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Using the Bankruptcy Code “Safe Harbors”

by Iskender “Alex” H. Catto and Gregory Kopacz

Energy bankruptcies can be rich in opportunity for potential debtors, creditors and distressed-asset purchasers. Failing to understand the “safe harbors” of the bankruptcy code can lead to the evaporation of value, lost opportunity and potential severe disruption to a company’s operations. But, when properly understood, utilizing the safe harbors can be an effective tool in preserving value and mitigating risk.

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This article was originally published in Daily Bankruptcy Review on July 10, 2013.

Massachusetts DOER Extends the Availability of Valuable Solar Carve-Out Program

by William Friedman

As previewed at a recent solar stakeholder meeting, the Massachusetts Department of Energy Resources (DOER) released its emergency regulation on June 28, 2013 to address the excess of applications for Massachusetts’ Solar Carve-Out program and to guide the program’s future.  Qualification for the program enables a solar project to sell valuable Solar Renewable Energy Certificates (SRECs) to distribution companies, which are required to fill a minimum percentage of their electricity sales with generation qualified under the Solar Carve-Out.  Last month DOER reported that an unexpectedly high volume of applications for the Solar Carve-Out blew through the program’s 400 megawatt (MW) cap, creating uncertainty as to which projects would qualify under the program. 

The emergency regulation sets the 400 MW cap aside and permits all projects that meet certain conditions and construction deadlines to qualify for the Solar Carve-Out.  The conditions in the emergency regulation were previously announced by DOER at its solar stakeholder meeting and described in an earlier article. The emergency regulation changes the date for extension of the construction schedule from March 31, 2014 to June 30, 2014.   In addition, the emergency regulation clarifies that all solar projects under 100 kilowatts will qualify for the Solar Carve-Out so long as they have submitted their Statement of Qualification Application and receive authorization to interconnect or permission to operate by the effective date of the next Solar Carve-Out program or June 30, 2014, whichever is earlier.

Along with new qualification requirements, the emergency regulation changes the formula used to calculate the compliance obligation of retail electricity suppliers, who must fill a minimum percentage of their electricity sales from generation qualified under the Solar Carve-Out program.  The updated compliance obligation formula is based on the new Program Capacity Cap, which will be announced by DOER on or before July 31, 2014, and will reflect actual supply beyond 400 MW.  However, DOER will provide exemptions to the additional compliance obligations for load that was under contract before the effective date of the emergency regulation.

Under Massachusetts law, the emergency regulation is only effective for three months unless DOER gives notice and holds a public hearing to formalize the rule.  According to the explanatory release accompanying the emergency regulation, DOER plans soon to schedule a public hearing and comment period in order to finalize the regulation.

U.S. Pledges Support for Investments in Sub-Saharan African Power Projects

by Ari Peskoe

Last week President Obama announced a package of programs that aim to increase electricity generation and transmission in Ghana, Kenya, Liberia, Nigeria and Tanzania.  Headlined by $7 billion in U.S. government support and $9 billion in commitments from the private sector to invest in new generation projects, Obama’s initiative aims to “double access to power in Sub-Saharan Africa.” Although details are still forthcoming, the initiative is evidence of the enormous demand in Sub-Saharan Africa for new generation.  New supply supported by the President’s initiative is likely to primarily be large-scale natural gas-fired and hydro generation, and it is not clear how such projects will “double access.”    

Less than a third of people living in Sub-Saharan Africa have access to electricity.  Excluding South Africa, Sub-Saharan Africa has only 28 gigawatts (GW) of generation capacity for a population of approximately 850 million people.  (For context, the Netherlands has 26 GW of capacity for a population of less than 17 million).  With the exception of Nigeria, the five target countries have very low population densities and lower than average urban populations as a percent of the total population.  In other words, dispersed populations either have no electric grid at all or have access to a grid with only meager capacity.

