are you paying close attention to?
Lauren Collins 06:38
I think there’s, there’s all of the ones you mentioned, slate, but there’s a few in particular around Climate Week that I think are exciting. Environmental Justice is one of the topics that we’ll be focused on. And that comes up in the IRA as well, where we see additional benefits for low income communities and energy communities. And we also see new labor requirements and prevailing wages needing to be paid in apprenticeship programs all opening up. So I think that’s a that’s a good focus. That’s, that’s something we’ll see talked about a lot and the next week and beyond, and just reflects kind of an overall policy objective of making sure that we’re all pushing for climate change, but we’re doing so in a way that’s really equitable and not leaving folks behind. And then transportation to as you mentioned, Sean, that that’s an area where we’ll see a lot of focus in the next week, but also an area where we’re seeing lots of deal work. Right, you know, EVs, Evie, charging greening fleets, those are exciting areas where we’re seeing an uptick in interest on the investor side,
Michael Joyce 07:47
What I’d add that the narratives change, I mean, the Brookfield CEO is speaking today. And whereas transition and energy transition might have been a part of his speech, which largely focused on energy transition to renewable energy. So it’s not an afterthought or a side note, it’s the main focus and thrust of some of these businesses. You know, there is the the way that those of us who work in this space think of it and the way that the general public thinks of it, there’s still quite a divide there. I mean, I was with family over the weekend. And they were talking about the California initiative on EVs specifically, and how that affects consumers. And what are we really doing is it kind of high minded idealism or in something that’s really necessary to move the dial, you’ll see a lot of the same protests from truckers around the cost of the long haul trucking changes that will be imposed under that same ordinance. So a way to say that there’s still work to be done and having folks appreciate at the public level, why these policies are being passed, and that they are more than lip service or just some, you know, government agenda that it really does translate to trying to get in front of, you know, the other half of the newspaper, the natural disasters, the uptick in climate, the death from heat, but things that are really struggling with it that make us have a week like Climate Week. The other point I noticed, it’s not a week anymore. Like this is life. You know, I know it translates as a nice sound bite. But the truth is, we’re all struggling with the impact of this. It tried to take a vacation this year, I’m sure you’ve noticed that your favorite spot was different, had less water was hotter, whatever it is, it’s really hard to deny the importance of focusing not just on individual transactions and stuff that Lauren and I do every day, but the broader initiatives that we need to publicly get behind to help support the changes that will hopefully help protect us and catch up against the trend and climate that has been going wrong way the last several years, if not decades.
Lauren Collins 09:34
And that’s an area that you hit on Michael, that folks can debate whether these are the right policies or or whether we should be focusing on on EVs or solar energy or whatever that topic du jour is. But now we’re seeing these projects be financeable we’re seeing them develop their own marketplace, they’re creating jobs. They’re creating US manufacturing So the the conversation doesn’t need to just be about ESG or or greenwashing it can be about these are actually really valuable projects and investments that are better for the economy than the status quo. And that’s a shift that I’ve seen over the past few years. And the IRA really helped with that quite a bit.
Sean McMahon 10:21
Yeah. Now, Mike, you mentioned speech by the executives from Brookfield and Lauren, your comments on conversations about finance? So that kind of leads to my next question, like how have conversations when you’re, you know, you guys work on deals, and I’m not asking you to share any specific deal things but trends, you know, questions you’re getting from finance years or interest are showing and how and where to invest in renewables. Have those trends change at all?
