Energy Finance Report

Jeffrey Karp

Jeffrey M. Karp is a partner in Sullivan & Worcester's Washington, D.C. office, where he heads the firm’s Environment & Natural Resources Group. The Group includes the following fields of practice: environmental compliance & litigation; climate-related business & technology; renewable energy & energy efficiency; water resources & conservation; pesticides & bioagra; and energy, infrastructure & finance. The Group brings together practitioners from across the firm’s legal disciplines in its offices in Boston, New York, Washington, D.C., London and Tel Aviv.

Mr. Karp’s practice focuses on assisting clients in resolving complex regulatory matters and high-stakes business disputes, and engaging in cutting-edge technology transactions. He advises clients on the full range of environmental regulatory compliance issues under federal and state laws, and provides defense in government investigations and enforcement actions. He also represents clients in litigating and resolving disputes under a variety of federal and state laws, and claims arising from transactional agreements.

Mr. Karp advises companies seeking to participate in water, renewable energy, and clean technology transactions and projects worldwide, with an emphasis on assisting Israeli companies seeking to commercialize their products, services, and technologies. Mr. Karp also has substantial experience assisting clients in addressing legal, contractual, and regulatory issues arising during the development of large-scale infrastructure projects, including obtaining government authorizations and negotiating project agreements.

Before entering private practice in 1990, Mr. Karp served as an environmental prosecutor at the U.S. Department of Justice where he litigated and supervised enforcement cases involving a variety of environmental laws.

Email: jkarp@sandw.com

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Recent Posts

Renewables Can Play a Big Role in Puerto Rico's Fresh Start

Posted by Jeffrey Karp on 6/27/17 11:23 AM

This article originally appeared on Recharge.

Just two years ago, the future seemed promising for renewable energy development in Puerto Rico. Much of the groundwork was established, numerous developers had entered into Power Purchase Agreements (PPAs) with the state-owned utility, PREPA, and discussions were ongoing with funding sources.

However, decades of fiscal irresponsibility and bad deals finally caught up with Puerto Rico, leading to a terrible debt crisis. The government defaulted on bonds, sales taxes escalated to 11% (higher than any mainland state), and businesses began fleeing the island.

The generous incentives that initially had attracted development dried up. For the last couple of years, energy investment has been at a virtual standstill, with the exception of Oriana Energy’s solar plant that commenced operations in May 2017.

Despite these setbacks, and with the Commonwealth’s [government's] bankruptcy filing in May 2017, the Puerto Rican government now has a second chance to regain its financial footing, and the development of renewable energy may play an integral part in accomplishing such a task.

In 2010, the Commonwealth enacted Renewable Energy Portfolio Standards (REPS) that required 12% of the island’s electricity to come from renewable sources by 2015 and 20% by 2035. Following the enactment of the REPS, utility PREPA entered into dozens of PPAs with renewable energy developers agreeing to purchase the power to be generated. By the end of 2015, Puerto Rico had 318MW of renewables in place, according to latest available data from the International Renewable Energy Agency.

However, as Puerto Rico became mired in its debt crisis, developers were unable to secure financing as investors grew fearful of funding long-term energy deals with PREPA. Adding to the uncertainty, due to PREPA’s financial woes, the utility serially renegotiated the terms of developers’ PPAs, which only served to make investors more jittery about financing the underlying renewable energy projects. Eventually, most of the agreements expired before the power plants could be financed or built.

Despite its financial travails, Puerto Rico’s commitment to renewable energy has not waned. In June 2016, Congress passed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The legislation, intended to provide Puerto Rico with a pathway out of its debt crisis and establish a baseline for fiscal responsibility, also established the framework within which investment may occur. In providing a blueprint for interested investors, PROMESA also reaffirmed Puerto Rico’s commitment to renewable energy.

Recognizing that PREPA was incapable of shouldering the burden of energy development entirely on its own, PROMESA emphasized the need for public-private partnerships that shifted the initial funding burden to private investors. In April 2017, a P3 Summit was held to encourage developers and investors to collaborate with the Commonwealth on a wide variety of infrastructure projects, including energy, water, waste management, and transportation. The presentation on the energy sector reaffirmed Puerto Rico’s commitment to achieving the REPS of 20% renewable energy by 2035.

In setting the stage for infrastructure investment, PROMESA created an Oversight Board, which has authority over revitalization and infrastructure development. Importantly, the Oversight Board may “fast-track” projects deemed “critical,” such as projects that reduce the Commonwealth’s reliance on oil and diversify its energy sources. Moreover, the Oversight Board gives priority to privately-funded projects.

