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BLM Finalizes Segregation Rule for Wind and Solar Energy Projects

by | May 8, 2013 | ,

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 | May 6, 2013 | ,

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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IRS Updates Notice Determining When Construction Begins for Purposes of the Production Tax Credit and Investment Tax Credit

by | Apr 26, 2013 | ,

by Gale Chan, Martha Groves Pugh and Philip Tingle

Last week, we reported that the Internal Revenue Service (IRS) issued Notice 2013-29 (Notice) to to provide guidance on eligibility for the production tax credit (PTC) and investment tax credit (ITC). On April 25, 2013, the Internal Revenue Service (IRS) updated the Notice. Under the IRS’s additional guidance, a binding contract that has a liquidated damages provision that limits damages to at least 5 percent of the total contract price will not be treated as limiting damages to a specified amount. 

When the Notice was first issued on April 15, 2013, it provided that a contract is binding only if the contract did not limit damages to a specified amount, including the use of a liquidated damages provision. This language differed from the treatment of a binding contract under the guidance issued by the Department of Treasury with respect to the grant program under section 1603 of the American Recovery and Reinvestment Act of 2009 because the Section 1603 Grant program, like the bonus depreciation regulations, provided that a liquidated damages provision that limited damages to an amount that was equal to at least 5 percent of the total contract price would not be treated as limiting damages in a contract to a specified amount. As updated, the Notice is now in line with the definition of binding contract under the guidance issued with respect to the Section 1603 Grant as well as the IRS’s own regulations regarding a binding contract in the bonus depreciation regulations.



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Bipartisan Group of Legislators Reintroduces Master Limited Partnerships Parity Act

by | Apr 26, 2013 | , , ,

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. 



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IRS Determines When “Construction Begins” for Purposes of Production Tax Credit and Investment Tax Credit

by | Apr 18, 2013 | ,

by Gale Chan, Martha Groves Pugh and Philip Tingle

The Internal Revenue Service (IRS) issued Notice 2013-29 to provide guidance on eligibility for the production tax credit (PTC) and the investment tax credit (ITC). Under the most recent extension of the PTC and ITC, enacted by Congress on January 1, 2013, a renewable energy facility must begin construction before January 1, 2014 to be eligible for the PTC or ITC.  The IRS’ Notice largely follows the guidance that Treasury provided with respect to Section 1603 grants and provides that a taxpayer may establish that construction has begun either by demonstrating that physical work of a significant nature has begun or by satisfying a five percent safe harbor.  Key differences between the Section 1603 Guidance and the IRS’ Notice on the PTC and ITC are highlighted below.

Under the IRS’ Notice, physical work of a significant nature must be with respect to tangible property that is integral to the facility.  Thus, property integral to the production of electricity is included but not property used for the transmission of electricity.  Power conditioning equipment, such as a transformer, is an integral part of the facility.

Either on-site or off-site work can be sufficient to demonstrate the beginning of construction.  If work is performed off-site, the work can be performed either by the taxpayer or by another person for the taxpayer pursuant to a binding written contract.  A contract is binding only if it is enforceable under local law against the taxpayer (or a predecessor), and the contract does not limit damages to a specified amount.  This definition is a departure from the 1603 Guidance, which determined that a contract is binding so long as the liquidated damages provision in the contract does not limit damages to less than five percent of the total contract price.

A taxpayer must maintain a continuous program of construction of a significant nature.  The IRS’ Notice lists detailed examples, not provided in the 1603 Guidance, of allowable disruptions that are beyond the control of the taxpayer, including: severe weather, licensing and permitting delays, delays requested in writing by a government agency, financing delays of less than six months, and supply shortages.p>

Alternatively, like the 1603 Guidance, the IRS’ Notice includes a safe harbor that provides eligibility for the PTC or ITC if the taxpayer pays or incurs five percent or more of the total costs of the facility.  All costs properly included in the depreciable basis of the facility are taken into account.  However, the cost of land or any property not integral to the facility is not included. 

Unlike the 1603 Guidance, the IRS’ Notice imposes a continuous efforts requirement for the safe harbor and includes a taxpayer favorable provision related to cost overruns.  Facts and circumstances indicating continuous efforts include paying or incurring additional amounts included in the total cost of the facility, obtaining permits, and entering into binding written contracts for components or future work.  With respect to a single project [...]

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DOE Issues Guide For Developing Large-Scale Renewable Energy Projects on Federal Land

by | Apr 3, 2013 |

by Thomas Hefty

Last month, the Department of Energy (DOE) issued its Large-Scale (>10 MW) Renewable Energy Guide, which is subtitled “A Practical Guide to Getting Large-Scale Renewable Energy Projects Financed with Private Capital” (Guide).   According to The Guide, its main purpose is to “provide a project development framework to allow the federal government, private developers and investors to work in a coordinated fashion on large-scale renewable energy projects.” The Guide aims to achieve this purpose by (a) developing a common language between federal agencies and developers; (b) describing a “best practice” large-scale renewable energy project development process; (c) giving government employees an understanding of what his or her responsibilities and roles are within the development process; and (d) outlining for developers a recognizable, reliable and predictable process in which it can engage with a reasonable likelihood of commercial success.

