Legal Considerations in Renewable Energy Procurement PRESENTED BY TAMMIE PTACEK MIDWEST SOLAR EXPO MINNEAPOLIS MN MAY 1 2019 Driving Factors Behind Renewable Energy Procurement Climate Change ID: 776360
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Slide1
“50 Shades of Green”—Legal Considerations in Renewable Energy Procurement
PRESENTED BY TAMMIE
PTACEK
MIDWEST SOLAR EXPO, MINNEAPOLIS, MN
MAY 1, 2019
Slide2Driving Factors Behind Renewable Energy Procurement
Climate Change—
CO
2 & Temp. Trends
Drivers of Corporate Renewable Energy Procurement
Source: climate.nasa.gov
Source: PWC, Corporate Renewable Energy Procurement Survey Insights (June 2016)
Slide3Unsubsidized Levelized Cost of Energy (LCOE)
Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)
This analysis shows a continued decline in cost of generating electricity from alternative energy technologies, especially utility-scale solar and wind. In some scenarios, alternative energy
costshave
decreased to the point that they are now at or below the marginal cost of conventional generation
Slide4Unsubsidized Levelized Cost of Energy—Wind & Solar PV (Historical)
Source:
LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)
Slide5Production Tax Credit (PTC)~ Typ. Wind
Full Credit—Generally, $0.023/kWh (inflation adjusted)Term—First 10 years of operationApplication—Power sold to an unrelated person (i.e., not self-supply)Phase-Out (Wind):Internal Revenue Code § 45, IRS Notice 2017-04 et al.
Begin Construction
% Full Credit
Pre-2017
100%
2017
80%
2018
60%
2019
40%
2020
0%
Slide6Investment Tax Credit (ITC)~ Typ. Solar
Credit—Generally, 30% of basis of propertyApplication—Qualifying energy property that is depreciable (thus making it business property) and used to produce electricity (i.e., includes self-supply)Phase-Out (Solar):Internal Revenue Code § 48, IRS Notice 2018-59 et al.Capture of ITC & PTC → Tax equity financing for project
Begin Construction*ITC AmountPre-202030%202026%202122%2022 and after10%
*Placed-in-Service date requirements also apply.
Slide7Levelized Cost of Energy—Effect of Federal Tax Subsidies
Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)
Slide8Source: Rocky Mountain Institute
Slide9Renewable Energy Buyers Alliance
The largest trade group of corporate renewable energy buyers in the U.S.
Since 2014, the REBA community has grown to over 200 large energy buyers including Walmart, General Motors, Google and Facebook as well as 150 renewable power developers and service providers
Participants in the REBA community have been a part of 98% of all large-scale U.S. corporate renewable energy deals to date
Aims to expand the number of organizations buying renewable energy from dozens to tens of thousands and cause 60 gigawatts of new renewable energy by 2025
Slide10What is Renewable Energy?
Renewable Energy:
Electricity generated from natural resources that replenish themselves over short periods of time
Solar, wind, biomass, geothermal, [hydro]
Energy
+
Renewable Attributes
(
e.g
.,
RECs
)
Renewable Energy Credits (
RECs
):
Legal instrument that conveys to its owner the right to claim the associated environmental attributes of its generating resource
1 REC ~ 1 MWh of Renewable Electricity
Electronic tracking systems issue, track, and retire
RECs
Slide11Slide12“Renewable” Marketing Claims
BE CAREFUL HOW YOU REPRESENT YOUR
“GREEN”
OR
“RENEWABLE”
EFFORTS!
"[
U]nfair or deceptive acts or practices in or affecting commerce...are...declared unlawful." Section 5(a) of FTC Act, 15 U.S.C. Sec. 45(a
).
FTC Green Guides, 16 CFR Pt 260
Marketers should not make broad, unqualified general environmental benefit claims like
‘green
’ or ‘eco-friendly.’
Broad claims are difficult to substantiate, if not impossible
.
U
tilities that
sell RECs to third parties
are recommended to
clearly identify such sales and
the
effects of transferring the right to claim credit for those RECs and related environmental benefits in annual reports or other
publications
Slide13FTC Green Guides Example
Facts:
A manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is "100% solar-powered."
The manufacturer, however, sells
RECs
based on the renewable attributes of all the power it generates.
Guidance:
Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling the
RECs
, transferred the right to characterize that electricity as renewable.
The manufacturer’s claim is therefore deceptive.
It also would be deceptive for this manufacturer to advertise that it "hosts" a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy.