New large-scale generation located near urban centers and industrial zones can be helpful in supplying stressed grids, and such projects are also likely to be the most feasible.  The more daunting task, however, is to provide electricity to dispersed rural populations, 85 percent of whom in Sub-Saharan Africa have no access to electricity.  Obama’s initiative includes $2 million in grants to African-owned and operated enterprises “to develop or expand the use of proven technologies for off-grid electricity benefitting rural and marginal populations.”  The initiative’s private sector commitments also include “installation of 200 decentralized biomass-based mini power plants in Tanzania.”  Such small-scale projects demonstrate that sub-Saharan Africa presents a range of opportunities, but that Obama’s initiative is focused on large-scale projects rather than reaching rural populations with decentralized alternatives.

Of the $9 billion in private sector commitments, just over $1 billion is for wind generation; fuel source for the balance has yet to be specified.  Natural gas and hydro projects, however, are well-positioned to receive the bulk of the support.   According to the most recent statistics (which are a bit out of date and incomplete), the five target countries currently get the majority of their power from natural gas and hydro, and oil is the third most common fuel, providing almost twenty percent of the countries’ electricity.  New investments may include some oil-fired generation, but that fuel is generally more valuable for transportation than power generation.

Coal-fired generation is also unlikely to see major support from Obama’s initiative.  Coal is used for electricity generation only in Tanzania, which is otherwise dominated by hydro and natural gas generation.  Furthermore, in his recent Climate Action Plan, Obama committed to “end to U.S. government support for public financing of new [...]

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Interior Department Report Exposes Flaws in Federal Coal Leasing Program

by Bethany K. Hatef

Last week, the Office of the Inspector General (OIG) of the Department of the Interior (DOI) published a report highlighting apparent weaknesses in the coal sale process overseen by the DOI’s Bureau of Land Management (BLM), which allegedly have resulted in lost bonus revenues of $2 million in recent lease sales and $60 million in potentially undervalued lease modifications.  The report also raised concerns about BLM’s inspection and enforcement activities, and recommended changes to those activities and to other aspects of the coal leasing program.  BLM implementation of OIG’s recommendations is likely to increase the value of public and Indian lands leased for coal exploration, thereby increasing the cost of federal coal leases.  In addition, more comprehensive appraisals for lease modifications are likely to lengthen and potentially complicate that process. 

To enter into a coal lease with BLM, a company must first apply for a license to explore.  It then submits a lease request to BLM that contains detailed information about the project.  BLM is responsible for calculating the fair market value (FMV) of the lease, an amount that is kept secret, and for publicly announcing the sale.  BLM then awards the lease through a competitive sealed bid process.  The public has an opportunity to comment at several points during this process.  The winning “highest qualified company” with a bid of at least the FMV then pays the first installment of the bid “bonus” (the amount paid by the company to obtain the lease), with the remainder being paid over the next four years.  During the lease period, BLM inspects the mine to ensure compliance with the lease. In 2012, BLM collected $2.4 billion in royalties and bonus bids, the highest amount recorded in the past 10 years and nearly a 200 percent increase over BLM’s 2010 collections.

Several of OIG’s concerns are centered around BLM’s process for establishing FMVs for particular lands.  Among OIG’s concerns is BLM’s continued use of its own appraisers to make FMV decisions in apparent violation of a May 2010 Secretarial Order that placed responsibility for FMV determinations within DOI’s Offic company must first apply for a license to explore.  It then submits a lease request to BLM that contains detailed information about the project.  BLM is responsible for calculating the fair market value (FMV) of the lease, an amount that is kept secret, and for publicly announcing the sale.  BLM then awards the lea noncompetitive petitive sealed bid process.  The public has an opportunity to comment at several points during this process.  The winning “highest qualified company” with a bid of at least the FMV then pays the first installment of the bid “bonus” (the amount paid by the company to obtain the lease), with the remainder being paid over the next four years.  During the lease period, BLM inspects the mine to ensure compliance wich &llease. In 2012, BLM collected $2.4 billion in royalties and bonus bids, the highest amount recorded in the past 10 years and [...]

