On December 15, 2016, the Internal Revenue Service released Notice 2017-04, which provides welcome guidance on how to meet the “beginning of construction” requirements for wind and other qualified facilities. There has been much uncertainty about when construction of these types of facilities begins for renewable energy tax credit purposes. The Notice (1) extends the “Continuity Safe Harbor” placed in service date for projects that started construction before 2014; (2) provides that the “combination of methods” rule set forth in prior guidance only applies to facilities on which construction begins after June 6, 2016; and (3) clarifies that for purposes of the 80/20 Rule, the cost of new property includes all costs properly included in the depreciable basis of the new property.
On November 17, 2016, the US Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) announced the largest single round award of New Market Tax Credit (NMTC) allocations since the program’s creation in 2001. One hundred and twenty organizations, headquartered in 36 states, the District of Columbia and Puerto Rico, were awarded a total of $7 billion of NMTC allocations.
On November 17, 2016, the Federal Energy Regulatory Commission (FERC) issued a notice of proposed rulemaking (NOPR) that, if adopted, would require organized wholesale electricity markets (RTO/ISO markets) to modify their open access transmission tariffs and market rules to accommodate electric storage resources and allow participation of distributed energy resource aggregators. This NOPR is part of FERC’s ongoing efforts to remove barriers to participation in wholesale electric markets. FERC recognizes that electric storage resources and distributed energy resources are often constrained by antiquated wholesale market rules that were, as FERC puts it, “developed in an era when traditional generation resources were the only resources participating in the organized wholesale electricity markets.” This NOPR will promote far greater market participation by storage resources of all types, including batteries, flywheels, compressed air and pumped hydro, as well as distributed resources such as distributed generation, electric storage, thermal storage and electric vehicles.
For electric storage resources, which are defined as resources capable of receiving electric energy from the grid and storing it for later injection of electricity back to the grid, the NOPR would require each RTO/ISO to implement tariff provisions that will:
- Ensure an electric storage resource is eligible to provide services it is technically capable of providing
- Incorporate bidding parameters that reflect the physical and operational characteristics of the resources
- Ensure that electric storage resources can set the market clearing price as a seller or buyer
- Establish a minimum size requirement that does not exceed 100 kW
- Specify that sales and purchases must be made at the wholesale locational marginal price
The US Court of Federal Claims awarded damages of more than $206 million to the Plaintiffs in a case with respect to the cash grant program under Section 1603 of the American Recovery and Reinvestment Act of 2009 (the Section 1603 Grant). In its opinion, which was unsealed on Monday, October 31, the Court held that the US Treasury Department (Treasury) had underpaid the Section 1603 Grants arising from projects in the Alta Wind Energy Center because it had incorrectly reduced the Plaintiffs’ eligible basis in the projects. The Court rejected Treasury’s argument that the Plaintiffs’ basis in the facilities was limited to development and construction costs, and accepted Plaintiffs’ position that the arm’s-length purchase price of the projects prior to their placed-in-service date was a reasonable starting place for the projects’ value. The Court determined that the facilities, having not yet been placed in service and having only one customer pursuant to a master power purchase agreement (PPA), could not have any value assigned to goodwill or going concern value which would reduce the amount of eligible costs for purposes of the Section 1603 Grant. The Court noted that the transactions surrounding the sales of the facilities were conducted at arm’s length by economically self-interested parties and that the purchase prices and side agreements were not marked by “peculiar circumstances” which influenced the parties to agree to a price highly in excess of fair market value. Importantly, the Court also held that PPAs were more like land leases which should not be viewed as separate intangible assets from the underlying facilities, and are thus eligible property for purposes of the Section 1603 Grant. Finally, the Court accepted the Plaintiffs’ pro rata allocation of costs between eligible and ineligible property.
This significant decision is welcomed by the renewable energy industry and is an affirmation of a long held view by many taxpayers as to an appropriate measure of cost basis in the context of the Section 1603 Grant. The decision may also serve as much-needed guidance for determining cost basis for purposes of the investment tax credit under Code Section 48.
McDermott will be issuing a full On the Subject review and analysis of the Court’s opinion in the coming days.
On August 31, 2016, the Internal Revenue Service (IRS) and US Department of the Treasury issued final regulations (Final Regulations) under section 856 of the Internal Revenue Code to clarify the definition of “real property” for purposes of sections 856 through 859 relating to real estate investment trusts (REITs). The Final Regulations largely follow proposed regulations issued in 2014 (Proposed Regulations) by providing a safe harbor list of assets and establishing facts and circumstances tests to analyze other assets.
