Tax Insurance for Clean Energy Projects - Alliant Insurance Services

When you buy a house, your solicitor flags anything that could come back to haunt you. Most of the time it's fine, but if your lender isn't comfortable with the risk, the deal doesn't close. Sometimes not because anything was actually wrong but because uncertainty has a price. On a billion dollar clean energy project, that uncertainty can live in the tax position.

The credit claim is probably correct but probably isn't enough for a lender or tax equity investor. They want a guarantee and in a post IRA world of gray areas that guarantee is increasingly coming from insurance. James is a tax lawyer turned managing director at Alliance Insurance Services in Houston, Texas. He's the person developers call when the question isn't whether their tax position is right, it's whether they can afford to be wrong.

I'm Ed Porter introducing Alejandro Di Diego. Welcome back to transmission.

James, thank you very much for joining us today. Can you start by introducing yourself, what role you play in the energy industry, and what Alliant or Alliant, you can tell us how you spell it, actually does.

Well, I'll start with it is Alliant. Yes.

What I do now is I'm a tax lawyer by trade, and I insure tax issues. And so when an energy project or any taxpayer has an issue that is probably correct under the tax law and their lawyers think it's probably correct, I get insurance syndicates to essentially guarantee it with tax insurance.

Okay. And just for our audience to follow what we're just saying, what are syndicates insurance syndicates?

Think about Lloyd's of London, Swiss Re, Munich Re. There's a lot there are also insurance companies like Berkshire Hathaway, Liberty Mutual. There's a lot of insurance carriers and insurance decentralized syndicates that are backing the the the risk for our clients.

Okay. And where are you based and when did you start in the industry?

I'm based in Houston.

Long time Houstonian. My children are ninth generation Houstonians. My father was a chemical engineer here in petrochem. My uncles were all in, like, downstream.

When I was a kid, we would be he would we would drive over the bridge in Deer Park and he would roll down the window. You could smell the refineries and the chemical plants and he would say, kids, it smells like money.

So Houston, which is where you wanna be for energy and energy projects, it's where I started my career as a tax lawyer at Baker Bots Yeah.

In two thousand and five, which was about the best time and place you could Start because that's when energy, particularly domestic oil and gas energy transactions were starting to get a lot of tailwinds, particularly with fracking. And we did a ton of deals.

Halliburton spun off KBR. East Resources sold their Marcellus to Shell. EQT consolidated a ton in the Marcellus space. There was so much activity.

California and Chicago firms were coming into Houston and trying to grab legal teams, and we we did that. And I started at Gibson Dunn in twenty seventeen. We opened their office. And then I was there for five years when I did my first tax insurance deal where we guaranteed the tax result in an oilfield services transaction for one of our clients. And that's kinda how I got from Houston to law to the insurance world.

Yeah. And for speakers who don't speak the insurance language, to make it as simple as possible for them, what do you do at Alliant in a daily basis, and what is tax insurance, what you just mentioned, transactional risk insurance, really buying for a developer or an investor in the energy industry?

Most of what I do is talk to clients and their advisers Yes. About their tax issues generally.

On the off chance there's such a requirement to have that tax answer be correct that they need the insurance. So most of what I do is not that dissimilar than what I did at the law firm, except it doesn't I'm not charging by the hour and having all these conflicts. We're talking about their tax issue and finding out if it's the kind of issue that we can insure. So to answer your question, what does it do when we insure it? Well, all we're doing is we're taking the tax answer that the client wants, and we are based on the advice of their counsel that we go to insurance syndicates, and they will look at the advice. And if they believe that it's correct, it would win.

It it will put the taxpayer essentially in the same position as if they didn't have to litigate it with the government. And if they lost at court, they would get reimbursed for all of the interest, taxes, a gross up on receipt to try to put them in the same position as if the government hadn't litigated their tax position.

Okay. And so that our audience as well follows the other side of the coin, which is your final clients. Why would they approach you?