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Massachusetts DOER Unveils Emergency Regulation to Address Oversupply of Solar Applications

 by William Friedman

At a recent solar stakeholder meeting, the Massachusetts Department of Energy Resources (DOER) outlined its emergency regulation that will address the recent influx of applications for the Massachusetts Solar Carve-Out.  The Solar Carve-Out program, which was established in 2009, is currently capped at 400 megawatts (MW) of installed capacity.  DOER announced this spring that the program cap had been exceeded months earlier than expected with applications totaling more than 550 MW.  While reaching the 400 MW cap four years before Governor Patrick’s target is a remarkable step for the Commonwealth of Massachusetts and its renewable energy goals, it left the solar industry in Massachusetts, particularly those developers with projects on the waiting list, with questions about solar’s present and future in the state.

In Massachusetts, participation in the Solar Carve-Out enables a solar system to produce Solar Renewable Energy Certificates (SRECs).  For each megawatt-hour generated by a qualified solar system, it receives one SREC, which can be sold on the open market or at auction.  Distribution companies purchase SRECs to meet their compliance obligations under Massachusetts’ Renewable Portfolio Standard, which requires distribution companies to fill a minimum percentage of their electricity sales with generation qualified under the Solar Carve-Out.

At the stakeholder meeting, DOER announced that it will scrap the 400 MW cap; all projects that applied to DOER and executed an Interconnection Service Agreement with a local distribution company by June 7, 2013 will qualify under and be able to participate in the existing Solar Carve-Out if they meet prescribed project construction deadlines. Specifically, a solar project must be completely installed and receive authorization to interconnect from a local distribution company by December 31, 2013.  If a project does not meet the December 31 deadline, it may receive an extension until March 31, 2014 if it can demonstrate that it expended at least 50 percent of its total construction costs by December 31, 2013.  Finally, if a project can demonstrate that it is ready to begin operations and is only waiting for a distribution company to issue its authority to interconnect, the qualification deadline is extended indefinitely.  DOER also intends to recalibrate the Solar Carve-Out compliance obligations of distribution companies to match the extended cap. The emergency regulation is expected to be published this month.

DOER’s emergency regulation comes as welcome news to developers and investors who faced the possibility that projects in which they have already placed substantial investments would lose access to the potentially significant revenue stream created by the Solar Carve-Out.  DOER’s extension of the Solar Carve-Out program demonstrates the agency’s preference for solar projects that are well invested and significantly developed and its awareness of the vital role that the Solar Carve-Out has played in the rapid growth of the solar industry in Massachusetts. 

DOER has also begun the rulemaking process for a new Solar Carve-Out to meet Governor Patrick’s recently announced goal of an aggregate of [...]

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BLM Finalizes Segregation Rule for Wind and Solar Energy Projects

by Thomas L. Hefty

As part of its policy to encourage private development of renewable energy projects on public lands, the Bureau of Land Management (BLM) issued its final rule for “segregating” (temporarily withdrawing) BLM public lands from appropriation. Under the final rule, when the BLM receives an application for right of way (ROW) for a solar or wind energy generation project (or when the BLM initiates a competitive process for solar or wind energy development), the BLM has the authority to segregate those lands for up to two years to ensure that they remain available for solar or wind projects.  The final rule should provide greater certainty to developers applying for ROW to develop solar or wind projects.

Most of the public lands with pending wind energy ROW applications are currently managed for multiple resource use and are open to mineral entry under the Mining Law of 1872 (Mining Law). Such mining claims are not subject to BLM approval and could interfere with the BLM’s processing of solar or wind ROW application. Prior to this final rule, the BLM lacked authority to maintain the status quo on lands during the period between when it  publicly announced the receipt of a solar or wind energy generation ROW application, or when it identified an area for such applications, and its final decision. As the BLM pointed out, certain Mining Law claims were likely filed not for actual mining, but “to provide a means for a mining claimant to compel payment from the ROW applicant in exchange for relinquishing a speculative mining claim.” The final rule is intended to prevent such claims. Because segregation is intended only to preserve the status quo until the BLM acts on a ROW application, the segregation order will have no effect on valid existing Mining Law claims or Mining Law claims made after the segregation period. 