Following PREPA’s recent settlement with its bondholders, we understand the utility is ready to reengage with developers to amend PPAs that have been in limbo for several years. Many of these developers already have performed much of the engineering for these renewable energy projects. Once PREPA amends the extant PPAs, the underlying projects would qualify as “existing projects,” which would enable the Oversight Board to prioritize them.

In light of these recent fiscal and regulatory developments, investors again are inquiring about “shovel ready” renewable energy projects that require funding. Investors also may have gained a level of comfort having seen Oriana Energy successfully reengage in Puerto Rico. Since May 2017, the company is operating the largest solar plant in the Caribbean at 58MW, the power from which PREPA is purchasing pursuant to a renegotiated PPA.

Puerto Rico appears primed for renewed interest by energy investors. For several years, investors have been unwilling to accept the risks inherent in financing long-term energy projects in which PREPA is the counterparty. More recently, these concerns have shown signs of abating as PREPA has successfully engaged with its bondholders, and the Oversight Board created by the PROMESA legislation appears to have imposed an acceptable level of fiscal discipline on the Commonwealth.

With solar energy on the cusp of coming to Puerto Rico, the question is which financiers will enter the market soon enough to bathe in the sunlight.

Jeffrey Karp is a partner in the Washington, D.C. office of Sullivan & Worcester LLP and leader of the firm’s Environment, Energy & Natural Resources practice group. Zachary Altman, an associate, and Paul Tetenbaum, an intern at the firm, were co-authors of this article.

Topics: Energy Finance, Renewable Energy, Energy Investment, Puerto Rico, Power Purchase Agreements, Renewable Energy Portfolio Standards

Opportunities Abound in the U.S. Offshore Wind Market

Posted by Jeffrey Karp on 5/30/17 12:52 PM

Offshore wind projects have taken root in America. The country’s first operating offshore wind farm, in Block Island, Rhode Island, began contributing energy to the power grid in December 2016. Now, more than 23 offshore wind projects — collectively expected to produce 16,000 MW of power — reportedly are being planned. Thus, opportunities abound for developers, contractors, and investors in the U.S. offshore wind market.

The recent spike in offshore wind activity has been fueled largely by a surge of political interest. Some critics have decried President Trump’s apparent lack of commitment to renewable energy, but the U.S. Department of the Interior (DOI) has proved to be a willing partner in offshore wind energy development. In March 2017, DOI leased 122,000 acres off the coast of North Carolina to Avangrid, a subsidiary of Iberdrola, a Spanish company. Recently, DOI also finalized a lease with a Norwegian company, Statoil, for Long Island, New York waters. DOI evidently sees a future for U.S. offshore wind. According to a spokesperson, the Bureau of Ocean Energy Management currently is receiving annual rent payments of over $4 million for offshore wind project leases.

State activities also have primed the pump for offshore wind development. In August 2016, Massachusetts Governor Charlie Baker signed a law requiring utilities to procure 1,600 MW of electricity from offshore wind facilities by 2026. In May 2017, the Commonwealth’s Department of Energy Resources issued a request for proposals to develop up to 800 MW of offshore wind. New York Governor Andrew Cuomo announced that the state would commit to installing 2,400 MW of offshore wind by 2030, furthering his goal that renewable energy resources would supply 50% of New York’s power. To that end, in January 2017, Governor Cuomo approved Deepwater Wind’s 90 MW, 15 turbine South Fork Wind Farm project, which is expected to power 50,000 Long Island homes.

Moreover, the Maryland Public Service Commission recently awarded two developers, U.S. Wind and Skipjack Offshore Energy, contracts to build offshore wind farms totaling 368 MW. The projects are expected to create 9,700 new direct and indirect jobs.

With each completed project the supply chain grows stronger and developers become more efficient, making each successive project more cost-effective. For example, the estimated total cost of the South Fork project already has decreased 25% since Deepwater Wind’s first projections, and the energy generated is expected to cost 30% less per unit than at Block Island. Furthermore, the Department of Energy predicts that the cost of offshore wind energy will fall 43% by 2030. As this trend continues, there will be greater incentives to promote offshore wind as a clean energy resource.

Also, each successful project increases investor confidence. Deepwater Wind, developing its second offshore wind project, is owned by D.E. Shaw, a hedge fund and private equity firm managing over $40 billion in assets. Moreover, both Citigroup and HSBC have expressed interest in financing future offshore wind projects.

The U.S. offshore wind market is growing rapidly and approaching maturity. State and federal government actions appear to support a long-term horizon for offshore wind development. With every completed project, production and financing costs will continue to drop, the market will grow, and new jobs will emerge. The question now is whether the players in the renewable energy market — developers, investors, contractors, and vendors — are well-positioned to reap the rewards of this burgeoning industry.

