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Congress's Budget Compromise Lifts Crude Oil Export Ban and Extends Wind and Solar Tax Credits

January 21, 2016

On December 18, President Obama signed H.R. 2029, the “Consolidated Appropriations Act, 2016,” a nearly 900-page compromise budget bill. In an era noted for legislative stalemate, Congress brought the bill to the President’s desk the old-fashioned way: by including something for everyone.

The political horse trading extended to the energy sector. Congress lifted the ban on export of crude oil, achieving a goal of Republican leadership. However, there are exceptions for national emergencies and trade sanctions, as well as a safety valve if crude oil exports lead to sustained increases in unemployment. For wind and solar energy, the budget compromise provided a multi-year extension and phase-out of tax credits. This will permit developers to plan, permit and construct projects with greater certainty regarding the tax component of project finance.

This article examines the specific changes to the crude oil export ban and to the federal tax credits available for new wind and solar facilities.

I. Export Ban Ends after 40 Years

The ban on export of U.S. crude oil was enacted as part of the Energy Policy and Conservation Act of 1975 (EPCA).[1] The export ban was a reaction to the oil embargo of 1973 by Arab nations belonging to the Organization of Petroleum Exporting Countries.

The ban on export of crude oil produced in the United States is not without exceptions. Most notably, legislation signed into law by President Clinton in 1995[2] reversed a ban on export of crude oil from Alaska’s North Slope put in place in 1973 as part of the Trans-Alaska Pipeline Authorization Act.[3] Other exceptions to the export ban include exports to Canada for use in Canada and exports of limited volumes of heavy California crude oil.[4]

Additionally, in 2014, the U.S. Department of Commerce’s Bureau of Industry and Security issued private rulings allowing two companies to sell light oil known as “condensate” from the Eagle Ford shale in South Texas,[5] apparently concluding that the stabilization of the condensate at gathering facilities removed the oil from the Department’s definition of “crude oil.”[6]

The Department of Commerce also can authorize exports of crude oil on a case-by-case basis, including when the export transaction “will result directly in the importation into the United States of an equal or greater quantity and an equal or better quality of crude oil or of a quantity and quality of petroleum products … that is not less than the quantity and quality of commodities that would be derived from the refining of the crude oil for which an export license is sought.”[7] Last year, the Commerce Department approved a limited program through which Mexico’s national oil company, PEMEX, could trade heavy Mexican crude for light crude produced in the United States.[8]

Nonetheless, the ban on crude oil exports has largely remained intact. With U.S. crude oil production soaring from 5,350 thousand barrels per day (bbd) in 2009 to 8,715 thousand barrels per day in 2014,[9] and with crude oil prices and retail gasoline prices at historic lows, pressure to modify or repeal the ban has been mounting. The Government Accountability Office reported in 2014 that its review of relevant studies and interviews with stakeholders indicated that lifting export restrictions could increase prices for domestic crude oil producers while lowering prices for consumers at the pump:

[R]emoving crude oil export restrictions is likely to increase domestic crude oil prices but decrease consumer fuel prices. Prices for some U.S. crude oils are lower than international prices — for example, one benchmark U.S. crude oil averaged $101per barrel in 2014, while a comparable international crude oil averaged $109. Studies estimate that U.S. crude oil prices would increase by about $2 to $8 per barrel — bringing them closer to international prices. At the same time, studies and some stakeholders suggest that U.S. prices for gasoline, diesel, and other consumer fuels follow international prices, so allowing crude oil exports would increase world supplies of crude oil, which is expected to reduce international prices and, subsequently, lower consumer fuel prices.[10]

Legislation to reverse the ban took shape this past summer. On July 30, the Senate Energy and Natural Resources Committee voted to send to the full Senate the Offshore Production and Energizing National Security Act of 2015 (OPENS Act). The legislation proposed to lift the ban on export of crude oil and make substantial changes in the outer continental shelf oil and gas lease program. On a 12-10 vote in Committee, the bill received party line support from Republicans and opposition from Democrats.

