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Project Development and Finance

European Solar Markets: There is Life after Feed-in Tariffs

by McDermott Will & Emery | Jun 27, 2012 | EU Developments, Project Development and Finance, Renewables

by Michael Ruoff, Carsten Steinhauer and Anna Vesco

The aim of the European solar energy incentive programs has always been to bring solar technology to the point where photovoltaic (PV)-generated electricity becomes competitive with the retail rate of grid power, a situation known as "grid parity". In most of Europe, grid parity is expected to be reached by 2017, but is already nearly a reality in certain southern European countries with high levels of sunshine and high electricity prices. The recent cuts to incentives in many European markets are both a cause and an effect of this near-parity, and as such are not necessarily bad news. Achieving competitive cost structures for solar power plants is expected to eliminate the market distortion resulting from subsidies, which until now were the driving force of the European PV market.

To read the full article, please click here.

ITC Will Decide on Duties for Solar Imports

by McDermott Will & Emery | Jun 14, 2012 | Environmental, Project Development and Finance, Renewables

by Raymond Paretzky and David J. Levine

The U.S. International Trade Commission (ITC) is now beginning its final phase “injury investigation,” which will result in a determination in November as to whether U.S. producers are harmed by imports of allegedly dumped and/or subsidized imports of Crystalline Silicon Photovoltaic Cells and Modules from China.

The parallel dumping and subsidy actions began with the filing of a petition by Solar World Industries America Inc., the U.S. subsidiary of a German parent company, in October 2011. In December, the ITC issued a unanimous affirmative preliminary injury determination, rejecting arguments by companies opposed to the action that price declines in the industry resulted not from Chinese imports but rather from plummeting silicon prices, reduced U.S. government incentives for the housing industry to use solar cells/panels, and limited U.S. demand. The ITC will revisit these arguments in its more expansive final phase investigation, in which importers, U.S. producers, purchasers and Chinese producers will be required to answer ITC questionnaires. All parties with interests at stake are well advised to make their positions and relevant facts known to the ITC.

If the ITC finds that the U.S. industry making these products is in fact injured (or threatened with injury) by the imports, the United States will impose tariffs on imports of these products. The amount of the tariffs will be determined by the U.S. Department of Commerce (DOC) in separate proceedings. DOC preliminarily found that subsidization was occurring in the range of 2.90 to 4.73 percent and dumping in the range of 31.14 to 249.96 percent, but DOC could change these rates in its final investigations, which are currently ongoing.

Key dates in the ITC investigation’s final phase are:

Questionnaire Responses Due Aug. 13 Confidential Staff Report Released Sept. 13 Requests to Appear at Hearing Due Sept. 19 Prehearing Briefs Due Sept. 20 Hearing Oct. 3 Posthearing Briefs Due Oct. 11 Final Comments on New Info. Due Nov. 1 ITC Vote (Proposed) Nov. 7

Proposed Legislation Would Expand Use of Master Limited Partnerships to Renewable Energy Projects

by McDermott Will & Emery | Jun 14, 2012 | Project Development and Finance, Renewables, Tax

by Madeline M. Chiampou and Brian Levy

Last week, Sens. Chris Coons, D.-Del., and Jerry Moran, R.-Kan., introduced bipartisan legislation aimed at expanding the use of master limited partnerships (MLPs) from fossil fuel-based energy projects such as oil, natural gas, coal extraction and pipeline projects to also include renewable energy projects. Interests in MLPs are traded on markets, like corporate stock. However, unlike corporations, MLPs are not subject to entity level tax; rather, the profits of MLPs are subject to taxation at the partner level, much like other entities treated as partnerships for federal tax purposes. These benefits are viewed as having significantly increased investment in fossil fuel-based projects in the United States.

Congress first enacted tax legislation specifically relating to MLPs in 1987. The legislation required MLPs to derive at least 90 percent of their income (qualifying income) from certain categories of passive income, including income from resources subject to depletion, such as oil and gas. In 2008, the Emergency Economic Stabilization Act 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. The proposed legislation would expand the definition of qualifying income for MLP 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.