Michael Joyce 10:44
They certainly have, because you can, we can have all the ideals we want, and all the reasons to change. And until the money’s behind it, it really isn’t much more than lip service and press right. So I was sitting with the folks that protect our winters a couple of years ago, and they were talking about some of their policy initiatives, I said, Look, I hear a lot of in terms of you won’t support people that support fossil fuels. But if you think that you’re not if you’re going to be able to drive change in the agenda, without having a dialogue with those people, or more importantly, where their money comes from. You’re kidding yourself. Because there’s still an economy, the investment dollars follow opportunity. Yes, there are shareholders who are younger, have different views on the importance of climate change, that are kind of having more influential, influential voices in those boardrooms are in those private equity funds. But the business is still to make a buck, as crass as that sounds. And until you can align the economic incentive with the policy agenda, you’re gonna have a tough time advancing that agenda. And what we’ve seen with the IRA, and some of the other initiatives is having the government step in and do what many of us believe the role of government is, which is to fill the gap and help align those economic incentives with the policy agenda. And Lauren, and I see that every day in terms of new market entrants, right? The renewable investors have traditionally been a small club of banks and insurance companies, and a couple of targeted private equity folks that were focused on these sort of initiatives because of opportunity. And some of the things they saw in the last two years, everyone’s come off the sidelines, Lauren, and I have been dealing a lot with corporates investing through transferability. And that really kind of, again, putting those dollars behind the agenda in terms of additional additionality and adding projects that are going to lead to a better footprint versus just some greenwashing I bought some racks, right. So we see it in terms of where the dollars are being spent, who’s spending the dollars, how the funds are being raised with a targeted focus towards renewables. So the the action and the investment is catching up with the agenda. But there has been gap filling to get there in terms of what the government’s done, as well.
Lauren Collins 12:54
Sean, I think you and I talked about this a year ago, but Ira enacted transferability, which allows you to buy a credit from one of these renewable or clean energy projects, and you’re gonna buy it for less than it’s worth. So you can buy $1 credit for 90 to 95 cents, you’d be crazy not to right. And so the IRA has turned each tax department into a profit center for these corporates. So that’s why, you know, as Michael highlights, we’re seeing a lot of corporates come into the market, and be able to invest in renewables and clean energy, not just because it sounds good, or helps people sleep at night, but because they actually make money by doing so. And I think we’re gonna see even more uptick, as we see more public company reporting, because there are plenty of companies that are on board and jumped on the bandwagon early and often and are doing these deals already. But there’s others that have been sitting on the sideline. And the second that public company reporting starts coming out, those companies that haven’t done it yet are going to be getting questions from shareholders as to why not? Because it’s almost irrational not to.
Sean McMahon 14:05
Yeah, Lauren, we didn’t just talk about that last year, you actually highlighted that as something that was going to be huge, which, which was a bold prediction, I think you might have made that was right. So. And, Mike, your your point about the fossil fuel industry, you know, having a dialogue with him. I couldn’t agree with that more. I feel like whether it’s the dollars, whether it’s the know how the technology or things like that, there’s going to be a role to play there for sure. So we’ve already talked a lot about the IRA. And I definitely want to do a deep dive on that. But before we get there anything else about Climate Week that you’re keeping your eye on or any individuals that you’re going to be curious to hear what they have to say?
Michael Joyce 14:40
Like to Lauren’s point, I’m interested to see where companies come out in terms of some of their directed statements around what they’re doing. We have long had a dialogue around the ESG side of the practice, which is kind of the capital markets boardroom side in terms of what shareholders were focused on and how they manage it and there was this chiasm of okay, well, I I’m going to be carbon neutral by x date without any real plan to get there, you know, the way that the securities laws have shifted, there needs to be a plan. Now, it is Climate Week, it’s the time to talk about it. So we expect companies to seize on those opportunities. I’m interested to hear what they have to say.
Lauren Collins 15:16
Yeah, completely agree that that’s probably what I’m most interested in is just seeing all of the announcements come out over the next week of things that folks have been working on. But I’ve waited till Climate Week to announce I mean, just yesterday, Trina came out and announced that they’re opening a facility. Here in the US, Amazon’s buying a bunch of carbon capture credits from direct air capture that was announced earlier. So I think we’ll just be seeing a lot of those kinds of cool deals being announced and made public, which just increases momentum.
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We’ll be right back. The world needs ways to reduce carbon emissions. ExxonMobil is working on solutions in its own operations, like carbon capture and clean energy from hydrogen, that could also help other businesses like manufacturing, commercial transportation and power generation. Helping deliver heavy industry with low emissions. Find out more at ExxonMobil.com or click on the link in the show notes.
