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Offshore Wind And The US Inflation Reduction Act – Oil, Gas & Electricity


The Inflation Reduction Act of 2022 (IRA), which was signed into
law by President Joe Biden on August 16, 2022, has the potential to
shape offshore wind development for the foreseeable future. Among
other things, the IRA modifies the investment tax credit
requirements for offshore wind projects, ties offshore wind leasing
to offshore oil and gas leasing while also opening new areas for
potential offshore wind development, and appropriates additional
funds for the planning and development of interregional electricity
transmission and transmission of electricity generated by offshore
wind.

Tax Credits

There are now more onerous requirements for offshore wind
projects to qualify for investment tax credits (ITCs) at the full
rate but a renewed opportunity to claim production tax credits
(PTCs).

Previously, offshore wind projects under construction by the end
of 2025 qualified for a 30% ITC but were ineligible for PTCs at the
full rate unless they were under construction by the end of 2016.
Wind projects under construction between 2017 and 2021 qualified
for PTCs at a reduced rate. Most offshore wind projects are
expected to claim the ITC given the high capital costs of
constructing such projects.

Now, offshore wind projects under construction by the end of
2024 are eligible for a reduced base credit (6% ITC or 0.3 cent
PTCs, adjusted for inflation) that is subject to increase if
certain criteria are met. In order to be eligible for the full ITC
or PTCs, offshore wind projects must meet certain prevailing wage
and apprenticeship requirements or else be under construction no
later than 60 days after the Treasury secretary issues guidance on
the prevailing wage and apprenticeship requirements.

Prevailing wage requirement: A taxpayer, as well as its
contractors and subcontractors, must pay prevailing wages to
laborers and mechanics in the construction of the facility and,
during the first five (in the case of ITC projects) or 10 (in the
case of PTC projects) years of operation after the facility is
placed in service, the alteration and repair of the facility.
Prevailing wages are determined by the secretary of Labor.
Taxpayers have the ability to correct a shortfall in wages by
paying to the laborer or mechanic the difference between the
prevailing wage amount and what the laborer or mechanic was
actually paid plus interest and a penalty to Treasury. The amount
owed to the laborer or mechanic for a shortfall is multiplied by
three and the penalty is higher, if there was “intentional
disregard” of the prevailing wage requirement.

Apprenticeship requirement: A certain percentage of the
total labor hours for the construction, alteration or repair work
with respect to the facility (including work by contractors or
subcontractors) must be performed by qualified apprentices. The
percentage is 10% for projects under construction before 2023,
12.5% for projects under construction in 2023, and 15% for projects
under construction after 2023. A “qualified apprentice”
is an apprentice employed by the taxpayer or its contractors or
subcontractors and who participates in certain registered
apprenticeship programs. Additionally, any taxpayer, contractor or
subcontractor who employs four or more individuals to perform
construction, alteration or repair work with respect to the
facility must employ at least one qualified apprentice. There is an
exception to the apprenticeship requirement if (i) the taxpayer
requested qualified apprentices from a program and either the
request was denied or there was no response from the apprenticeship
program within five days or (ii) the taxpayer otherwise pays a
penalty to Treasury for failing to meet the labor hours and minimum
participation requirements. The penalty is multiplied by 10 if the
taxpayer intentionally disregarded the apprenticeship
requirement.

Practical considerations: For wind projects, the
determination of whether the prevailing wage requirement and
apprenticeship requirements are satisfied is made on a
“qualified facility” basis. The IRS generally considers
each turbine, pad and tower a separate facility. It is unclear how
the requirements will apply to the balance of the wind project.
Another consideration is whether the start of construction rules
that have been used for qualification purposes over the last nine
years, including the “single project” rule, will apply
for purposes of determining whether a project was under
construction in time to avoid having to meet the prevailing wage
and apprenticeship requirements. Recordkeeping will be critical in
deals claiming the full tax credit rates. Investors are likely to
ask sponsors to make representations that the prevailing wage and
apprenticeship requirements are met, if applicable. Beginning of
construction analysis will be important for projects looking to
avoid having to meet the requirements. Sponsors will need to
coordinate with contractors to ensure the requirements are met and
may attempt to push these risks on to contractors. It is worth
noting that the start of construction deadline for claiming an ITC
for an offshore wind project was pulled forward by one year, but
projects under construction in 2025 or later may be eligible for a
technology-neutral ITC or PTCs as discussed below.

Another change for offshore wind projects is the availability of
an additional 10% ITC or a 10% increase in the PTC rate for
projects that meet certain domestic content requirements. To claim
the additional credit, a taxpayer must certify to the Treasury
secretary that any steel, iron or manufactured product that is a
component of a facility upon completion of construction was
produced in the United States. The 10% adder is available for
projects placed in service after 2022.