Jeffrey Karp is a partner, Zachary Altman is an associate, and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: Energy Finance, Renewable Energy, Energy Investment, Energy Project Finance, Offshore Wind, Wind Energy, Energy Project

New Jersey's Proposed Renewable Portfolio Standard- Ambitious, but Uncertain

Posted by Jeffrey Karp on 4/20/16 11:28 AM

Co-authors Emma Spath and Morgan M. Gerard

New Jersey is poised to become a national leader in renewable energy by virtue of pending legislation that would substantially decrease the Garden State’s greenhouse-gas emissions through an ambitious Renewable Energy Portfolio Standard (RPS). An RPS is a regulatory mandate that requires utility companies to obtain a certain percentage of the energy they sell from renewable sources such as wind and solar, or purchase renewable energy credits (RECs) from qualifying energy sources. Recently passed by the State Senate, a new bill would require utilities to source 80 percent of their electricity from renewable energy by 2050.  If the General Assembly passes the bill and it survives the pen of Governor Christie, utilities must procure 11 percent of their electricity from renewables by 2017, with an increase every five years of approximately 10 percent until the 80 percent threshold is reached in 2050.

Although New Jersey passed its original RPS mandate in 1999, and has since updated its program to reach 20 percent by 2020-21 (including a solar energy “carve out” requirement of nearly 4 percent), the ambitious new bill faces an uncertain outcome. First, although the bill already has passed one legislative chamber, the Senate vote was strictly divided along party lines.  Second, the General Assembly, which is the next destination for S1707, delayed voting on a similar Senate bill in December 2015.  However, this General Assembly, like the Senate, has a Democratic majority; thus, it seems likely that the bill would pass.  Finally, the bill faces a veto-threat by Governor Christie, which could be overcome by a two-thirds majority in both houses.  In this scenario, a lack of bi-partisan support could doom the legislation due to a failure to obtain the requisite super-majority vote to overturn a veto. 

The bill also may be perceived as political by some or a “hot potato.” In addition to an increased RPS mandate, the legislation would allow the Board of Public Utilities (BPU) to establish an “emissions portfolio standard applicable to all electric power suppliers and basic generation service providers, upon a finding that [t]he standard is necessary as part of a plan to enable the State to meet federal Clean Air Act or State ambient air quality standards.”  The provision may reflect the State Senate’s desire to assure New Jersey’s compliance with President Obama’s Clean Power Plan, an Environmental Protection Agency (EPA) regulation presently under court review that seeks to limit greenhouse gas emissions under authority of the Clean Air Act.  In an omnibus litigation pending before the United States Court of Appeals for the D.C. Circuit, twenty-seven states, including Governor Christie’s administration, seek to block the Plan’s implementation.  Recently, the Supreme Court stayed the regulation and suspended any deadlines for state compliance until resolution of the litigation.

Another possible objection to the N.J. bill—based on the reaction to a similarly aggressive RPS in California—may be its potential significant implications for the power grid. A review of a study concerning the potential impact of California’s plan to increase renewables to 50 percent by 2030 provides insight into the challenges that such measures may pose. That study found that an aggressive RPS could result in over-generation of renewable energy. The study showed that once California reaches a 50 percent RPS, excess power would be generated for 23% of annual hours.  Such an occurrence could result in grid forecast uncertainty, which is very costly for utilities.  Thus, New Jersey lawmakers instructed the BPU to concomitantly evaluate how to ameliorate solar energy volatility. It may behoove the BPU to also look at longer-term grid strategies to mitigate the substantial increase in renewable energy.  Such viable mitigative methods may include requiring steps such as energy storage, smart inverters with future solar photo-voltaic installations, or encouraging a diverse renewable energy portfolio.  While each of these measures may come with its own political baggage, the consideration of such grid solutions may be the palliative that enables New Jersey to substantially increase its RPS.

Topics: Energy Storage, Solar Energy, Renewable Energy, clean power plan, Wind Energy, renewable portfolio standard, Clean Air Act, New Jersey, Grid Security

U.S. EPA Earns Early Victory in Opponents' Challenge to Clean Power Plan

Posted by Jeffrey Karp on 1/22/16 5:47 PM

Co-authors Van Hilderbrand and Morgan M. Gerard

On January 21, the United States Environmental Protection Agency (U.S. EPA) won an initial victory as the D.C. Circuit refused to grant opponents a stay of the Clean Power Plan (CPP or Rule).