Sean McMahon 16:24
And now back to my conversation with Lauren Collins and Michael Joyce from Vinson and Elkins. So now let’s get into the IRA. You know, we recently marked the one year anniversary of its passage. And so let’s look at things sector by sector say solar, you know, battery storage, when things like that, which sectors do you think, enjoyed the most momentum here in this first year that’s already gone by and which sectors do you think will continue that momentum in the year ahead?
Michael Joyce 16:50
Shot, I’d suggest that perhaps the two that we’ve seen at the most benefit are standalone storage, as previously being tied to the solar plus storage to get value from the credit. Now you have the standalone credit, which is really kick those projects off, they’re not without issue in terms of the revenue model, a lot of those are largely merchant or partially merchant. So they still have their own difficulties investing. But having that 30% Or potentially more credit, helps fill some of that gap in the revenue model and lead to those projects kicking off, they’re not renewable per se, but they are part of making renewable a more dependable resource in terms of storing the wind and the solar that generates in the same localities. The other one that I’d focus on is hydrogen. We’ve been saying for last year now that b&e was doing hydrogen before it was cool by virtue of all the ammonia work that the firm does. But that was gray hydrogen. And we talked about the rainbow of hydrogen and we often do but Green was thought to be beyond reach on economical in the wake of the IRA, many great development projects are now focused on green, we spent a lot of time looking at the green model to help companies calculate how they can kind of make that jump and access the higher credit. So hydrogen has been the other one that I’ve seen have the most focus, I will say that the smaller developers, particularly on solar have had better access to capital markets by virtue of transferability. That’s not to be underestimated. So there has been an uptick in in solar. The folks that are maybe behind and I don’t mean that in a negative light, but carbon sequestration carbon capture, those projects aren’t well understood by traditional renewable investors, they now have even more opportunities in wind, solar storage, things that they understand. So what we’re expecting and hoping happens, there’s some of the the EMP folks and the folks that do understand those assets, otherwise, have profits to shelter, get involved in that side of the equation, start moving those projects forward, because in our view, the policy and the credits work, but it’s going to take a different type of investor than the folks who have traditionally been investing in the sector to move those projects forward on a large scale.
Lauren Collins 19:01
I agree with all of that, that the one I would add is just r&g and other clean fuels. And that has been a little bit of a surprise to me, I think, you know, looking back over the past year, I didn’t think it would play such a big part. Certainly it you know, is part of my day to day workflow. But there has been an incredible interest in orangey, dairy, RNG landfill gas, we’re seeing lots of those deals, and the economics there are really hyped up from Ira. I think a lot of those projects were getting done anyway, because there’s other credits and environmental attributes that are available, but you layer on now a new investment tax credit and these 45 Z production tax credits, and those projects start to look really attractive. So we’re seeing new investments, new tax equity deals, and m&a as well all in the r&d space, which is very cool.
Michael Joyce 19:56
And that really does shine another point on that, you know, we can talk about what the policy was intended to do fill gaps and bankability. Orangey is really a prime example because other credits you refers to specifically the RINs. And the LCFS are volatile credits, they’re hard to bank, whereas a tax credit is a set dollar put against to return. And that really has helped bring additional investment capital into the space kickstarts on those projects and getting moving in a much more accelerated pace.
Sean McMahon 20:23
So that’s some of the momentum that the IRA is enjoying and might be expected to continue to enjoy any headwinds.
Michael Joyce 20:29
headwinds wise, you know, the, the guidance has not been equal, in terms of the IRA was implementing legislation, we’ve been waiting on guidance, we’ve gotten some that was better than others. transferability being an example of guidance, that was largely helpful, domestic content being an example of guidance that has been problematic in terms of folks, again, it’s accessing a bonus credit. So I’m not going to suggest that it’s fatal, but in terms of motivating that on shoring and having people understand the credits that will be available from paying increased costs to purchase, quote unquote, domestic content versus how you calculate and prove out that it’s domestic content. That’s been one of the bigger challenges. The other one that I would highlight is just something we’ve touched on earlier. And that’s the folks that traditionally have finance, renewable now have more opportunity. So the same amount of dollars, same amount of profits, more opportunities, and we do need more folks to come off the bench. I agree with Lauren and hope that when when earnings come out, and people see the power of these credits on returns, that they get off the bench and take time to understand it, but it’s still a constrained market. And that hopefully will continue to open up.