It would not be deceptive, however, for the manufacturer to advertise, "We generate renewable energy, but sell all of it to others."
Slide14Renewable Procurement Options
On-Site, Self Supply
On-Site, Vendor Supply
Community Solar Garden
Wholesale Power Purchase (
PPA
)
Virtual Power Purchase +
RECs
REC Purchase
Retail/Utility-Sleeved
PPA
Utility/Retail Green
Program
Slide151. On-Site, Self Supply (“Behind the Meter”)
Renewable Project
Utility
40 kW
60 kW
100 kW
Meter
Environmental Attributes
Payment for 40 kW
Buyer
Slide16Buyer
On-Site, Self Supply
(continued)
(Net Metering Example)
Renewable Project
Utility
40 kW
100 kW
60 kW
Meter
Environmental Attributes
Payment /
Credit for 40 kW
Slide17Net Metering—Regulatory Developments
Basic Concept: Customer consumes 50 MWh, produces 50 MWhCustomer pays utility for 0 MWhCost-Shifting Issue—Customer depends on utility and grid infrastructure to ensure it has reliable 24-hour power but is not paying for itAlternatives (States with high levels of solar adoption—e.g., AZ, HI, CA):Net metering + fixed monthly fee on solar ownersCompensate excess output at lower than retail rate (e.g., “Value of Solar”)Compensate all output at lower than retail rate (two meters, “buy-all, sell-all”)Technological “End-Around”: Energy Storage…
Slide18Source: DSIRE, N.C. Clean Energy Technology Center at N.C. State University,
available at
www.disreusa.org
Slide19Buyer
On-Site, Self Supply
(continued)
(Storage Example)
Battery
Utility
40 kW
100 kW
60 kW
Meter
Environmental Attributes
Slide20Outlook for Capitalized Cost of Storage by Technology
Source: LAZARD’S LEVELIZED COST OF STORAGE ANALYSIS—VERSION 4.0 (Nov. 2018)
Slide21On-Site, Self Supply (continued)
Summary of Legal Considerations
Permitting
Public Utility Commission Need/Site Permit (Large Projects)
Zoning/Conditional Use Permit
Building Permit
Environmental (
SWPP
, wetlands, etc.)
Utility Tariff—Interconnection, Net Metering/Solar Rate
Incentives—Federal Tax, State Agencies, Utility Programs
Contracts
Module Supply—Product & Output Warranty, Term, Exclusions
O&M
—Scope of Services, Pricing Structure, Term
Insurance—Property and Commercial General Liability
Slide22Buyer
2.
On-Site,
Vendor Supply (PPA)
Renewable Project
Utility
40 kW
60 kW
100 kW
Meter
Env’tl Attributes
Payment for 40 kW
Payment for 60 kW
Slide23On-Site, Vendor Supply (continued)
Power Purchase Agreement (
PPA
)
Long Term, Fixed/Scheduled Price
Common and useful method for developers to finance projects
Advantages
Shift construction/installation burden
Shift
O&M
responsibility, focus on core business
Shift tort liability
Regulatory Issue – Avoid becoming a “public utility” or violating “exclusive service area” of a public utility…
Slide24Source: DSIRE, N.C. Clean Energy Technology Center at N.C. State University, available at www.dsireusa.org
Slide253rd-Party PPA Case #1 (Indiana)
U.S. Steel Corp. v. N. Ind. Pub. Serv. Co.,
951 N.E.2d 542 (Ind. Ct. App. 2011)
U.S. Steel sold a “Plate Mill” facility within its large “Gary Works” complex to
ArcelorMittal
.
U.S. Steel had been self-supplying electric power within the complex, including to the Mill, and continued to supply power to the Mill after sale.
Parties file for
IURC
declaration recognizing right to continue arrangement.
IURC
found U.S. Steel was a “public utility” (and thus violating
NIPSCO’s
exclusive service area)
“Public Utility” means any company “
that may own, operate, manage, or control any plant or equipment within the state for the . . . production, transmission, delivery, or furnishing of heat, light, water, or power.
” Ind. Code § 8-1-2-1(a).
Slide263rd-Party PPA Case #1 (continued)
Ind. Court of Appeals reversed:
“It is an essential requirement that a business or enterprise
must in some way be impressed with a public interest
before it may become a public utility.”
“[P]
ublic
” means “[t]he community or peoples as a whole; the members of the community collectively” (quoting Oxford English Dictionary)
Distinguishing factors:
Providing electricity to “only one customer located within its industrial complex pursuant to a special agreement.”