Although the budget compromise includes the reversal of the export ban, in two respects the compromise represents a retreat from the ambitions of the proposed OPENS Act.

First, the Consolidated Appropriations Act does not include the changes to outer continental shelf oil and gas leasing contained in the OPENS Act. The OPENS Act would have expanded and enhanced opportunities for oil and gas leases on the outer continental shelf in the Gulf of Mexico, in a new “Nearshore Beaufort Sea Planning Area” and in the “South Atlantic Planning Area” off the coast of Virginia, North Carolina, South Carolina and Georgia. It would have required the Secretary of the Interior to make available for leasing “any outer Continental Shelf planning area in the Gulf of Mexico that – (i) is estimated to contain more than 2,500,000,000 barrels of oil; or (ii) is estimated to contain more than 7,500,000,000,000 cubic feet of natural gas.” The OPENS Act also proposed to expand a precedent from Section 105 of the Gulf of Mexico Energy Security Act of 2006[11] requiring that revenue from certain oil and gas leases in the Gulf of Mexico be shared with Gulf States. Sections 104, 203 and 305 of the OPENS Act proposed expansion of the revenue sharing concept within the Gulf, Alaska and the four states adjoining the South Atlantic Planning Area. Those concepts await another legislative opportunity.

Second, the Consolidated Appropriations Act recognizes and authorizes some restrictions on the right to export U.S. crude oil. Section 501(a) of the OPENS Act proposed sweeping the 40-year ban aside in one sentence:

Notwithstanding any other provision of law, to promote the efficient exploration, production, storage, supply, and distribution of energy resources, any domestic crude oil or condensate (other than crude oil stored in the Strategic Petroleum Reserve) may be exported without a Federal license to countries not subject to sanctions by the United States.

By contrast, the Consolidated Appropriations Act is not so absolute. The repeal of the export ban, set forth in Title I of Division O (“Other Matters”), establishes a general rule that “no official of the Federal Government shall impose or enforce any restriction on the export of crude oil,”[12] but with critical exceptions. The repeal is conditioned by a “savings clause,” recognizing the President’s authority under the Constitution and specific statutes, “or any other provision of law that imposes sanctions on a foreign person or foreign government (including any provision of law that prohibits or restricts United States persons from engaging in a transaction with a sanctioned person or government), including a foreign government that is designated as a state sponsor of terrorism, to prohibit exports.”[13]

The Act also authorizes the President to “impose licensing requirements or other restrictions on the export of crude oil from the United States for a period of not more than 1 year,” [14] under any of three circumstances:

(A) the President declares a national emergency and formally notices the declaration of a national emergency in the Federal Register;

(B) the export licensing requirements or other restrictions on the export of crude oil from the United States under this subsection apply to 1 or more countries, persons, or organizations in the context of sanctions or trade restrictions imposed by the United States for reasons of national security by the Executive authority of the President or by Congress; or

(C) the Secretary of Commerce, in consultation with the Secretary of Energy, finds and reports to the President that—

(i) the export of crude oil pursuant to this Act has caused sustained material oil supply shortages or sustained oil prices significantly above world market levels that are directly attributable to the export of crude oil produced in the United States; and

(ii) those supply shortages or price increases have caused or are likely to cause sustained material adverse employment effects in the United States.[15]

The third of these grounds for export restrictions represents a “safety valve” to address concerns that lifting the export ban will lead to domestic oil shortages or escalating prices with concomitant impacts to U.S. employment. The standard for invoking this provision, however, appears intentionally narrow. In an open market, it is difficult to imagine circumstances in which the United States would experience “sustained oil prices significantly above world market levels that are directly attributable to the export of crude oil produced in the United States.” Higher domestic prices would lead U.S. producers of crude to sell in the domestic market rather than the export market.