Lauren Collins 21:38
Yeah, the other item to mention that we’ve been getting a lot of questions on is Basil three. And I’ll get out of my depth really quickly. If I if I pretend to be a Bessel three expert but but you know the basics, there’s that it can really limit tax equity investment, and is something that you know, might be spooking the market a little bit. And I think it kind of highlights that there. There is some inconsistency in Washington where we have the IRA that, you know, sets out to accomplish very lofty goals. And then we have something like this regulation that comes out the Basel three regs that are proposed, they’re not final, but they would significantly limit the ability of tax equity investors to make these investments. And so there’s, you know, speaking of headwinds, that’s exactly what it is. They’re they’re working against each other in terms of bringing more financing players into the market, so that we’re hoping that gets corrected, and that those proposed rules are not passed as they’re proposed. But it’s enough to kind of freak people out and so on down a little bit.
Michael Joyce 22:47
Yeah, just to unpack that for the the audience what the the primary issue and what’s in the proposed rules around about Basel three is a 400% risk weighting charge on renewable investments compared to say 100% on low income housing, the logics a bit baffling not just for the reasons that Lauren notes around, on one hand, the government’s trying to incentivize these investments and make them more accessible and other hand bank regulatory side, they’re saying they’re exceptionally risky. It’s the exception risky that I struggle with when you know, 85% of your return comes in the form of a government tax credit, where’s the risk? So it’s, it’s baffling on many levels, and it’s become an issue in deals in terms of negotiating outs and who’s at fault is their break into that sort of thing that the nitty gritty of what we do every day, but if past its current regulation, it would effectively shut down tax equity. And that’s not an exaggeration in terms of, there’d be very limited capacity, very low that deal flow transfer would still be accessible, but they don’t have as much juice. And frankly, the tread transfer market on larger scale has relied on what we call a hybrid approach where you have a traditional tax equity, who takes down the bonus depreciate or the depreciation, some of the credits and transfers the rest out. All of that comes to a stop and takes the imprimatur off of the marketability of those transfer credits. So Lauren’s exactly right. Probably the biggest challenge that we’re facing day in and day out today, is this cloud of Basel three.
Lauren Collins 24:12
It’s all around the same theme that you started with, Michael, just the idea that we have the IRA it, it has a lot in it, great benefits, will spur a bunch of investment. But we have the Fed slowing things down with basil three, we have Treasury slowing things down with regulations being slow to come out. We have state and local permitting issues that slow down project development, and we have just overall capacity constraints. So you know, I like to be a bit of an optimist, but there are still some serious things that need to be overcome if the IRA is going to do what it actually set out to do.
Sean McMahon 24:48
Let me just jump in there. So but considering the global nature of basil three versus the domestic nature of the IRA, is the Fed not just trying to kind of a balancing act there or maybe it’s it It’s the international players who won’t mind seeing the US slowdown because they’re trying. They’ve been complaining about the subsidy nature of the IRA all along. So it’s almost it’s an international thing versus a domestic thing. And I can see why that would you know, where the rubber meets the hits the road, there could be difficult.
Michael Joyce 25:13
It’s a very fair point that it’s hard to say, Sean, because frankly, the feedback we’ve been getting from some of the lobbying efforts has been that the government here has been relatively cold today and engaging in the conversation. And maybe it’s for the very reason that you note in terms of it being a bit of a broker deal on an international level, but it’s still hard pressed to fathom, in terms of being consistent with their own agenda.
