Project Development and Finance

FERC announced actions in response to the 2017 tax reform legislation and a revised income tax policy, which eliminates the income tax allowance for Master Limited Partnerships. Regulated entities should ensure that they comply with FERC’s orders regarding the treatment of income taxes and consider whether to file comments on the proposed rulemaking and notice of inquiry.

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Changes to the energy credits proposed in the Tax Cuts and Jobs Act could impact the eligibility of renewable energy projects that had been relying on the guidance previously issued by the Internal Revenue Service.

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On September 29, 2017, the Illinois Power Agency (IPA) released its Long-Term Renewable Resources Procurement Plan (Plan) to implement renewable energy goals set forth in Illinois’s Future Energy Jobs Act, which went into effect on June 1. Together, the new legislation and the Plan, among other things, make significant modifications to Illinois’s renewable portfolio standard (RPS) goal of 25 percent of retail electricity sales sourced from renewable energy by 2025. The Plan sets forth procurement programs designed to meet the state’s annual RPS targets until 2030 and will be updated at least every two years. These changes significantly expand renewable energy development opportunities in Illinois—by some estimates, leading to the addition of approximately 1,300 megawatts (MW) of new wind and nearly 3,000 MW of new solar capacity by 2030.

Expanding the Illinois RPS

While maintaining the same 25 percent renewable energy sourcing goal, the Future Energy Jobs Act functionally increases the state’s RPS target because Illinois’s RPS standard previously applied only to customers buying power through a utility’s default service, not customers taking supply through alternative retail suppliers or through hourly pricing. According to the IPA, in recent years, only 30-50 percent of potentially eligible retail customer load actually received default supply services, while competitive class customers (including larger commercial and industrial customers, which represent approximately half of total load) had no default supply option. Given this transition, meeting Illinois’s RPS goal of 13 percent of retail electric sales in the state sourced from renewable energy for the 2017–2018 delivery year will require the IPA to procure on behalf of the state’s electric utilities an additional 7.5 million renewable energy credits (RECs), which will gradually increase to a forecasted procurement of 31.5 million RECs for the 2030–2031 delivery year. One REC represents 1 megawatt hour (MWh) of generation produced by an “eligible renewable resource.” Eligible resources include wind, solar, thermal energy, biodiesel, anaerobic digestion, biomass, tree waste, landfill gas and some hydropower. Many other states, including California and Massachusetts, utilize RECs to demonstrate compliance with the state’s RPS program. Continue Reading Illinois Renewable Resources Procurement Plan Aims to Boost Renewable Energy Development

On June 30, 2017, the Massachusetts Department of Energy Resources (DOER) announced that Massachusetts would adopt an aspirational 200 megawatt-hour (MWh) energy storage target to be achieved by January 1, 2020. The target is the second largest in the nation, although it is far lower than California’s 1.3 gigawatt storage mandate. Still, Massachusetts’ storage target will make the commonwealth a leader in the burgeoning energy storage field.

The process of setting storage targets began last summer, when Massachusetts enacted a law directing DOER to determine whether to set targets for electric companies to procure energy storage systems by January 1, 2020. In September 2016, Massachusetts released a report called the “State of Charge,” which recommended the installation of 600 megawatts (MW) of energy storage by 2025. The report predicted that 600 MW of storage could capture $800 million in system benefits to Massachusetts ratepayers. The energy storage industry praised the 600 MW level as a good starting point.

DOER’s “aspirational” 200 MWh by 2020 target falls short of the “State of Charge” recommendation, but leaves the door open to achieving 600 MW by 2025. DOER’s letter announcing the target noted that “[s]torage procured under this target will serve as a crucial demonstration phase” for Massachusetts to gain knowledge and experience with storage. “Based on lessons learned from this initial target,” the letter continues, “DOER may determine whether to set additional procurement targets beyond January 1, 2020.”

Beyond DOER’s storage target, Massachusetts has a broader Energy Storage Initiative, which includes a $10 million grant program aimed at piloting energy storage use cases and business models in order to increase commercialization and deployment of storage technologies. DOER also announced that it will examine the benefits of amending the Alternative Portfolio Standards, an incentive program for installing alternative energy systems, to expand the eligibility of energy storage technologies able to participate. While Massachusetts’ storage targets are not as lofty as some in the industry were hoping, the commonwealth is demonstrating a clear commitment to developing its energy storage industry beyond the few megawatts currently installed.

President Trump released his budget proposal for the 2018 FY on May 23, 2017, expanding on the budget blueprint he released in March. The budget proposal and blueprint reiterate the President’s tax reform proposals to lower the business tax rate and to eliminate special interest tax breaks. They also provide for significant changes in energy policy including: restarting the Yucca Mountain nuclear waste repository, reinstating collection of the Nuclear Waste Fund fee and eliminating DOE research and development programs.

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Two environmental organizations, Environmental Defense Fund (EDF) and Natural Resources Defense Council (NRDC), have weighed in to defend the legality of New York State’s Zero Emissions Credit (ZEC) program in ongoing litigation concerning that program.  This blog is tracking the ongoing litigation and this article summarizes the arguments made by EDF and NRDC in their recent filings.

The ZEC program, which was approved by the New York Public Service Commission (NYPSC) in August 2016, compensates eligible facilities for the zero-emissions attributes of produced nuclear energy through long-term contracts with New York State Energy Research & Development Authority (NYSERDA) for the purchase of ZECs.  New York’s load-serving entities are required to purchase those ZECs from NYSERDA in proportion to their share of statewide load. The NYPSC determined that New York’s FitzPatrick, Ginna and Nine Mile facilities were eligible to participate in the ZEC program.

In October 2016, various electric generators in New York and surrounding states filed a complaint against the NYPSC in federal court, asserting that the ZEC program intrudes on the exclusive authority of the Federal Energy Regulatory Commission (FERC) by “effectively replacing the [wholesale electricity market] auction clearing price” received by the nuclear facilities with a higher price and thus artificially suppressing wholesale electricity prices in the New York market.  The NYPSC and the owners of the New York nuclear facilities moved to dismiss the complaint in December and both EDF and NRDC recently filed briefs in support of the motions to dismiss.

The environmental organizations (like the NYPSC) deny that the ZEC program intrudes on FERC’s authority.  They argue that the program compensates the nuclear power providers for the environmental attributes of their electricity, rather than sets wholesale electricity prices.  The environmental organizations’ support stems from the similarities between the ZEC program and renewable energy credits, which are a key component of many state renewable energy programs and might be threatened by a judicial opinion extending FERC’s exclusive jurisdiction to the sale of unbundled environmental attributes.

The outcome of litigation over New York’s ZEC program will likely have impacts outside New York.  In Illinois, the recently enacted Future Energy Jobs Bill establishes a Zero Emission Standard program that utilizes the same framework to support nuclear generation facilities in Illinois.  Illinois and other states considering such programs will be watching the outcome of the litigation in New York to determine whether and how to implement their own programs to support struggling nuclear facilities.

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.

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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.

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.

Continue Reading New York’s New Renewable Energy Standard

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.

Conclusion

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.