Under the current legislative regime, developers and investors typically invest in renewable energy projects through entities taxed as partnerships for tax purposes. Tax benefits available to such projects flow through to and are allocated among the partners. MLPs would also permit tax benefits to flow through to and be allocated among the MLP partners. Thus, for federal income tax purposes, there would not be many differences between the traditional partnership scenario and MLPs. From a transaction cost perspective, both traditional renewable energy partnerships and MLPs can involve significant transaction costs to developers and investors. However, since MLP interests are able to be traded on a market, investing in or exiting from MLPs may be easier than selling non-MLP partnership interests in the private market. As a result, MLPs are more attractive for some private investors who are more accustomed to buying and selling shares of stock than investing in partnerships.

Most of the recent legislative focus from the renewable energy community has been on the impending expiration of tax credits related to the investment in and production of electricity through wind. Co-sponsor Coons has indicated that the proposed legislation should not be seen as a replacement to the expiring tax credits but as a complimentary piece of legislation. Without these tax credits or other tax incentives, the benefits of using MLPs alone may not be sufficient to make some renewable energy projects economically viable. However, it bears noting that any tax benefits generated by an MLP structure would be subject to existing limitations on the use of energy tax credits, such as the passive activity loss rules applicable to individuals and the investment tax credit and depreciation [...]

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EPA Proposes to Require Carbon Capture and Sequestration; Creates Uncertainty for the Future of Coal

by McDermott Will & Emery | Apr 12, 2012 | Environmental, Project Development and Finance

by Ari Peskoe

The U.S. Environmental Protection Agency (EPA) proposed the first ever CO2 emissions limits for newly constructed power plants last month. Under the proposal, power plants that have already acquired a preconstruction permit from the EPA and commence construction by March 27, 2013 do not need to comply with the rule.

The emissions limit, set at 1,000 pounds per megawatt-hour, would effectively require all new coal-fired plants to cut CO2 emissions in half from current rates. The only plausible technology for enabling such drastic cuts is carbon capture and sequestration (CCS). EPA’s proposed rule allows a new plant to implement CCS ten years after beginning operations, so long as its emissions after CCS are below 600 lb/MWh. That gives the coal industry some extra time to work through the many legal and regulatory issues currently facing the technology.

Like any large-scale energy development, a sequestration project would trigger state and Federal environmental reviews. While there is extensive experience around the country reviewing and approving projects that involve injecting substances into the ground, no other project is designed to store vast quantities of gas underground for hundreds of years. It’s not clear how legislators, environmental agencies and the public will evaluate this risk.

Long-term liabilities relating to leaks are another legal hurdle. According to a Federal interagency task force report published in 2010, some businesses are uncomfortable with the risk but also unsure of how to quantify it. Insurers, and particularly investors, are fixed on short-term thinking, and 10 or 20 years is considered “long-term” in business decision making. But sequestered carbon must stay underground for centuries. There is no agreement on how to account for this time horizon.

A 2010 paper by a Harvard Law School professor and student researchers proposed a range of regulatory incentives to spur development of large scale test projects. The suggestions included establishing a trust fund paid for by industry to cover liabilities, developing sites on Federal land to streamline the approval process, imposing caps on liability and preempting nuisance and trespass claims. Regardless of the specifics, instituting any new regulatory system takes time. Fracing is a multi-billion dollar business in the U.S., and yet after a decade of widespread use its legal framework is not yet firmly established. As EnergyBusinessLaw.com has been documenting, legal norms are still developing, and all three branches of government are issuing new rules and decisions that have major impacts on the industry.

Without an impetus to do so, governments will probably ignore CCS, and the lack of legal certainty will hinder development. Perhaps EPA’s rule, if implemented, will motivate action. Until then, rather than urging governments to enact rules that create legal certainty for CCS, the coal industry is likely to fight tooth and nail to kill yet another attempt by Washington to regulate CO2 emissions from the power sector.