Sean McMahon 25:36
Yeah, I’m not sure how present the US was doing some of the negotiations, Basil has been in the pipeline. For years, I’ve been covering the sausage making on that for a long, long time. Some of the parts of it definitely were determined before the bite administration took office. Michael, you’re talking about hydrogen, and things like that. And one of the things I’m curious about, and just tell me if I’m wrong, because it might be. So we had a guest on the show from like, you know, Louisiana, and, you know, they got the hydrogen hubs kind of trying to set up all around the country. And, you know, I thought of him when the Gulf deals kind of for offshore wind when not the right way. Any, I guess I’m gonna say threat to the hydrogen hubs are just uncertainty around them based on what maybe a year ago seemed like it might be a viable power source that is either not going to happen like that stuff, or citing issues or things like that.
Michael Joyce 26:22
What we’ve heard, and again, this is rumor at this point is that, because the other piece of the habit outside of colocation is using RX to satisfy or to green up your brown power, right, because you cannot produce on a 24 hour cycle with exclusively renewable energy apps in a very few collate located facilities. So the thinking was, you’d be able to use renewable energy credits to green up for brown power, at least in the off times, if not in places where there wasn’t large scale renewable. And what we’re hearing is that it’s not the guidance is not expected to come down with just a yeah, you can buy racks to make your energy green, and move up in the green model. And that is a significant threat, because it’s kind of like back where you were with, with storage plus solar, it doesn’t make any damn sense from a grid stability perspective to put your battery next to a solar facility to get the ITC like that, yeah, it gets to the ITC, it doesn’t help with grid stability. Similar thing like where you can produce hydrogen effectively move it store it from isn’t necessarily where you could produce it. Green. So yes, there is an issue there. It’s not just related to the offshore, it’s probably the bigger issue is where we hear the guidance is going to come on the racks not being fully eligible. Is the low peak at this point or not. Have you heard it being clear? I’ve just heard that it’s not going to go the way everyone’s hoping.
Lauren Collins 27:40
I think that the hydrogen guidance that is pending is kind of hanging over everyone’s head. And I think however it comes out, there will be folks that are really unhappy about it. There will be winners and losers depending on how you’ve developed your project. But the issue is that Michael described the idea that you can use market based mechanisms to green your hydrogen, that there might be additionality or location or time matching requirements. Those are all unknown. You know, maybe people closer to Treasury would be able to opine on where they think those will fall. But But I certainly have an idea where Treasury’s gonna come out on these things. And they were supposed to come out with regs, or some sort of guidance documents this fall. Sounds like it’s not going to be till December. Normally, I like to see guidance sooner than later. But I actually think that’s a good thing. Because this is a really hard issue, and one that requires coordination between treasury and DOA, and probably requires a fair bit of comment from taxpayers, which we know taxpayers are, are working on and have been engaged on. So I think it makes sense that they’re taking their time to get it right. Because again, how it comes out is going to have a major impact on whether projects qualify and whether they’re economic or not. So there’s a lot of pressure on Treasury to get it right.
Sean McMahon 29:09
So getting back to when you’re interacting with, you know, developers out there, and they’re trying to, you know, close deals, you know, we’ve talked about headwinds of the IRA as and maybe a little bit of uncertainty around the tax credits, because of Basel three. But are there any other questions or challenges that developers are facing, you know, when they’re when they’re kind of really getting close to signing those contracts?
