Compressors used by midstream companies to move gas through their pipelines also produce heat, which usually is allowed merely to dissipate and thus is a “wasted” source of potentially useful energy. Instead of being allowed to dissipate, however, the heat can be harnessed as useful energy through the installation of electricity-producing turbines. The electricity so produced is clean or green power because no incremental combustion of fossil fuels is associated with its production. Effective in 2021, there is a federal tax credit for the installation of waste heat recovery property, meaning that midstream companies have the opportunity to improve their sustainability or “ESG” profile by producing green power while offsetting a portion of the associated capital expenditures with a tax credit.
At the end of 2020, Congress enacted the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260 (Dec. 27, 2020), in which it finally recognized the green nature of waste heat projects by adding, beginning in 2021, “waste energy recovery property” to the list of property eligible for the energy tax credit set forth in section 48, a federal tax credit based on the amount of a qualifying investment.
The new statutory provision defines “waste energy recovery property” as “property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity.” Since the primary purpose of gas pipelines and gas compression stations is not the generation of electricity, property using heat from midstream equipment to produce power generally should be qualifying property.
The statute imposes a size limitation, stipulating that qualifying property may not have a production capacity in excess of 50 megawatts. The statute also provides that property shall not be treated as waste energy recovery property for purposes of section 48 if it is part of a combined heat and power system unless the taxpayer elects not to treat such system as a combined heat and power system for purposes of section 48. These limitations should not be problematic for most midstream installations, however.
To qualify for the energy tax credit, the “waste energy recovery property” must meet the general requirements of the energy tax credit. For example, the “waste energy recovery property” must have been constructed by the taxpayer or, if acquired by the taxpayer, the original use thereof must commence with the taxpayer. The waste energy recovery property must also be property that is eligible for depreciation (for example, not land). The property must also meet any applicable performance and quality standards prescribed by the Secretary of the Treasury (though, to date, the Secretary has not prescribed any such standards). In some limited circumstances, mere lessees, rather than owners, of otherwise eligible property may claim the credit. No property used outside the United States is eligible for the credit.
The amount of the credit is equal to the taxpayer’s basis in such property multiplied by:
- 26% for any waste energy recovery property the construction of which begins before 2023; and
- 22% for any waste energy recovery property the construction of which begins in 2023
The credit is not available if construction does not begin before 2024.
The basis of any waste energy recovery property with respect to which the credit is claimed is reduced by 50% of the claimed credit. If the waste energy recovery property with respect to which the credit is claimed is sold or otherwise ceases to be eligible for the credit within five years of being placed in service, a ratable portion of the claimed credit must be recaptured.
At the time of this writing, Congress is restarting negotiations on legislation that could expand and extend the waste heat tax incentive. Under this prospective legislation, a taxpayer may elect, under certain circumstances, to treat the credit as an actual tax payment, and thus seek a refund even if no tax is due for a taxable year. Other provisions of this prospective legislation would extend the deadlines for construction of projects and increase the credit amount for certain property.
Midstream gas companies, especially those companies feeling either management or shareholder pressure to “go green,” are looking at the opportunity offered by the waste energy recovery property tax credit. The potential to use the credit to reduce the cost of initiatives a company may feel compelled to undertake, as well as the possibility of an even further enhanced credit if proposed legislation is enacted, make this an exciting tax incentive to consider.
Visit 2021 – Traditional Energy Rebounds and Increased Energy Transition, for the complete list of individual, detailed articles associated with this publication.
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