Never attempted to compete with or displace
NIPSCO
or simply “cherry-pick” profitable customers.
Arrangement was the result of a unique circumstance, out of convenience and as a continuance of its previous self-supply.
No legitimate concern regarding discrimination in services and rates.
Electric service was ancillary to primary business of steel production
Slide273rd-Party PPA Case #2 (Iowa)
SZ
Enterprises, LLC d/b/a/ Eagle Point Solar v.
IUB
, 850 N.W.2d 441 (Iowa 2014)
Eagle Point Solar (EPS) sought
IUB
declaration that it could install solar panels on city building and sell power to city without being a “public utility”
IUB
held such activity
would
make EPS a public utility.
Iowa district court reversed.
Iowa Supreme Court (4-2 with one abstention) upheld district court, holding that EPS
would not
be a public utility.
The Supreme Court applied an eight-factor test and found that most factors favored finding that EPS was not a public utility and that a few were neutral. By contrast, the lower court had found that a few of the factors did support finding that EPS was a public utility but were ultimately outweighed by those factors supporting that EPS was not.
Slide283rd-Party PPA Case #2 (continued)
Iowa
Supreme Court applied an eight-factor
test:
(1) What the corporation actually does.
(2) A dedication to public use.
(3) Articles of incorporation, authorization, and purposes.
(4) Dealing with the service of a commodity in which the public has been generally held to have an interest.
(5) Monopolizing or intending to monopolize the territory with a public service commodity.
(6) Acceptance of substantially all requests for service.
(7) Service under contracts and reserving the right to discriminate is not always controlling.
(8) Actual or potential competition with other corporations whose business is clothed with the public interest.
Iowa Supreme Court found
that
(1) most
factors
→
not
public utility, (2) a few factors
→
neutral.
Lower
court had found that
(1) a
few
factors
→
is
a
public
utility,
but
(2) other factors
→
not
public
utility, outweighed the others.
Slide293rd-Party PPA Statute? (Minnesota)
Minn. Stat. § 216B.02
Subd
. 4:
"Public utility" means persons, corporations, or other legal entities . . . operating, maintaining, or controlling in this state equipment or facilities for furnishing at retail . . . electric service to or for the public or engaged in the production and retail sale thereof. . . .
No person shall be deemed to be a public utility if it produces or furnishes service to less than 25 persons.”
Slide30On-Site, Vendor Supply (continued)
Contracting Considerations
PPA
+ Lease/Easement (with cross-termination)
Conditions Precedent/Early “Outs”
Price (fixed/escalating), Term/Renewal, Quantity (versus load)
Allocation of
RECs
Allocation of Permitting/Utility Interconnection Obligations/Risk
Allocation of Insolation/Solar Obstruction Risk
Access/Non-Interference with Buyer Operations & Vendor Output
Protection of Property/Roof
Indemnity & Insurance
Limitation of Liability/Consequential Damages
Purchase or Removal Option/Obligation at End of Term (and associated tax issues)
Slide31Buyer
3. Community Solar Garden (CSG)
Renewable Project
(Off-Site)
Utility
Environmental Attributes (Opt.)
Subscription Payment
Bill Credits
Electrical Output
(Proportional to Subscription)
Slide32Subscribe” for participation in a portion of a remote solar facilityPay subscription fee to sponsor/owner of the solar project“Virtual net metering”— Receive bill credits from your retail utility based on output of the project
Community Solar Garden (cont.)
Advantages:
Avoid ownership and operation liability
Avoid
O&M
and administrative responsibility
Avoid interference with business operations and/or diminution of property value
Optimal installation locations (insolation, interconnection, access, etc.)
Possible economies of scale
Slide33States with CSG Programs (2018)
Source: solstice.us/solstice-blog;
see also
seia.org/initiatives/community-solar
Slide34Example CSG Programs (MN v. NY)
MN
NY
Max. Size
1 MW-ac
2 MW-ac
Min. # Subscribers
5
10
Location Restriction (Customer & Project)
Project must be in utility territory. Subscriber
must be retail customer of utility in same or contiguous county of project.
Subscriber & project
must be in s
ame utility territory & NYISO load zone
Min. Subscription
200 W
1,000 kWh/Yr
Max
. Subscription
120% of average annual consumption
Average annual consumption
Max.