It's almost always the case where there's a financing new like, either a buyer or a lender or a new investor like tax equity Yes.

That is basing their decision on the transaction on the tax attribute being there. So that's really ripe for issues like tax credit projects. It's really ripe where you have giant bonus depreciation, cost segregation in a big project. It is or in an m and a transaction. So when someone's saying, I like this project, but only if the tax goodies that I'm modeling are gonna be there Yeah. That's usually when someone raises their hand and said, hey, I should call Shenoweth and talk to him about this.

So when looking at a new project, you have to make a decision at some point and say, oh, this product is insurable or not. How do you make that decision at the end?

At the beginning, it's based on what the tax lawyers outside counsel or outside accounting firm concludes probably wins at court. So they will look at the pros and cons of the position and think about whether a judge is would agree with the taxpayer or not. And if they say yes, they agree that it probably would win, then it's generally insurable. It's actually not that different than what a lot of project developers will be used to with pollution insurance, where an environmental engineer looks at a site and says, oh, yeah.

I don't think a big problem environmentalized. Or a builder's risk where you get a construction engineer or EPC explaining, hey. This is how we're gonna build it. I don't think it's gonna fall down.

Same thing except replace that kind of engineer specialist with a tax lawyer or tax accountant.

Okay. Can you walk us through some of specific examples that you have seen recently?

Sure. So there's a lot of structuring that goes on in energy infrastructure projects. And so some insurable risks in addition to the amount of the credit, the qualification for the credit Gotcha. The recapture for the credit, if something happens later, put them thinking think of carbon capture in a leak, Or the structuring in of the legal entities above the project company that you haven't messed up the credit by doing something above the chain that causes a problem down below. All of those are insurable risks.

And all of them in this space are ripe for getting coverage.

And which are the biggest technologies that come with the most demand for your services?

Solar is probably the in the the most by new number, but that will probably change going forward. The solar and wind, they're in a they're in a spot where beginning of construction and the FIOC rules, the foreign entity of concern rules, are kind of the own they're on they're like the only gray areas left. And then we're gonna be in a pretty settled space after projects starting in next summer as to where that goes. The growth in this sector is gonna be in large projects, hydrogen, carbon capture, the nuclear, green like fuels like SAF. That's where the growth will be.

Do you also see growth, for example, in batteries? Batteries too.

Yes. Batteries are actually hot now, I would say.

For our audience to follow us, when you mentioned the new FEOC rules for entity of concern rules, could you explain them on a high level?

So when the OBBBA, which came out earlier this year, the one big beautiful bill act came out, there are there are rules that are essentially anti Chinese supply chain rules. And how Chinese manufacturers and suppliers can be in the supply chain of your project and whether it will and that will affect whether your project is creditable. They are definitive rules in the in the statute, but we're still waiting IRS guidance. When the I which we could get any day now. When we get the IRS guidance, then the concerns people have about whether I've got a Chinese player in my supply chain or not ought to become quite mitigated, and then that issue will be something that the carriers can start insuring, hopefully.

We looked at the side of underwriting any insurance and trying to discern the green light for going for that insurance product or not.

The other question is how can you price that insurance product? And and yeah. What different signals or what information can you use to price it?

So going to the carriers, they're gonna we'll start a competitive auction. And the carriers are gonna bid not dissimilar from like pollution insurance where they're gonna look at the environmental engineer's report and say, hey. I'll bid this much on it. I'll bid this much on it. And we get the carriers to compete each other on with each other on price and on terms. And so it's a it's a competitive process that usually ends up costing something like three to six cents on the dollar in most cases for a one time premium fees and costs to cover the tax issue for the whole period of the statute of limitations, usually seven years, but can be as long as ten.

I'm learning a lot of new things today just to make sure that I'm following properly. So whenever someone needs a new insurance product, you start a competitive auction where all of the different insurance providers can bid, and the cheapest price will win the auction. Is that correct?