Last week’s article discussed New York’s Zero-Emissions Credit (ZEC) for nuclear power. The ZEC is one component of New York’s Clean Energy Standard (CES). The other major component of the CES is the new Renewable Energy Standard (RES). In the RES, the New York Public Service Commission (PSC) formally adopted the goal set by Governor Cuomo in December 2015: 50 percent of all electricity used in New York by 2030 should be generated from renewable resources. This goal builds on the State’s previous goal of achieving total renewable generation of 30 percent by 2015.
The RES consists of a Tier 1 obligation on load-serving entities (LSE) to support new renewable generation resources through the purchase of renewable energy credits (REC), a Tier 2 program to support existing at-risk generation resources through maintenance contracts, and a program to maximize the potential of new offshore wind resources.
The goal of the RES is to reduce carbon emissions and ensure a diverse generation mix in New York. The state’s existing nuclear facilities, supported by the ZEC program, will close in 2030 (absent a renewal of their licenses) and the RES aims to ensure that the electricity provided by those units is replaced with new renewable resources.
The New York Public Service Commission’s (PSC) Clean Energy Standard (CES), adopted in August, includes a new emissions credit—the ZEC. The ZEC, or zero-emissions credit, is the first emissions credit created exclusively for nuclear power.
The ZEC is the result of a highly politicized effort to support New York’s struggling nuclear power plants. New York’s four nuclear plants account for 31 percent of the state’s total electric generation mix. According to the PSC, “losing the carbon-free attributes of this generation before the development of new renewable resources between now and 2030 would undoubtedly result in significantly increased air emissions due to heavier reliance on existing fossil-fueled plants or the construction of new gas plants to replace the supplanted energy.” The ZEC Program is intended to keep the state’s nuclear plants open until 2029 and provide an emissions-free bridge to renewable energy.
Property assessed clean energy (PACE) programs are an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. They also present a number of challenges to investors—for one, the variance between different programs (even within a particular state) and an understanding as to how particular programs work remains an impediment to investors and to scalability. This post provides a brief overview of PACE programs generally and one particularly popular PACE program – CaliforniaFirst.
Overview of PACE
PACE programs vary by state, but most allow property owners to finance clean energy projects through a voluntary property assessment paid as a line item on their property tax bills. Thirty-two states and the District of Columbia have enacted PACE-enabling legislation and there are active PACE programs in 19 states and the District of Columbia. While most of these states provide financing for commercial PACE projects, only California, Missouri and Florida have active residential PACE programs.
CaliforniaFirst PACE Program for Commercial Property
The CaliforniaFirst PACE program is one of 12 PACE programs active in California and is available for both residential and commercial real property. CaliforniaFIRST is offered by the California Statewide Communities Development Authority (CSCDA) and is currently available in more than 40 California counties, with over 330 participating local governments.
Using the CaliforniaFirst PACE program (Program), commercial property owners can work directly with a clean energy developer and the CSCDA. The developer agrees to install the clean energy project and provide power to the property owner through a power purchase agreement or lease. The property owner pays for the project through a contractual assessment, which appears as a line-item on the property tax bill.
The CSCDA secures the payments through a notice of assessment recorded on the property title. The contractual assessments have priority over any existing mortgage lien. If the property owner sells the property, the repayment obligation remains an obligation of the property. The Program’s underwriting criteria focuses primarily on the relevant payment history and value of the property. The clean energy project must have an effective useful life of at least five years and only new systems can be financed through the Program. The Program is administered by a third-party administrator (Renewable Funding LLC).
As an “interim financing mechanism,” CSCDA and a clean energy developer would typically enter into an assignment and assumption agreement under which CSCDA assigns its rights to receive the contractual assessments to the clean energy developer in exchange for the clean energy developer assuming CSCDA’s financing obligations under the assessment contracts, plus certain specified costs. The assignment term is expected to last three years. On or prior to the end of the assignment term, CSCDA issues bonds to the clean energy developer in exchange for the property tax assessments that were assigned to the clean energy developer. The principal amount, maturity date, amortization and interest rates of the bonds are designed, in the aggregate, to produce cash flows that replicate the principal and interest components of the contractual assessment installments.
From an investor point of view, PACE payments are a senior benefit assessment lien on the property, and a new owner of the property would inherit the solar PV benefits and the PPA/lease payment obligation though the PACE program. In the event of a default, the remedies are fairly strong—for instance, CSCDA has the right to have the delinquent installment and its associated penalties and interest removed from the secured property tax roll and immediately enforced through a judicial foreclosure action. In the event of foreclosure, the proceeds of the foreclosure sale would be used to pay any delinquent amounts and future installments would become the responsibility of the purchaser.