Proportionate Share
Each subscriber
must take
≤
40% of CSG output
Subscribers > 25 kW must take ≤
40% of CSG output
Authority
Minn. Stat. § 216B.1641
NY PUC
No. 15-E-0082
Slide35Community Solar Garden (continued)
Subscription Agreement—Contracting Considerations
Primary Commercial Terms
Price—Fixed, Escalating, Retail Minus Discount, …
Allocation of
RECs
(affects price)
Conditions Precedent/Early “Outs”
Quantity—Restrictions based on customer’s retail load? Guaranteed output?
Term—Long-term commitment (e.g., Minnesota typically 25 years)
Exit/Transferability if Customer Moves/Abandons Location
Termination or transferability rights?
State/utility location restrictions?
Liquidated damages for lost income?
Mitigation obligations?
Slide36Buyer
4. Wholesale Power Purchase (PPA)
RTO/ISO
Market
Energy at Project Node
Environmental Attributes
Fixed Price Payment
Energy at
Project Node
Floating
Price
Payment
(Nodal Market)
Renewable Project
Retail Price Payment
Energy at Load
Utility
PPA
Slide37Wholesale Power Purchase (continued)
Power Purchase Agreement (“PPA”)FERC Regulatory Requirements:“Sale of electric energy at wholesale in interstate commerce” is subject to FERC jurisdiction under FPA, 16 U.S.C. § 824(b)(1) Generally applicable to all wholesale sales unless limited to AK, HI, or TX-ERCOT markets“Wholesale” = sale for resaleMust obtain Market-Based Rate (MBR) authority, 18 C.F.R. Pt. 35Initial application based on formulaic “market power” screens60-day review periodUpdate for “change in status” (e.g., add’l 100 MW within geo. market)Must file Electric Quarterly Reports (EQRs), 18 C.F.R. § 35.10bOther compliance obligations—Anti-manipulation, etc.RTO/ISO ParticipationMust become “Market Participant” in applicable RTO/ISOMust satisfy credit requirements (guaranty or other performance assurance)
Slide38Wholesale Power Purchase (continued)
Contracting IssuesConditions Precedent (permitting, land, financing, board approval)Commercial TermsPrice (fixed/escalating)—Imperfect hedge of retail load costsTerm/RenewalQuantity (typ. full output; flexibility for development risk?)Credit Support (guaranty, letter of credit, bond, cash; pre/post-COD)Accommodation of Financing Parties (collateral assignment and consent issues)RTO Products—Energy, Capacity, Ancillary ServicesProduction GuaranteesAllocation of RECsAllocation of Change-In-Law/RTO Rules Risk (e.g., PTC/ITC)Allocation of Curtailment Risk (RTO/reliability, regulatory, market pricing) and Payment for “Deemed Energy” (including lost PTC) Purchase Option or Right of First Offer (ROFO)
Slide39Buyer
5. Virtual Power Purchase + RECs
RTO/ISO
Market
Environmental Attributes
Fixed Price Payment
Energy at
Project Node
Floating
Price
Payment
Renewable Project
Floating Price Payment
Retail Price Payment
Energy at Load
Utility
Swap
+
RECs
Slide40Virtual Power Purchase + RECs (continued)
Financially-Settled Transaction Between Parties
No physical transfer of power between the parties
Buyer receives standard retail power from utility
Imperfect hedge
Fixed price payment to Seller
“Offsetting” market price payment to Seller/retail price payment to utility
Accommodates restricted retail access
Buyer avoids need for FERC
MBR
status,
RTO
participation
Geographic flexibility—Advantage for Buyer with scattered footprint or limited access to good projects
“
Additionality
” claims—Finances development of project
Contracting—Non-phys. items of
PPAs
+ regulatory issues
Disadvantages—More complicated “story,”
swap regulation
…
Slide41Virtual PPAs—Swap Regulation
Dodd–Frank Wall Street Reform and Consumer Protection Act (2010)
→ Swap Provisions of Commodity Exchange Act, 7
U.S.C
. §§ 1-27f
→ Commodity Futures Trading Commission (
CFTC
) Swap Rules
Eligible Contract Participant (
ECP
) Requirement
Only
ECPs
can trade in off-exchange swaps, 7
U.S.C
. §2
Generally, any company with assets > $10,000,000, 7
U.S.C
. §1a(18)
Swap Recordkeeping, 17
C.F.R
. §45.2
“[F]
ull
, complete, and systematic records, together with all pertinent data and memoranda, with respect to each swap”
Maintain during life of swap and 5 years following termination
Must be retrievable within 5 business days
Slide42Virtual PPAs—Swap Regulation (continued)
Swap Reporting, 17
C.F.R
. Pts. 43, 45
Each swap must be reported to a swap data repository (
SDR
)
Only one party reports—either the “swap dealer” or by agreement
Each party must have a legal entity identifier (LEI)
Other (often not applicable)—17
C.F.R
. Pts. 1-199
Slide43Buyer
6. REC Purchase
Environmental Attributes
REC Payment
Energy Sale (?)