Lauren Collins 29:29
One issue that I am surprised every time it comes up, but it sure does come up a lot is the potential for change in law. So, you know, Ira was passed, you know, by a narrow margin, but it was passed, and it’s signed into law, and there is an ongoing concern that it might be repealed. And that is a somewhat reasonable concern given efforts in Washington to do just that. But but that is an area where I see developers being faced with challenges and and all almost having to backstop the change in law risk and ensure that to get a deal closed, if the law changes, they are kind of on the hook for it, which is a tough position for developers to be in. And, you know, as a as a general matter, they are getting squeezed from all sides, they have their investors that are trying to extract as much economics as they can. And then they have supply chain issues and contractors who kind of rightfully don’t necessarily want to give up their own reps and warranties and indemnities. So in many ways, the developers are kind of left in the middle, in some circumstances, really holding the bag in the markets kind of working all that out. And I don’t know that it’s finally settled. But that that is something that I’ve seen,
Michael Joyce 30:46
the one that I that I’ve seen is just the lack of talent. And I’m not saying we don’t have a ton of talented, focused people focused on this field, what I’m suggesting is you can’t multiply production of something by 3x or more, without having a talent issue, both in terms of building the facilities as well as managing the financing. So we see, there’s been a lot of movement within the sector, on the financing side with people trading shops kind of taking a better higher paying job and their old shop kind of filling that gap with less experienced folks, that might be frustrating on a deal for us financing types, it’s potentially very problematic. On the actual build side of things, whether it be manufacturing components, or putting up wind farm towers, there has been, you know, just a, a rush, a lot of movement in the sector, which has kind of depleted some of the strongholds in talent and like the IPPs are still very strong. But they’ve lost a lot of talent in the last year. And it’s hard to deny that we don’t see that in our transactions and fear what it means for the actual projects themselves.
Sean McMahon 31:50
But with some of that not kind of structured in parts of the IRA. And
Michael Joyce 31:53
yeah, I mean, the IRA tried to get in front of that. And I’m not suggesting that Washington didn’t do a good job of trying to forecast and address the issue. But it takes a while to train in the presence. We didn’t I mean, we save Harvard, or we were using began construction. For all the projects that are already started, we already had negotiated contracts to get them built on time on budget. So that we’re the apprentices are just now starting right. And, and again, 3x 3x is a lot you know, if you look at like a teaching, like a school, and think of meeting three times as many teachers, educate your kids, think about what that would take. It’s the same sort of thing and an energy generation and building the projects,
Lauren Collins 32:33
That it’s the folks on the ground where we have the apprentice programs that will hopefully increase the amount of workers that are available, but it’s it’s all stages through the life of the deal. It’s the project managers, it’s the financing parties, it’s the lawyers, you know, we need more of everyone. And you know, Michael and I have been doing this for a long time. But we need more of us to do this. So there’s been kind of a ramp up process of just getting more people into the industry, all along that chain.
Sean McMahon 33:05
Okay, well, you just mentioned that you and Michael been doing this for quite a while. And I recognize that I’m talking to a couple of partners at a law firm. Are there any tax aspects that are continuing to kind of fly under the radar? I mean, Treasury’s using new guidance seems like every other week, but is there any kind of nuggets you’re waiting to see, and that might end up proving pretty pivotal?
Lauren Collins 33:25
Yeah, one that came up recently that we were able to unpack and I was surprised by is the interaction of BEAT with some of these tax credits. And so it’s an area that gets pretty nitty gritty into the tax code really quickly. But the idea being that, even for direct pay of credits, if you’re subject to BEAT, you really kind of lose a lot of the benefit.
Sean McMahon 33:54
Real quick, what’s what’s, what’s BEAT
Lauren Collins 33:57
The base erosion, anti abuse tax. It was enacted a few years ago, it just serves as a minimum tax basically. And, again, it kind of came up over the past few weeks. And of course, when something comes up one time, it just comes up over and over again. So it’s been very top of mind, but it’s now something where anytime I’m talking to someone about doing direct pay, I have to stop them and say, Hold on, are you subject to beat because that can change your calculus of whether you’re going to do direct pay or transferability really quickly? And so I think that, you know, if we’re just talking about tax aspects, that’s a good one. And just generally making sure that that taxpayers are looking at their credits holistically. So you know, at the top of the show, we talked a lot about like everyone should be doing this, you know, this is economically rational not to invest. That’s definitely an overstatement because depending on the overall time Next capacity and attributes of a company, some credits may be more or less valuable transferability may be more valuable than direct pay, or just claiming the credit may be the best. So that’s it’s those kinds of nuances and making sure that anytime a taxpayer is looking to take advantage of these credits, they are working with their tax department, they’re working with their tax counsel, and they’re really understanding the overall impact of the credits that they’re investing in and the benefits they hope to get
Michael Joyce 35:30
the law and I might suggest, as someone who’s not a tax lawyer, but runs across a lot of them, the one that I wasn’t as familiar with, and I’ve heard a lot is the the at risk limitations. kind of appreciate how those impact private equity investors and the like and may impact their ability to transferability deals specifically, and some of the other structuring that we do.