You've got it, Alex.

Wow. Incredible. Very interesting.

In energy transition, the value of tax positions is huge and timelines are tight because we have multi billion dollar projects, especially now with new data center demand. What are the main risk categories you're seeing blow up deals right now in the renewables and batteries space?

Time is the main one. Getting permitting and all the different stakeholders to say yes on such a project. Because it's not just regulatory and local, it's the off taker. It's the financing.

It's getting all of those cooks in the kitchen to say yes at the same time. I think that is the main burden to to to cross in order to get a project to a decision versus getting delayed and dying. And it's not usually tax these days. I think it's one of those other non tax issues is you is the is the bigger bigger hindrance.

Okay. Thank you for sharing that. Now with this additional uncertainty created by the OBBA, the *** new rules, the treasury guidance that came out, have you seen a slowdown or a speed up of project deals recently, and have you seen more deals falling apart due to all of this uncertainty?

Not falling apart. Some go onto a pause because the uncertainty makes them stop and think. Yes. Some get accelerated, like particularly in the solar wind space, there's guidance that we we needed this guidance on beginning construction, and they're getting the shovel ready projects and accelerating them, but not dying for for the sake of the tax changes.

Okay. For people not that familiar with all of these tax matters in the audience, in a real project finance stack where we have sponsor equity, debt, tax equity, credit buyers, where does your insurance product sit strategically?

It's there to serve the lowest risk tolerant person, which is usually the tax equity. It could be the the buyer of a tax credit under the IRA.

The the sponsor can benefit as well and not have to deliver all these parent guarantees and just hand them out.

But if if you are a low risk tolerant taxpayer, that's who the insurance is for. Because most tax law, like I did as a a lawyer for so long, is gonna get done with the advice of the attorney Yes. And their accountant. We're gonna sign the return.

We're gonna take our tax benefit. And if the IRS comes calling, then we'll deal with it then. That's how almost all tax law is gonna get done. It's those low tolerance scenarios, and it's usually a financing partner.

Those are the the folks that benefit from the insurance.

Okay. Understood. Thank you for sharing that. But in this case, who gets more comfortable or more aggressive because the risk is transferred? And what does these products do to the perception of returns in a project?

Well, from a return perspective, the cost is really baked in in the modeling on the front end. It's usually, like I mentioned, three to six cent type Yes. Upfront cost on the amount of the insurance you're getting. And so you bake that into your financing model and then determine what what the returns are gonna be after the cost of the insurance. But then knowing that you don't have the uncertainty of a potential litigation fight with the IRS or the amount of your credit getting dinged at court. Okay.

Now we have been talking about the present, even about the past a bit with your experience. Thinking about the future, what do you think, well, in the next five to ten years becomes the next big and triple wedge in energy deals?

What is the new opportunities coming into play?

FIAC, for sure, will be coming as soon as we have guidance. Carbon capture, a lot of those projects are on hold waiting permitting processes, and those are gonna become insure they've already started to you know, we've gotten pricing on these kinds of insurance risks, but they're gonna be they're gonna be a lot there are gonna be a lot of those. Because carbon capture can kinda be done in a lot of places around the country. Battery for sure will be continue to grow. I am excited about nuclear, but it's I think it's still a few years away.

Okay. And do you see a specific concentration of opportunities in some regions in the US, or would it be all around?

Texas and the Gulf Coast are going to lead this sector. Not only because the infrastructure is here, but because the talent is here, and this is the energy capital. So this area, Texas just got primacy on their class six wells, for example, for carbon capture. But the Gulf Coast will lead the nation in these projects with the notable exception of maybe nuclear.

And out of curiosity now jumping on the per into the personal side, you have told me that nine generations of your family, going back, come from Houston. Houston is well known for oil and gas. How does it feel like to work in the renewable space now?

It feels like it always had in oil and gas because I mentioned the Halliburton KBR spin in two thousand six.