Manufactured components: Manufactured components are
deemed produced in the United States if no less than the
“adjusted percentage” of the total costs of all such
manufactured products of such facility are attributable to
manufactured products (including components) mined, produced or
manufactured in the United States. The adjusted percentage is 20%
for offshore wind projects.

Practical considerations: Guidance from Treasury will
be important to understand what parts of the project a taxpayer
must draw a circle around to determine if the domestic content
requirement is met, as well as to determine how granular the
“manufactured component” analysis must be—in other
words, how deep in the supply chain the taxpayer must look to
satisfy the domestic content requirement for a specific component.
As with the prevailing wage and apprenticeship requirements,
recordkeeping will be critical. It will be important for projects
claiming the 10% domestic content adder to put systems in place to
verify the source of materials and components. Investors are likely
to ask sponsors to make representations that the domestic content
requirement is met. Sponsors will need to coordinate with
contractors and suppliers to verify the source of materials and
components and are likely to ask contractors and suppliers to make
representations about the source of materials and components.

Additionally, offshore wind projects placed in service after
2024 may qualify for technology-neutral tax credits for zero- or
net-negative carbon emissions projects. The technology-neutral ITC
and PTCs phase down to 75% of the full credit for projects that
begin construction in the second year after the later of (i) 2032
or (ii) the calendar year in which Treasury determines that the
annual greenhouse gas emissions from the production of electricity
in the United States are equal to or less than 25% of the 2022
emissions level. The credit is further reduced to 50% of the full
rate for projects under construction the following year and is not
available to projects under construction after that.

Practical considerations: Projects may not
“double-dip” and claim both a wind ITC or PTCs as well as
a technology-neutral tax credit. For offshore wind projects under
construction by the end of 2024, the wind ITC and PTCs likely are
more attractive in order to avoid having to demonstrate
zero-emissions from the project.

Offshore Leases

The IRA ties new offshore wind leasing to offshore oil and gas
leasing. During the 10-year period after the IRA was enacted, the
Bureau of Ocean Energy Management (BOEM) may not issue a lease for
offshore wind development unless the agency had offered at least 60
million acres for oil and gas leasing on the Outer Continental
Shelf in the previous year. This provision could affect
decision-making for BOEM’s upcoming offshore oil and gas
five-year leasing program. In July 2022, BOEM released a proposed
program that considered a range of offshore oil and gas leasing
scenarios for 2023 through 2028, some of which offer sufficient
sales and acreage to meet the IRA’s criteria for enabling
offshore wind leasing while others would not.

However, the law also permits the federal government to issue
offshore leases, easements and rights-of-way in areas off the coast
of North Carolina, South Carolina, Georgia and Florida, which since
July 1, 2022, has been under an offshore leasing moratorium imposed
by former President Trump. In 2020, President Trump stated in a
memorandum: “I hereby withdraw from disposition by leasing for
10 years, beginning on July 1, 2022, and ending on June 30, 2032:
The portion of the area designated by the Bureau of Ocean Energy
Management as the Mid Atlantic Planning Area that lies south of the
northern administrative boundary of North Carolina,” which is
the administrative boundary depicted on the Atlantic NAD 83
Federal Outer Continental Shelf (OCS) Administrative Boundaries
map
. The IRA has officially ended this offshore leasing
moratorium for the Southeast.

The IRA provides staffing funding for BOEM and the National
Oceanic and Atmospheric Administration (NOAA), which may be used to
help support the review of the at least nine construction and
operation plans that have been submitted and the programmatic
environmental impact statement and consultations being prepared for
the NY Bight area.

The IRA also broadens the definition of Outer Continental Shelf
to include specific submerged lands adjacent to US territories,
including Puerto Rico, Guam, and the US Virgin Islands. This
potentially opens up new areas for offshore wind development. The
IRA directs the secretary of the Interior to gauge commercial
interest in offshore wind development off territorial coasts and,
if there is sufficient interest, authorizes wind lease sales in
areas deemed feasible after the secretary has consulted with the
territorial governor.

Transmission for Offshore Wind

The IRA appropriates $100 million for the purpose of convening
relevant stakeholders and conducting planning, modelling and
analysis with respect to the development of interregional
electricity transmission and transmission of electricity generated
by offshore wind. The planning, modelling and analysis would take
into account the local, regional and national economic,
reliability, resilience, security, public policy and environmental
benefits of interregional electricity transmission and transmission
of electricity generated by offshore wind and would focus on issues
such as integrating clean energy into the electric grid and
economic development opportunities for communities arising from the
development of transmission of electricity from offshore wind
projects.

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reserved.

This
Mayer Brown
article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.



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