Lauren Collins 35:51
Sure, sure. No, yeah, no, I’ll unpack that one a little bit. So for certain of the credits available through IRA, there are specific limitations for individuals and closely held corporations who have invested in those assets. And the transferability regs basically provide that those limitations continue to apply or might even apply to greater extent, if you do a transfer transaction. And so that means for certain investors, like private equity funds that do have individuals or closely held corpse, in their structure, it can actually limit the amount of credit that is otherwise available and would be able to be transferred, or requires a whole lot of structuring and diligence in order to be certain that you get the credit that you’re think you’re getting. And so you know, it’s one of those things where, again, it sounds great, you get all these credits, but then you have to step back and say, Wait a second, if I want that credit, I have to put in a bunch of corporate blockers. Otherwise, I have some of these limitations applying. And sometimes that’s just isn’t worth it. So back to the same theme of step back, work with your tax advisors, work with your tax department, and really make sure you’re understanding holistically how these credits are going to impact cash flow and tax capacity.
Sean McMahon 37:09
Okay. And then one other quick question I had. Lauren, when you were on last year, we talked a little bit about, you know, the possibility for stacking tax tax credits. Are you guys seeing that in in practice now, now that the IRA is in effect?
Lauren Collins 37:22
Yeah, yeah, we’re seeing quite a few 40%, ITC 50% ITC 110% PTC, again, domestic content hasn’t proven to be as easy to qualify for as one would have hoped. But the Energy Community guidance was extremely clear and makes projects kind of go or no go. So it’s easy to feel confident in your energy community bonus credit. So we’re seeing lots of stock stacking around that. The other area we’re seeing stacking again is RNG, where we’re seeing folks take the biogas ITC, and then the 45. C PTC, when that becomes available, and taking both of those credits, again, makes those projects just look really attractive.
Sean McMahon 38:11
Okay. And as I mentioned earlier, we’re, you know, we’re having this conversation, I guess, a little more than a year after the passage of the IRA, we’ll call it 13 months. So looking back on the last year, what what were your biggest takeaways or any big surprises that you saw kind of surface after that legislation was passed?
Michael Joyce 38:28
Because the IRA itself calm?
Sean McMahon 38:30
The actual passage of it, getting the deal? I mean, we had spent
Michael Joyce 38:33
so much time hedging, will they won’t they, and then all but given up hope, and we had folks here that had sat with managin, and tried to figure out kind of where so the passage of the legislation itself and how broadly sweeping it was, and how much it seemed to understand where the pinch point lies in and of itself was surprising. So though, I joke, I mean it seriously as well. Other surprises. I actually think the corporates have done a good job of getting involved early, it hasn’t been uniform. But Lauren, I know that a couple of deals that you and I work on, we had a corporate come in through another partner and look at transferability and they’re rolled off three deals, you know, in four months. So some of these folks are FLIR flip that we might have thought.
Lauren Collins 39:18
I completely agree. One of my biggest surprises is just how much work there has been like we, we knew this was going to be big. We knew there was going to be a lot of deals. I don’t think I could have predicted this many. I mean, it it feels like every day there’s a new term sheet or a new client that wants to engage with us. And so it keeps us busy. It keeps us you know, nimble as practitioners, but it’s remarkable the amount of work and the amount of different types of work that we are seeing. Again, I knew it was going to be big. I don’t think I knew it was going to be this big. On the flip side, you know the area where I I thought it would be bigger but seems like it has been so down to Michael mentioned was just the domestic content rules. And that bonus, I think folks have been incredibly frustrated with the guidance that came out a few months ago. And that’s really slowed things down and made it hard to finance those domestic content bonus projects. That’s an area I really hope gets corrected, and that we see some interim guidance or better final guidance. But it’s such a tough area. And I don’t blame treasurer, the IRS for for not being for not putting out perfect guidance, because it really was an impossible ask, in order to put out that domestic content guidance, you really have to have a fundamental understanding of how every single project that’s eligible for these credits works. And that’s just, you know, a really hard ask, it’s something that’s probably going to take years to kind of perfect and get right. So I guess I shouldn’t have been surprised. But I am surprised that that that was such a tough process and continues to be.
