Capitalizing on energy policies and regulations

Today’s environmental policies and regulations are often behavior changer oriented and are designed to accelerate global decarbonization through incentives. That, in turn, is encouraging new changes for the oil and gas sector in many markets around the world. The two leading examples of this type of legislation globally are the EU Green Deal and the US Inflation Reduction Act (IRA).

The EU Green Deal aims at creating a net-zero green economy by 2050, enhancing manufacturing and digital capacity in crucial industries and sustaining innovation leadership via scientific and technological investment. Achieving these goals will be facilitated, in addition of national tax incentives,  by a high volume of non-tax incentives, including EU funds, national funds and the EU's Covid-specific NextGen Fund.

Opportunities supported by the EU Green Deal include notably:

• Financing the development of low-carbon industrial manufacturing
• Support for lower income EU member states regarding climate neutrality
• Financing renewable energies – including hydrogen, wind, solar and biofuel
• Promotion of research and development
• Establishment of sustainable infrastructure in low-income member states
• Investments under the Important Projects of Common European Interest (IPCEI).

EU Green Deal, like IRA, has a large scope and is in essence a large compilation of industrialization and innovation programs with a sustainability final goal.

The IRA is set to be the largest US congressional action on climate change, to date, with provisions that touch on a mix of energies - including wind, solar, nuclear, hydrogen, oil and gas, and biofuel - and climate-change prevention measures (such as carbon capture, battery storage, clean vehicles).⁶

Key opportunities supported by the IRA include:

• Investment Tax Credits (ITC) and Production Tax Credits (PTC) that are available to taxable business entities and certain tax-exempt entities eligible for direct payment of tax credits.⁷
• Tax-credit increases involving factors such as meeting prevailing wage and apprenticeship requirements for construction projects and using domestically sourced steel and iron.
• The monetization or transferability of IRA tax-credits, further opening investment opportunities for energy projects.
• Potential creation of demand-side incentives for M&A transactions in industries such as solar, wind, and geothermal power generation, as well as electric transmission, lithium processing, and battery manufacturing.⁸
• Enhancement of existing 45Q tax credit, which benefits facilities capturing and storing carbon dioxide.
• Manufacturing tax credits to increase the domestic production of components needed for the energy transformation, including critical minerals, battery components, and others.

According to American Clean Power, an industry group, nearly US$350 billion in clean energy investments were announced in the year after the IRA was passed⁹. Another report suggests that more than US$70 billion flowed into the US battery sector during the same period.¹⁰

There are signs that capital flow is already starting to shift to capitalize on IRA incentives and opportunities. Competition among markets for clean energy investment has ramped up considerably since the passage of the IRA, and the Act is encouraging many governments around the world to reassess their own package of clean energy incentives and policies to become more competitive.

Corporations with major investment, decarbonization or innovation projects in the U.S. or the EU might investigate if they are eligible for incentives related to the Green Deal or the IRA.

Policies and regulations related to sustainable energy should be included in any business planning or portfolio diversification strategy. Based on KPMG firms experience in helping companies make the most of their opportunities in jurisdictions around the world, we suggest that organizations focus on the following three areas as they develop their energy transition strategy:

Understand the opportunities – current and future. No two schemes are quite the same, and it will take time and insight to fully understand the implications and value of each. In many cases, this may require on-the-ground resources with local contacts and insight to help unravel the regulatory requirements and tax incentives in each market.

Carefully assess the data and reporting. Accurate, comprehensive, and timely data is key at every stage of the process – data to develop your strategy, apply for incentives, report on results, and drive future investment decisions.

 Elevate the tax function. The tax function has become increasingly important to enabling key aspects of the oil and gas business strategy. Company executives will ensure they have the capabilities and capacity to support the company’s tax posture.