Technology and energy have always been at the joined at the hip. And whether it's the Hughes tool drill bit, whether it's hydraulic fracturing, or whether it's how do we make a battery for a a data center application.

This meshing of intellectual property and technology and deploying large scale projects has always been here in Houston, and has always been in this industry. So it doesn't feel all that different than an upstream drilling type joint venture. This is just a power joint venture or a storage joint venture or a carbon capture joint venture.

And so, in many ways, it it it feels the same.

Okay. I see. You mentioned some crazy years at the beginning of your career, two thousand six, with a lot of deals getting done. Do you have any interesting story about those years that you could share with the audience?

I will say the best closing dinner I ever went to was after that East Resources sale to to Shell when Terry Pagula, who was the seller of had the wine list at Tony's and was picking out the wines. And that's probably some of the best wine I've ever had.

And we had just sold about four billion dollars of energy assets, oil and gas assets. Another one that was also in the Marcellus was the Dominion sale of a lot of oil and gas assets with multiple sales.

That was about twelve billion dollars of of of asset divestitures. I had another asset deal that came later. And I go to my boss, my partner at the time at Baker Bots, and I was like, hey, what do you think about this term versus that term? And he looked at me and he was like, James, didn't you just make the market for what these oil and gas deals should say? Just do what you did. And I I took the Dominion precedent and pushed it for the rest of my career. The Those are two good ones, think.

They're very good ones. Thank you for sharing them. Is there any question that I should have asked that I didn't ask so far?

I am an extroverted tax lawyer.

That is a rare thing.

And the beauty of what I do on a day to day basis is I have time to talk to you, Alex, or talk to others about their tax issues, come to the conferences, and hear what brilliant people are doing in this industry, and being able to deploy that and help people and get people connected, like part of what I've done here at this conference, is very rewarding.

I see. Now, I came up with another question, which is, is is there any piece of advice that you could give to developers to increase the success rate of their projects? Looking from your perspective.

You have to get the right team of lawyers, investment advisers, insurance advisers, and your commercial BD team talking to each other, not stepping over each other, and collaborating as early as possible. And where it's really hard in project development is those first couple of of advisers because they tend to be a cost upfront.

That's one of the things that the investment adviser community and the insurance advisory community can be a little bit more proactive because we're compensated on transaction when it happens and not necessarily just for asking us questions. So get us involved as early as possible to help make sure that you're not going in a direction that's gonna cause a problem later.

I'm sure a lot of people will value that piece of advice. So now jumping onto the final section, we're gonna start with, is there anything you would like to plug or promote to our audience?

I want to promote our ability here at Alliant, and particularly in Houston in the energy group, to do large scale projects, whether it's LNG, carbon capture, a large scale hydrogen. The beauty of those kinds of projects is you get folks involved at early and over what is many years to partner with you from start to finish. I get most excited about those. Even if the actual tax insurance day doesn't happen until months or years later.

Great. The final question. What is your contrarian view about the energy industry that not many people share with you?

This is true for the energy industry, but also broader for tax. We've lived into a period of uncertain tax law times over really since the end of the Cold War, but certainly in the last ten years.

I think that the OBBBA that just passed, the TCJA, the Tax Cuts and Jobs Act from twenty seventeen, and tariffs, the new tariff policy, are now a three legged stool that provide a firm and certain foundation for fiscal revenue raising in the near future.

And, yes, over the last eighteen months, it's been a little bit rushed to kinda understand, but I think the the ground is settling. And that after this year, from a tax policy perspective, project developers in energy or any industry can expect bonus depreciation, can expect the credits that are listed, can expect the ground not to shift as much in the future.

And that means it might be the best time to get involved in energy projects. Because we're we're moving past what has been an uncertain time, and I think what will be a firm foundation for a stable tax policy future.

Thank you for sharing that contrarian view, and thank you for joining us today. It was great to have you.

Thank you, Alex.

It was a pleasure. See you soon.

Thank you.