Considerations for Investors
By statute, the owner of the renewable energy improvement is not permitted to remove the improvement from the property prior to the end of the assessment term. Investors should be aware that in the event of payment default they will not have the ability to seize the improvement and will need to rely on the public agency to foreclose on the property. Additionally, the public agency in charge of the PACE program is a third party beneficiary with respect to the power purchase agreement or lease until the assessment lien is fully repaid and also has consent rights over any amendments to the customer agreement. Therefore, it may be difficult for a developer or financing entity to revise a power purchase agreement or lease once it is in place.
PACE programs are likely to attract more investors and commercial property owners as they become more widely available and clean energy developers become more experienced working with them. We’ve highlighted the basics of the CaliforniaFirst program for commercial property, but investors, property owners and developers should ensure that they understand the regulatory nuances of the particular program in their area.
In the United States, the federal Clean Air Act (CAA) requires all “major sources” of air pollution, such as power plants, refineries and other large industrial facilities, to obtain permits detailing the conditions under which those sources are allowed to operate. Such “Title V” operating permits, as they are commonly known, are typically issued by state environmental agencies but are subject to pre-issuance review by the federal Environmental Protection Agency (EPA). In fact, EPA is required to object to any proposed permit that it determines is inadequate, and the CAA also contains a public participation backstop to EPA’s oversight: where EPA fails to object to a permit, any member of the public that believes the permit is inadequate can petition EPA to make an objection.
In recent years, environmental organizations have increasingly used the petition process to challenge proposed permits, especially with respect to alleged inadequacies concerning greenhouse gas emissions. By statute, EPA is supposed to respond to such petitions within 60 days. But EPA routinely misses that deadline and now faces a sizeable backlog of pending petitions.
In late August, EPA published a proposed rule, which, if finalized, would create a series of new requirements for the submission and handling of Title V petitions. Most notably, the proposed rule would:
- Create a new, mandatory, procedure for submitting Title V petitions to EPA;
- Require each petition to follow a standardized format and contain certain minimum content; and
- Impose a new requirement on state permitting agencies—a requirement that those agencies prepare written responses to all “significant comments” received from the public during the permit drafting stage.
EPA’s announcement of the proposed rule also includes a summary of EPA’s general approach to handling Title V petitions. The announcement includes, for example, a short summary of prior EPA applications of the CAA’s Title V provisions, as well as a list of “recommended practices” for state permitting agencies to follow when preparing proposed permits.
EPA is soliciting comments on its proposed rule. Comments must be received on or before October 24, 2016.
On August 8, 2016, Massachusetts Governor Charlie Baker signed into law a major energy bill aimed at putting Massachusetts at the forefront of states developing offshore wind power. The law, An Act Relative to Energy Diversity (H. 4568), requires Massachusetts electricity distribution companies to procure 1,600 megawatts (MW) of offshore wind energy by June 30, 2027. The United States currently has no offshore wind generation, but Rhode Island wind developer Deepwater Wind is nearing completion of a 30 MW offshore wind farm, which will be the first of its kind in the country. In a statement, Governor Baker’s office said the bill “spurs the development of an emerging offshore wind industry…and represent[s] the largest commitment by any state in the nation to offshore wind.”
The new law requires Massachusetts distribution companies and the Department of Energy Resources (DOER) to jointly develop a competitive bidding process for offshore wind energy generation resources by June 30, 2017. The bidding process will be subject to review by the Massachusetts Department of Public Utilities (DPU). The law permits one solicitation or multiple staggered rounds of solicitation that must result in at least 1,600 MW of aggregate nameplate capacity of offshore wind energy. If the solicitation is staggered, each round must seek proposals for at least 400 MW of capacity, and the costs in each subsequent round must decrease or the proposal will be rejected by the DPU. All proposals received during the solicitation process are subject to review by DOER.
Each distribution company will enter into a contract with the solicitation’s winning bidders for the distribution company’s apportioned market share, calculated based on the total energy demand for all distribution companies, compared to demand in an individual distribution company’s service territory. Distribution companies may use the long-term contracts to purchase renewable energy certificates, energy, or a combination. All proposed long-term contracts executed with distribution companies will be filed with the DPU and subject to DPU approval. Specifics on the solicitation, contracting, and approval processes will come when the DPU and DOER promulgate regulations carrying out the new legislative mandate for offshore wind.
The legislation represents a new chapter in offshore wind for Massachusetts. The infamous Cape Wind project—a proposed 468 MW wind farm—has been held up in the planning stages for years and its current status is uncertain. The new law is a definite step towards Massachusetts’ development of offshore wind energy generation resources. Several wind development companies already hold leases in Massachusetts waters.