Segregation is not automatically granted with every solar or wind energy ROW application. BLM’s decision will be made on a case-by-case basis when it finds that segregation is necessary for the orderly administration of public lands.  Based on the BLM’s Programmatic Environmental Impact Statements for solar energy (2012) and wind energy (2005) developments in the western states and the BLM’s solar and wind pre-application screening protocol, the BLM should possess sufficient facts to make a segregation determination shortly after receipt of the ROW application. 

Segregation is effective upon publication of notice by the BLM in the Federal Register identifying the affected public land. Because it is intended to prevent Mining Law and other claims from interfering with pending BLM’s decision on the ROW application, the segregation notice occurs without prior public notice or comment period. 

Upon segregation, the affected public land will no longer be subject to appropriation under the public land laws, including location and entry under the Mining Law, however, the segregated land remains subject, to the Mineral Leasing Act of 1920 and Materials Act of 1947. segregation remains in effect for a maximum of two years, but a BLM State Director has the [...]

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Massachusetts Net Metering Projects Face Suboptimal Interconnection Designs

by William M. Friedman

Massachusetts’ net metering program went into full effect in February, but the Massachusetts Department of Public Utilities (DPU) may have inadvertently stymied the program’s growth by issuing an order that prohibits or impedes optimal interconnection of larger projects. The Massachusetts DPU is now considering reversing course.

Under the Massachusetts’ net metering program, local utilities provide billing credit to customers with interconnected renewable energy projects that feed power into the grid. The customer that hosts the project can either use the credit against its own account or assign the credit to another account with the same utility. The amount of interconnected and net metered generation permitted under the program is subject to two separate caps, one for private entities and one for municipalities and other governmental entities. Each cap is at 3 percent of the utility’s highest historical peak load, but the rules that apply to each cap differ slightly.

A net metering facility under the private cap may have a generating capacity up to 2 MW, while a facility under the public cap may have a generating capacity up to 10 MW (each municipality may not exceed 10 MW for all of its departments or subdivisions combined), but is limited to 2 MW per unit. Last year, the Massachusetts DPU issued guidance defining a “unit” as a single turbine for wind facilities, a single piece of generating equipment (e.g., an engine or turbine) for agricultural net metering facilities, or a single inverter for solar net metering facilities. 

The Massachusetts DPU defined “facility” for both the public and private caps as “energy generating equipment associated with a single parcel of land, interconnected with the electric distribution system at a single point, behind a single meter.” This three-part test, however, poses problems for larger capacity projects, particularly those under the public cap, which can potentially have a capacity of up to 10 MW. For larger projects, the distribution company that performs the System Impact Study and designs the interconnect might conclude that a design using multiple points of interconnection is best for safety, electrical reliability and electrical efficiency. While a design with two points of interconnection and two meters might be more appropriate, a facility with more than one point of interconnection will not qualify for net metering credit. The Massachusetts DPU’s definition thereby encourages suboptimal interconnection configurations.

The Massachusetts DPU has recognized the problem its definition caused and is currently considering a fix. In October 2012, the Massachusetts DPU sought comments on whether to allow an exception on the basis of optimizing facility interconnection and how such an exception might work. In response, the local distribution companies tepidly supported an exception to the DPU’s three-part test, emphasizing a clear and workable definition of “facility,” while other commenters were more enthusiastic about an exception. There is no set timeline for the Massachusetts DPU to make a final decision on whether to grant an exception. Since the definitional order was issued, a number of petitions have been filed seeking exemptions from various aspects of the DPU’s rule, and some petitions have [...]

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Bipartisan Group of Legislators Reintroduces Master Limited Partnerships Parity Act

by Ari Peskoe

On April 24, four Republican legislators and four Democratic legislators reintroduced the Master Limited Partnership Parity Act in the House and Senate. Master Limited Partnerships (MLP) provide tax advantages to energy project developers but are currently limited under the Tax Code to resources subject to depletion, such as oil and gas, and transportation and storage of certain fuels. The Act would expand the definition of qualified projects to include a range of clean energy resources and infrastructure projects. 