The Act permits requirements or restrictions imposed under the first provision – a Presidential declaration of a national emergency – to “be renewed for 1 or more additional periods of not more than 1 year each.”[16] However, the Act includes no provision for renewal or extension of the 1-year limit on restrictions imposed under sections 101(d)(1)(B) and 101(d)(1)(C), concerning, respectively, trade sanctions and “material adverse employment effects in the United States.”

Crude oil producers quickly took advantage of the removal of the export ban, with several shipments from Texas ports in the weeks after the President signed the Consolidated Appropriations Act.[17]

II. Tax Credits for Wind and Solar: Extensions with Phase-outs

Predictable tax credits have been a major policy goal for renewable energy developers. But the Congressional history of last minute extensions of the production tax credit (PTC) and investment tax credit (ITC), often for short periods of time, has not provided stability and predictability.

The production tax credit (PTC) was enacted as part of the Energy Policy Act of 1992,[18] and has been extended several times. The PTC is an income tax credit based on production of electricity from certain renewable energy sources. Eligible taxpayers receive a credit at an inflation-adjusted rate per kilowatt-hour of electricity generated from qualified resources and sold to unrelated persons. The credit is available for 10 years, beginning when the facility is placed in service.[19]

Section 1102 of the American Recovery and Reinvestment Act of 2009 (ARRA) provided taxpayers with the right to elect to claim a 30 percent investment tax credit (ITC) in lieu of the PTC for wind energy and certain other renewable energy facilities.[20] Unlike the PTC, which is claimed over the 10 years after the facility is placed in service, the ITC is claimed in the year the facility is placed in service. Under the ARRA, the ITC and PTC were made available for wind energy projects placed in service before January 1, 2013, and other projects placed in service before January 1, 2014.

In the early days of January 2013, Congress sent to the President the so-called “fiscal cliff bill” – the American Taxpayer Relief Act of 2012 (ATRA).[21] Section 407 of the ATRA extended the PTC and ITC to qualified facilities “the construction of which begins before January 1, 2014.” The ATRA not only extended the PTC and ITC expiration for wind facilities by a year, it changed the threshold for vesting of the right to claim the PTC or ITC. The former threshold – the date the facility was “placed in service” – was replaced by the date construction of the facility begins.

In 2014, Congress waited until December before granting extensions of the PTC and ITC for wind facilities; the deadline to begin construction was extended only to the end of 2014.[22] Thus, for most of 2014 and 2015, wind energy developers could not know with certainty that beginning construction of a project would vest the right to federal tax credits.

The American Wind Energy Association summarizes the impact of such uncertainty:

Because the wind industry never knows if these credits will be extended, investment slows to a halt during the year leading up to their expiration dates. Stable, predictable tax credits would not only facilitate wind energy investment, but also allow wind to compete on a level playing field with traditional electricity sources. That’s why predictable and stable tax treatment is the wind industry’s top federal policy priority.[23]

Federal tax credits for commercial solar facilities have followed a different path. Although new solar facilities were once eligible for the PTC, that eligibility ended with facilities placed in service in 2005.[24]

Solar facilities initially were made eligible for a 30 percent ITC through the Energy Policy Act of 2005.[25] Most recently, the Emergency Economic Stabilization Act of 2008 extended the 30 percent ITC to include solar facilities placed in service before January 1, 2017, with the ITC falling to 10 percent for facilities placed in service on or after that date.[26] Thus, when the Consolidated Appropriations Act was signed into law, the ITC for solar facilities had not expired and threshold for eligibility was determined by the “placed in service” date rather than the date construction begins.

For wind facilities, Title III of Division P of the new law reinstates both the PTC and ITC effective January 1, 2015.[27] Thus, the developers of wind facilities on which construction began in 2015 or begins in 2016 can elect either the PTC or the 30 percent ITC. For facilities begun in 2017 through 2019, however, both the PTC and the ITC are reduced year to year[28] as shown in the table below.

