Joel A. Hugenberger advises clients on tax equity, project finance, acquisition finance and corporate finance transactions in the energy and infrastructure sectors with a particular emphasis on transactions relating to renewable energy and distributed generation. Joel represents tax equity investors, sponsors, developers, borrowers, lenders and arrangers in the financing of complex energy and infrastructure projects, domestically and internationally, and in the structuring and negotiation of various secured and unsecured loan facilities, joint ventures and tax equity investment structures. Read Joel A. Hugenberger's full bio.

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

The Arizona Public Service Co. (APS) and solar industry representatives and advocates have reached a settlement on rooftop solar compensation and rate design, following years of heated policy debate.  The settlement, which the Arizona Corporation Commission (ACC) is expected to vote on this summer, required compromise from both sides on a variety of issues.

Future Rate Design

The settlement nixes APS’s request for a mandatory demand charge on all residential and small business customers.  Instead, the settlement gives new solar distributed generation customers the option to choose between a time-of-use or demand-based rate.  Under the settlement, APS would compensate solar customers with an export credit rate of 12.9 cents per kWh.  APS initially proposed to cut compensation from the retail rate, which is approximately 13 to 14 cents per kWh, to the wholesale rate, which is only 3 cents per kWh.  The export credit rate will decrease by up to 10 percent annually.  However, customers will be able to lock in their rates for 10 years, providing some long-term certainty.

Current Net Metering Customers

The settlement will preserve existing net metering benefits for distributed generation customers who file an interconnection application before the ACC issues a decision in the case.  Those customers will be grandfathered in and continue to receive the full retail rate for a period of twenty years from the date of interconnection.

Utility-Owned Generation

The settlement allows APS to invest $10 to $15 million per year in AZ Sun II, a new program for utility-owned rooftop solar for low- to moderate-income customers.  The agreement puts a moratorium on new self-build generation by APS until 2022, excepting distributed generation, microgrids, and renewable generation.

What’s Next?

The settlement moves Arizona away from retail rate net metering and towards value-based solar rate design.  While solar advocates do not believe the settlement fully recognizes the value of solar, the settlement preserves benefits for existing customers and allows the state’s solar industry to move forward with more certainty.  APS, industry representatives, and many solar advocates committed to stand by the settlement agreement and refrain from seeking to undermine it through ballot initiatives, legislation or advocacy at the ACC.

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.