Renewable Project
Retail Price Payment
Energy at Load
Utility
REC Purchase
Slide44REC Purchase (continued)
Separate
Renewable
+
Energy
Procurement
Purchase and retire
RECs
Purchase standard retail energy service from utility/retail provider
Advantages:
Flexibility—purchase
RECs
from any project anywhere
Avoid FERC,
CFTC
, and state utility regulatory issues
Avoid long-term commitment to any renewable project(s)
Disadvantages:
Exposed to REC market risk unless long-term purchase
Diminished renewable “story” but can still make green claims
Provides no hedge/savings of power
costs
Slide45Buyer
7
. Retail/Utility Sleeved
PPA
RTO/ISOMarket
Energy at Project Node
Environmental Attributes
Fixed PPA Price
Imbalance Energy
Payments for Imbalance Energy
Renewable Project
Retail PPA-Based Payment
Energy at Load
Retail Provider or Utility
Environmental Attributes
Sleeved
PPA
Slide46Retail/Utility Sleeved PPA (continued)
PPA
with Renewable Project, Intermediated by Utility
Provides a long-term price hedge in addition to
RECs
Buyer avoids need for FERC
MBR
status,
RTO
participation
Nexus to specific renewable project(s)
Retail Choice
(Deregulated States)
Wide flexibility to structure transaction
Regulated Utilities
“Green Tariff”
Price structure offered by local utility & approved by state PUC
Purchase energy &
RECs
from renewable project(s) at large scale, up to 100% of load
One-on-One Renewable Energy Deal
“Special contract” negotiated with utility under PUC rules/approval (not generally available)
Limited transparency
Structures Blend Into Standardized “Green Programs
”
Slide47Sleeved PPA* Availability
Source: World Resources Institute, U.S. Renewable Energy Map: A Guide for Corporate Buyers
Slide48Retail/Utility Sleeved PPA (continued)
Contracting Issues
Legal authorization for arrangement (reps & warranties)
Commercial Terms
Price (fixed/escalating)—Full hedge of retail load costs
Retail Service Fees
Term/Renewal
Quantity
Full/partial output
Full/partial requirements (with targets, minimums, makeup)
Fixed quantity (MW) block
Layering of renewable over generic service
Right/prohibition of adding on-site generation
Slide49Retail/Utility Sleeved PPA (continued)
Contracting Issues
Credit Support
Allocation of Change-In-Law or
RTO
Rule Risk
Allocation of
RECs
See also § 4. Wholesale
PPAs
Slide50Buyer
8
. Utility/Retail Green Program
Energy at Project Node
Environmental Attributes
PPA Prices
Third Party Renewable Project(s)
Green Retail Payment
Energy at Load
Environmental Attributes
Green Program
Utility/Provider Renewable Project(s)
Utility or Retail Provider
Slide51Utility/Retail Green Program (continued)
Examples:
100% renewable or renewable “blocks” (X MWh/month)
Source-specific (wind/solar) or generic (renewable)
Advantages:
Ease (off-the-shelf)
Avoid project risk
Disadvantages:
Limited offerings, depending on state
Limited savings/hedge opportunities?
Less “sexy” claims? (but still renewable
)
Slide52Volume Firming Agreement
Developed by Microsoft and insurance and risk specialists as a way to mitigate risk for buyers in renewable energy
PPAs
Weather-related risks of power production
Inherent intermittent nature of wind and solar
Moves these risks to insurers who charge a risk management price and an insurance premium, and in return, guarantee delivery of renewables-generated electricity for every hour of every day
To be used in conjunction with
PPAs
Microsoft has signed 3
VFAs
totaling almost 500 MW
Slide53Conclusion
Corporate procurements are expected to grow beyond 2019 due to factors such as increasingly favorable contract terms (pricing, structure and “understandability”), and sustainability goals
Three other positive trends to keep industry growing:
emerging policies supporting renewable growth
expanding investor interest in sector
advancing technologies that increase wind and solar energy’s value to grid, owners and customers
Slide54
Slide55Thank You
Tammie Ptacek
612.335.7246tammie.ptacek@stinson.com