New Title Insurance Designed Specifically for Energy Projects

by McDermott Will & Emery | Apr 11, 2012 | Project Development and Finance, Renewables

by Thomas L. Hefty

Energy project finance lenders and tax equity purchasers, it is time to update your opening day lineup — otherwise known as the closing agenda checklist — to include new title insurance products. Citing the growing wind and solar energy project markets and their unique needs for title insurance coverage, the American Title Insurance Association (ALTA) issued a new series of endorsements for energy projects as well as a new form of zoning endorsement, effective April 2, 2012.

The problems ALTA attempted to address can be seen from a typical utility scale wind energy project – a 150 MW facility, with a total development cost of $220 million, which includes $150 million in project financing and a $50 million tax equity investment along with $20 million of equity from the developer. Through multiple long-term leases (or easements) the energy developer controls thousands of acres of almost entirely unimproved land, on which it will install (i) site improvements, such as roads, an energy collection system (transformers, switchgear, transmission lines), an Operations & Maintenance (O&M) building, and other related improvements at a cost of under $20 million and (ii) 100 1.5 MW wind turbines and tower assemblies at a cost of $180 million. The lender group wants a loan title policy in the amount of $150 million, and the tax equity partner wants an owner’s policy in the amount of $220 million.

The problem is the mismatch between the property interests typically covered by title insurance and the value of the improvements. Easement/leasehold interests are real property and some of the site improvements are probably universally characterized as real property or at least as fixtures. But the costs of the energy collection system and the turbines and their towers accounts for more than 90 percent of the total project development budget and would generally be characterized as personal property (although the tower foundation system might be a fixture). ALTA title insurance policies insures neither title to nor a lien upon personal property, which is where most of the project value resides. Also, the ALTA forms do not easily accommodate title claims that (i) arise from improvements constructed after the date of policy or (ii) affect less than all of the insured tracts.

The Series 36 (Energy Project) endorsements address these energy project issues in the following ways:

where easements are used in lieu of leases, affirmative title coverage is given to those easement interests;
valuation of title is expanded to include loss to the “integrated project” even though the covered claim affects fewer than all insured tracts;
coverage is extended to claims for losses arising from improvements constructed after the policy date (provided those improvements are constructed in accordance with the project company’s plans);
in calculating loss or damage under a covered claim, the insurer will include diminution in value of the insured’s interest in “Severable Improvements” – which are defined as improvements that are a functional part of an “Electricity Facility”, but which are characterized as personal property, i.e., the turbines and towers; and

U.S. Department of Commerce Preliminarily Finds Chinese Solar Panel Manufacturers Received Subsidies from the Chinese Government

by McDermott Will & Emery | Mar 27, 2012 | Environmental, Project Development and Finance, Renewables

by David Levine, Raymond Paretzky and Melissa Dorn

The United States Department of Commerce (DOC) released its preliminary determination in the countervailing duty investigation on imports of silicon photovoltaic (PV) cells from China last week. The DOC preliminarily found subsidy rates for Chinese producers and exporters of PV cells ranging between 2.9 to 4.73 percent—rates that were lower than some industry members reportedly expected, and lower than the rates alleged by the Solar World Industries America Inc., the U.S. producer that petitioned for this countervailing duty investigation and the companion antidumping investigation. The DOC affirmed Solar World’s allegation of “critical circumstances,” resulting in retroactive application of the countervailing duty deposit requirement on imports of Chinese PV cells beginning in December 2011.

The DOC also clarified that the scope of the ongoing antidumping/countervailing duty investigations covers PV cells and modules produced in China as well as modules produced elsewhere with Chinese PV cells, but does not include modules produced in China from PV cells produced elsewhere.