An MLP is a business structure that is taxed as a partnership, but whose ownership interests can be traded like corporate stock on a market. Congress enacted legislation in 1987 that allowed entities that earn at least 90 percent of their income from “qualified” sources to be treated as MLPs. Qualifying income includes “income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource.” In 2008, Congress expanded the definition of qualifying income to include income from the transportation and storage of certain renewable and alternative fuels, such as ethanol, biodiesel and industrial-source carbon dioxide.

As we reported last June, legislators first introduced the MLP Parity Act last year. The Act would have expanded the definition of qualifying income purposes to include income from wind, biomass, geothermal, solar, municipal solid waste, hydropower, marine and hydrokinetic, fuel cells and combined heat and power projects, as well as certain renewable transportation fuels.  Those bills were referred to the Senate Finance Committee and House Ways and Means Committee but never advanced. The updated MLP Act introduced on April 24, also includes carbon capture and storage, waste heat to power, renewable chemical and energy efficient building projects.    

In public statements, Senators Coon (D-DE) and Murkowski (R-AK), two of the Act’s sponsors, have emphasized that the MLP Parity Act attempts to “level the playing field” by providing renewable energy projects with the same tax benefits that fossil fuel projects have enjoyed. Although the rhetoric should be appealing to both sides of the aisle and the Act is backed by a range of industry groups that would benefit from the legislation, it’s fate in Congress is unclear. 

Iowa Considers Feed-In Tariff for Wind

by Ari Peskoe

The Iowa state legislature is moving forward with a bill that would create the first U.S. feed-in tariff specifically for wind generation. If the bill is enacted, Iowa would join Vermont, and the cities of Los Angeles, and Gainesville, Florida as the U.S. jurisdictions currently offering a feed-in tariff. While it may seem like investors need little inducement to invest in wind capacity in Iowa, which already ranks third in wind capacity among U.S. states, the new incentive is aimed at mid-sized facilities, a neglected market in that state.

Under a feed-in tariff, a utility sets a long-term price for renewably generated electricity. A feed-in-tariff benefits generators by providing a standard offer contract and favorable rates, often based on a generous estimate of production costs. Feed-in tariffs are generally credited as one of the main reasons for large increases in renewable generation in several European countries. In the U.S., feed-in tariffs have been less popular. Under the Public Utilities Regulatory Policy Act (PURPA) of 1978, California offered a feed-in tariff in the 1980s that led to a proliferation of wind generation. While other states also offered similar programs under PURPA, none were as successful as California’s.

In Iowa, a state senate committee passed a bill earlier this month that would provide a feed-in tariff to wind facilities smaller than twenty megawatts in capacity and located on agricultural land. Under the standard offer contracts, the rate will be based on each utility’s cost, including a rate of return, for the new development of wind generation, and the term will be 10 years or until construction and financing costs have been recovered, whichever is earlier. 

The new tariff is designed to address a gap in the state’s wind portfolio. As of the end of 2011, about 85 percent of the state’s wind capacity was from facilities larger than 100 megawatts (19 total installations). The state had only five facilities sized between 2 and 20 megawatts, which accounted for less than two percent of capacity. Smaller-scale projects may be easier to site and could attract a different class of investors unable or unwilling to develop a utility-scale project. 

Other windy states have actively developed this mid-range market. Minnesota’s community wind program, launched in 2005, focuses on local ownership and provides front-loaded tariffs for facilities up to 50 megawatts. As of 2011, nearly 400 megawatts of capacity have been deployed under the program. Nebraska followed suit in 2007, but the program has failed to take off. That state, which has the fourth best wind for energy production, ranks just 23rd in total installed capacity.

International Trade Actions Complicate Global Market For Renewable Energy Businesses, Particularly Solar Sector

by David J. Levine and Pamela D. Walther

The flurry of international trade disputes in the renewable energy field, particularly the solar sector, is complicating the business landscape for the renewable energy industry.  In their BloombergBNA analysis piece, McDermott international trade lawyers David Levine and Pamela Walther provide a detailed account of renewable energy trade actions in the domestic and international arenas.  As the long-term implications of these disputes raise serious strategic issues for providers, consumers and governments, those involved are well-advised to monitor developments and take an active role in proceedings to protect their interests.

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