Michael Joyce 41:08
Yeah, my other surprises coming out of the legislation. It’s not how it’s evolved. But the Miss beyond transmission, if there was a miss in the IRA, it was sustainable aviation fuel, just in terms of the timeline that you can qualify for the credit lapsing in 2025. And the effort it would take to build at scale these facilities. So not a surprise, per se, and how it’s evolved over the last year, but a little bit frustrating in terms of that untapped opportunity.
Sean McMahon 41:35
Yeah, we’ve been talking to a few folks about about SAF. And same thing. It’s kind of a longer horizon on getting that ready. So yeah, definitely missed that, like I said, as well as transmission. So for the last part of the show, Mike, you might not know this, but one of the things I ask all my guests for is bold predictions, right. And Lauren, has been on the show before and I, for listeners, I encourage you to go back and listen to her previous appearance, because I’m pretty sure her batting average on her bold predictions was pretty good. So what are your bold predictions about both the IRA and just you know, the broader renewable space in the next three to five years?
Michael Joyce 42:09
Mine is that the earmark on what it will cost the government is way off. And I don’t know how bold that actually is that the program is largely going to be utilized beyond what the budgetary folks expected, in terms of how many dollars will flow out or not flow in. And I admit, I’m cheating, because I don’t think it’s terribly bold. We saw this with the cash grant program. And what it will lead to is additional scrutiny. So as much as there’s a lot of opportunity, and, and there is a lot to be thankful for in terms of what was in the IRA, I do expect that we will start to see the other shoe drop on audits in the next year or so in terms of some of these structures and transactions coming under scrutiny for value of step ups, eligibility of credits and the like. And that shoe will fall within the next year.
Lauren Collins 42:57
Yeah, unfortunately, I think you might be right, I will say one of a because I did go back and listen to what my bold prediction was last year to see how right or wrong I was. And one thing I was wrong about was the idea that you might be able to take advantage of these credits or buy these credits as an individual, I was wrong on that. The regulations tell you you cannot Much to my disappointment, I would have loved to go out and buy some some ITCs and put my money where my mouth is. But alas, based off of the current rules, that is not the case. You know, and then going forward, my bold prediction is just you know, more is more, there’s gonna there’s going to be more deals, I will not be surprised this time next year, when I tell you my deal flow has increased even more. Very excited about it, I think we’ll continue to see this tax credit marketplace develop even though individuals cannot buy credits. I do think we’ll see more corporates get involved, you know, large corporate, small corporates, all of the above. And I think though, that we might start to see some creative structuring that allows more tax exams and municipalities getting involved and, and doing creative direct pay structures. That’s an area where I thought I would spend a little bit more time on over the past year and it hasn’t happened yet. So I’d love to see that happen over the next year and, and find ways for tax exempt municipalities, universities, really to benefit from these credits, and be able to take direct pay on them. So that’s my hope and my prediction.
Sean McMahon 44:38
All right, well, hey, listen, Lauren, Mike, it’s been great talking to you. I always appreciate the insights I get from the team at Vinson & Elkins, so I appreciate your time.
Lauren Collins 44:46
Yeah, thanks. It’s been great. And let’s talk again in the year.
Michael Joyce 44:51
Thanks for having us on. We appreciate it.
Sean McMahon 44:57
That’s our show for today. But before Get out of here. And I want to say one final thank you to the exclusive sponsor of today’s episode, ExxonMobil. Thank you all for listening. And if you haven’t already, please subscribe or follow this show on Apple, Spotify, Google or wherever you listen to your podcasts. And as always, please be sure to share it with your friends and colleagues. Have a great day.