Renewable energy developed on federal land is a prototypical government/private industry hybrid — the federal government is making more of its land available for renewable energy development (regardless of whether the federal government will be the energy off-taker), but relies nearly exclusively on private developers to develop and operate projects. However, the record of federal agency participation in renewable energy development has been less than stellar. According to the Guide, “many of the faults found in past federal contracts related to renewable energy can be attributed to a failure by the government to adequately understand the commercial power plant development side of the transaction during negotiation.”

To bridge the divide between federal agencies and their private development counterparts, DOE designed the Guide to provide a project development framework that allows the parties to work in a coordinated fashion — to enable “both sides of a transaction to better understand the deal because better informed people execute better deals.” The Guide maps a process that is grounded in the foundations of commercial project development while integrating traditional federal processes. That process is shown below:

The federal agency takes the lead role in the project acquisition and pre-development phase and, by using the techniques in the Guide, the federal agency can methodically identify, analyze and choose projects that are more likely to be successful when offered to private developers in the late pre-development or early development phases.

The Guide maybe useful to private developers as well because if it can reduce developers’ perceptions of out-sized development risk when dealing with the federal government. To the extent that the Guide represents “best practices” for successfully developing renewable energy projects, private developers can use the Guide to analyze and improve their practices and strategies.

The Guide was developed in cooperation with the U.S. Army Energy Initiatives Task Force, the National Renewable Energy Laboratory and private industry consultants. DOE intends to update the Guide periodically.



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Iowa Considers Feed-In Tariff for Wind

by | Mar 21, 2013 | ,

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.



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

by | Mar 8, 2013 | ,

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.

To read the full article, click here.



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Sequestration to Result in Across-the-Board 8.7 Percent Reduction of 1603 Grant Payments

by | Mar 5, 2013 | , ,

by Melissa Dorn

The United States Department of the Treasury released a notification on March 4, 2013 clarifying how sequestration will affect payments awarded under Section 1603 of the American Recovery and Reinvestment Tax Act of 2009 for specified energy property in lieu of tax credits. Treasury stated that it will reduce the amount of each final award issued from March 1, 2013 through September 30, 2013 by 8.7 percent, regardless of when the application was received by Treasury.  The 8.7 percent sequestration rate is subject to change following September 30, 2013.

For more information please contact your regular McDermott lawyer of Phil Tingle at +1 305 347 6536 or ptingle@mwe.com.



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Is There Bipartisan Support for an Energy Security Trust?

by | Feb 15, 2013 | ,

by William Friedman

President Obama proposed in his State of the Union creating an Energy Security Trust to invest in research and technology that will “shift our cars and trucks off oil for good.”  Oil and gas lease revenues, estimated at $150 billion over the next decade, would fund the Trust.  The idea of the Trust is more than 30 years old and was recently endorsed by the ranking Republican on the Senate Energy and Natural Resources Committee.  While predicting what Congress will do is a fool’s errand, there is some reason to think that an Energy Security Trust could become a reality.

President Carter in 1979 asked Congress to pass a windfall profits tax on oil company revenues in order to establish a trust that would be used to “protect low income families from energy price increases, to build a more efficient mass transportation system, and to put American genius to work solving our long-range energy problems.” More recently, Energy Security Trust Fund bills were proposed in 2007 and 2009.  The 2009 bill, entitled “America’s Energy Security Trust Fund Act of 2009,” proposed an excise tax on “carbon substances” including coal, petroleum products and natural gas.  The tax would have collected $15 per ton of carbon dioxide content in taxable substances sold by manufacturers, producers or importers and would have escalated at a base rate of $10 each year.  The proposed trust fund would have been used to finance research in clean energy technology, assist industries negatively affected by the bill, and provide payroll tax relief to individual taxpayers.  Neither the 2007 bill nor the 2009 bill, (both proposed by Rep. John Larson (D-CT.)) passed in Congress.

Unlike these previous proposals, President Obama’s proposal does not rely on tax revenues and instead resembles a recent energy policy blueprint put forward by Sen. Lisa Murkowski (R-AK), the ranking Republican on the Energy and Natural Resources Committee.  Senator Murkowski’s plan, “Energy 20/20: A Vision for America’s Energy Future,” calls for an Advanced Energy Trust Fund that would be funded by rents, royalties, bonus bids and corporate income taxes.  Murkowski also advocates opening up federal lands like Arctic National Wildlife Refuge (ANWR) and other offshore resources and using those revenues to fund a trust.  The Advanced Energy Trust Fund would be administered by the Department of Energy and used to pay for advances in renewable energy, energy efficiency, alternative fuels and advanced vehicles.

The White House has not released details yet on how the proposed Trust would be funded or administered. Unlike Senator Murkowski, the President is unlikely to support opening ANWR for drilling, which environmental groups have long opposed.  Yet, some version of an Energy Trust has support on both sides of the aisle.



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