For solar facilities, eligibility for the 30 percent ITC will now extend to facilities on which construction begins before January 1, 2020, with reductions for projects commenced in 2020 and 2021,[29] as shown below. The ITC for solar facilities is set at 10 percent for construction beginning on or after January 1, 2022,[30] as well as for projects commenced earlier but not placed in service before January 1, 2024.[31]

Federal Production Tax Credit and Investment Tax Credit Levels for Wind and Solar Facilities

For construction begun in:Percent of full PTC for wind facilitiesITC for wind facilitiesITC for solar facilities
201510030 %30 %
201610030 %30 %
20178024 %30 %
20186018 %30 %
20194012 %30 %
2020------26 %
2021------22 %
2022 and after------10 %

As has been the case for wind facilities since enactment of the ATRA, the date construction begins will now be the key to determining the level of ITC for which a solar facility is eligible. In the wake of the ATRA, the Internal Revenue Service issued several notices[32] describing and clarifying two alternative tests for determining the beginning of construction. Although a detailed description of the IRS guidance is beyond the scope of this article, one alternative looks to whether the taxpayer has started “physical work of a significant nature,”[33] while the other test is a “safe harbor” under which construction begins when the taxpayer pays or incurs five percent of more of the total cost of the facility and thereafter “makes continuous efforts to advance towards completion of the facility.”[34] It is likely that these tests will continue to be applied, with additional guidance or clarification necessary for the particular circumstances of solar facilities.

The changes to wind and solar tax credits in the Consolidated Appropriations Act will be a significant boon to development of wind and solar projects in the coming years. Developers will not face imminent expiration of the tax credits and short-term or even after-the-fact extensions that impede project planning. Moreover, using the start of construction rather than the “placed in service” date as the basis for determining eligibility gives the developer certainty regarding the federal tax credit component of project finance earlier in project development.

For more information please contact Richard Allan in Marten Law’s Portland office.

[1] Pub. L. 94-163.

[2] Title II of the Alaska Power Administration Asset Sale and Termination Act, Pub. L. 104-58.

[3] Pub. L. 93-153.

[4] 15 C.F.R. § 754.2(b)(1)(ii), (iv).

[5] http://www.ogj.com/articles/2014/06/doc-authorizes-epp-pioneer-to-export-condensate.html

[6] See 15 C.F.R. § 754.2(a).

[7] Id. § 754.2(b)(2).

[8] http://www.wsj.com/articles/u-s-approves-limited-crude-oil-trade-to-mexico-1439570613

[9] U.S. Energy Information Administration, “Crude Oil Production.”

[10] GAO, Changing Crude Oil Markets, GA0 14-807 (Sept. 2014).

[11] 43 U.S.C. § 1331 note.

[12] H.R. 2029, Div. O, § 101(b).

[13] Id. § 101(c).

[14] Id. § 101(d).

[15] Id. §101(d)(1).

[16] Id. §101(e).

[17] http://fuelfix.com/blog/2016/01/06/first-crude-oil-export-cargo-from-houston-ship-channel-leaving-this-week/

[18] Pub. L. No. 102-486.

[19] 26 U.S.C. § 45(a).

[20] 26 U.S.C. § 48(a)(5).

[21] Pub. L. No. 112-240.

[22] Pub. L. No. 113-295, § 155

[23] http://www.awea.org/Advocacy/Content.aspx?ItemNumber=791

[24] 26 U.S.C. § 45(d)(4)(a).

[25] Pub. L. 109-58.

[26] Pub. L. 110-343, § 103(a).

[27] H.R. 2029, Div. P, § 301(b).  

[28] Id. § 301(a).

[29] Id. § 303(b).

[30] 26 U.S.C. § 48(a)(2)(A)(ii).

[31] H.R. 2029, Div. P, § 303(b).

[32] See Notices 2013-29, 2013-60, 2014-46.

[33] Notice 2013-29, § 4.01.

[34] Id. § 5.01.

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