Countervailable subsidies are receipts of financial assistance by producers and/or exporters from their local or national government that benefit the production or exportation of goods where such benefits are limited to specific enterprises or industries, or are contingent either upon export performance or upon the use of domestic goods over imported goods.

U.S. imports of Chinese solar panels in 2011 were valued at over $2.5 billion – a significant and growing share of the total U.S. market. The rapid growth of Chinese imports in fact supporting the “critical circumstances” finding noted above as well as the earlier preliminary determination by the U.S. International Trade Commission (ITC) that the U.S. industry is being injured by imports of PV cells from China.

Interested members of the solar industry will continue to watch these proceedings closely. The DOC is expected to announce its preliminary determination in the companion antidumping investigation in May. The final countervailing duty determination is due to be issued in June, and the ITC will issue its final injury determination in July, though these dates could be postponed. Interested parties also are closely monitoring the U.S. and global market implications of these investigations, including in the large solar market in Europe, where reports indicate similar trade relief actions against Chinese exports might be under consideration.

Key Energy-Related Tax Provisions in the 2013 Budget Proposal

by McDermott Will & Emery | Feb 17, 2012 | Environmental, Project Development and Finance, Renewables, Tax

by Madeline M. Chiampou, William R. Pomierski, Martha Groves Pugh, Philip Tingle and Brian Levy

President Obama’s recently released budget proposal for the 2013 fiscal year contains energy-related tax provisions, including an extension of the Section 1603 grant in lieu of investment credits through 2012.

Please click here to view the entire White Paper in Adobe PDF format.

Has the Nuclear Renaissance Finally Begun?

by McDermott Will & Emery | Feb 13, 2012 | Environmental, Project Development and Finance

by Ari Peskoe

The Nuclear Regulatory Commission (NRC) voted 4-1 on February 9 to issue Combined Operating Licenses (COL) for two new nuclear units at the Southern Company’s Vogtle site in Georgia. The two new reactors are the first to be approved since 1978. Their approval is the culmination of years of effort by the Federal government to reinvigorate the country’s nuclear industry. Environmental groups have promised to file a lawsuit challenging the permits.

A COL authorizes the licensee to construct and operate a nuclear power plant at a specific site. Seventeen COL applications are currently pending before the NRC, although four applicants have asked the NRC to suspend further consideration at this time. Most of the applicant projects are based in states whose laws and regulations guarantee recovery of the reactor’s multi-billion dollar construction cost in the sponsoring utility’s rate-base.

The NRC received the Vogtle application in March 2008, and the review process included assessments of environmental impacts, operational programs, and site safety. Like the new Vogtle reactors, nearly all of the proposed reactors in the U.S. are to be located at sites that already have at least one nuclear facility. Applicants hope that colocating reactors at existing sites will speed the approval processes.

The renewed interest in building nuclear reactors is partially due to the Department of Energy’s Nuclear Power 2010 program and the Energy Policy Act of 2005 (EPAct). Under the 2010 program, DOE provided funding for companies to submit COL applications. EPAct created a loan guarantee program, authorized a tax credit for nuclear electricity, funded research and development, and extended the Price-Anderson Act, which indemnifies the industry against damage claims arising from nuclear incidents. The owners of the new unit are benefitting from an $8.3 billion loan guarantee and may earn up to $250 million annually in federal tax credits if the reactors generate power by 2021. In addition, as the first licensee using an advanced reactor design, Vogtle can receive up to $500 million under EPAct to cover the cost of litigation or regulatory delays.

Environmental groups have already announced their intention to challenge the licenses. The Southern Alliance for Clean Energy (SACE) and eight other groups will claim that the Vogtle applicants must prepare a new environmental impact statement (EIS) that accounts for the lessons learned from the 2011 nuclear accident at Fukushima. The lawsuit will argue that the new EIS should include how the cooling systems and spent fuel storage pools will be designed to protect against floods, earthquakes and prolonged losses of power, as well as updated emergency plans for accidents affecting multiple reactors at the site. SACE is also involved in a Freedom of Information Act proceeding to obtain documents relating to the Vogtle loan guarantee.

DOE Previews Significant Funding Opportunities for Offshore Wind

by McDermott Will & Emery | Feb 10, 2012 | Environmental, Project Development and Finance, Renewables

by Kimberly Glasspool

The Department of Energy (DOE) has announced new funding opportunities for offshore wind energy projects. The DOE has not yet confirmed the amount of new funding that will be made available, but early indications from officials suggest grants could total between $100 million to $175 million. The DOE awards are expected to cover roughly half of a selected offshore project’s total costs.

According to a draft funding announcement available on the DOE’s website, the focus of this assistance is to support advanced technology demonstration projects that test new technology and verify performance and cost under actual operating and market conditions. The announcement indicates that one of the primary goals of providing financial assistance to advanced technology demonstration projects is to expedite development of offshore wind farms with the potential for bringing the cost of energy down to a point where these sources can compete with other generation technologies on an unsubsidized basis.

The announcement includes a potential roadmap to cost competiveness for offshore wind projects. The roadmap highlights development of innovative turbine architectures and advanced infrastructure to cut costs and increase efficiency. The DOE’s roadmap assumes that validation of construction, generation and operating expenses will be key drivers to reducing financing costs.

The DOE funding announcement is part of a broader effort by the federal government to facilitate offshore wind projects in the U.S. Recently, the U.S. Department of the Interior, Bureau of Ocean Energy Management announced completion of an environmental assessment for wind energy development off the coasts of New Jersey, Delaware, Maryland and Virginia. The assessment — required by the National Environmental Policy Act — identifies areas where offshore wind development would not have a significant impact on wildlife and the environment. Lease solicitation and application processes are underway for areas offshore of these Mid-Atlantic states.

Applications for offshore wind project funding are tentatively due on May 31, 2012. The DOE anticipates that it will select award recipients in August 2012 and make awards available in September 2012.

Maryland Poised to Develop Offshore Wind Resources

by McDermott Will & Emery | Jan 31, 2012 | Project Development and Finance, Renewables

by Benjamin B. McReynolds

Promoting development of Maryland’s considerable offshore wind energy resources tops Governor Martin O’Malley’s recently announced 2012 legislative agenda. The Maryland Offshore Wind Energy Act of 2012, S.B. 237, if enacted, will tweak the state’s existing renewable portfolio standard (RPS) to require that a small percentage (no more than 2.5 percent) of generation be sourced from qualifying offshore wind projects. The current draft of the bill requires utilities to meet the new offshore wind RPS beginning in 2017 and specifies that qualifying projects must interconnect to the PJM Interconnection at a point located on the Delmarva peninsula. Maryland’s utilities will be able to satisfy the offshore wind RPS by obtaining (through development or purchase) a new category of renewable energy credit (REC) — the offshore wind renewable energy credit (OREC).

The Maryland bill borrows from New Jersey’s Offshore Wind Economic Development Act of 2010. Other States in the Mid- to Upper-Atlantic region have successfully lured emerging renewable technologies to their region using similar modifications to RPS legislation. Delaware amended its RPS in an attempt to attract fuel cell technology, which resulted in the Delaware PUC’s recent approval of a tariff that allows the utility to rate-base portions of the cost of developing a utility-scale fuel cell project in Delaware. As mentioned above, New Jersey’s addition of an OREC in 2010 has garnered significant attention from developers, one of whom hopes to receive Public Utilities Commission-approval and start offshore construction later this year.

This is Governor O’Malley’s second attempt to encourage development of Maryland’s considerable offshore wind resources. The Governor’s first attempt, last year’s S.B. 1054, would have required the State’s utilities to enter into long-term (25+ years) power purchase arrangements with offshore wind projects. The Maryland Legislature rejected that approach, based largely on concerns over the ultimate costs to the average Maryland ratepayer, which were estimated to be between $24 and $108 annually.

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