Clean_Power_Plan_Legal_Challenge.jpgThe Rule, promulgated pursuant to section 111(d) of the Clean Air Act (CAA), limits carbon dioxide emissions from existing fossil fuel fired electric generating plants (generating units).  The CPP’s goal is to cut emissions by 32 percent from 2005 levels by 2030, and each state is provided an emissions reduction target. Qualifying state emissions reductions under the Rule generally prompt the retirement of coal plants and the greater adoption of natural gas and renewable resources.  States must submit their implementation plans (SIP) in 2016 demonstrating that they will achieve the requisite emissions reduction by 2022, or request a two-year extension. However, if a state fails to submit an adequate implementation plan by the 2016 due date or request an extension for plan development until 2018, U.S. EPA will assign a federal implementation plan (FIP) that will enable that state to meet its emissions reduction target.

The timing of SIP submittal is a critical element in achieving the Rule’s objective of curbing emissions.  Thus, if the challengers had obtained a stay of the Rule’s effective date, the Agency’s ability to demand compliance by states with the SIP submittal date may have been jeopardized.

Hours after the regulation was published in the Federal Register, 27 states filed more than 15 separate cases against the U.S. EPA that were consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. Eighteen other states, including New York and California, have joined in the consolidated lawsuits in support of the CPP. Although the final disposition of the Plan is still uncertain, the Rule remains in effect unless and until it is set aside by a court.

The opening maneuver of the Rule’s opponents was to request a stay with the goal of halting SIP submittal and U.S. EPA’s authority to enforce deadlines until the court ruled on the merits. The Agency and its allies prevailed in this initial squirmish, as the court found the Rule’s challengers “did not meet the stringent standard to grant a stay pending court review.” The result of the Court’s ruling is that all states must begin preparing to meet the CPP’s requirements or risk EPA’s imposition of a FIP.

Topics: Carbon Emissions, CPP, Clean Power, clean power plan, Environmental Protection Agency, EPA, State of West Virginia v. EPA, EPA Victory, West Virginia, Stay of the Rule, Climate change, Clean Air Act, Section 111(d), Global Warming, Greenhouse Gas Emissions, Stay

First Democratic Presidential Debate Recap— Where Do the Candidates Stand on Energy?

Posted by Jeffrey Karp on 10/16/15 9:59 AM

American Republican and Democratic party animal symbolsIn stark contrast to the Republican match up in September, energy and climate change related policy was freely discussed during the first Democratic presidential debate. For energy industry participants, the question becomes: how will climate policies affect the kinds of projects that get built and financed if a Democrat becomes President? The takeaway after surveying the positions of the candidates presented on Tuesday night is that Americans would be building a great deal of new energy infrastructure.

Martin O’Malley: Former Maryland Governor O’Malley advocated for a green energy revolution, and put forward a plan to move the country to a 100% clean electric grid by 2050. He claims that his clean energy plan would create 5 million jobs along the way. Stressing the fact that he was the only candidate to set forth a compressive energy plan, Mr. O’Malley took issue with President Obama’s current “all of the above” strategy. In particular, Mr. O’Malley’s plan would ease financing for solar and wind energy project development by extending tax incentives through the Investment Tax Credit (ITC). His plan also calls for stricter rules to curb greenhouse gas emissions and to encourage energy efficiency. Although hawkish on clean energy, Mr. O’Malley did not address the recent domestic oil and natural gas boom. He also did not address the country’s transition towards 100% clean energy while maintaining base load and peaking.

Jim Webb: Former Virginia Senator Jim Webb was the outlier pro coal candidate on the slate who also supports offshore drilling and the Keystone XL oil pipeline. He touted his Senate record as an “all of the above” energy policy legislator, and highlighted his introduction of alternative energy legislation. Mr. Webb also pledged his strong support for nuclear energy as both clean and safe.

Bernie Sanders: Senator Bernie Sanders challenged Mr. Webb on the issue of nuclear energy as “safe,” but wants to act aggressively on the climate change front. Although, Mr. Sanders did not promote a plan for the nation’s energy future, he advanced a bill in July in the Senate that would make solar energy more accessible to low income families. The Sander’s bill would allocate $200 million of Department of Energy loans to offset the upfront costs of installing solar facilities.

Hillary Clinton: Former Secretary of State Hillary Clinton did not address energy policy, but seems comfortable following an “all of the above” strategy. She is a defender of the Clean Power Plan. According to Mrs. Clinton’s “climate change fact sheet,” she would extend the ITC and expand installed solar capacity to 140 gigawatts by the end of 2020, a 700% increase from current levels. Mrs. Clinton’s plan lacks a strategy on the natural gas shale boom occurring in America, but she just may be holding back discussing her complete energy policy as she did with her decision to oppose the Keystone XL oil pipeline.

Lincoln Chaffee: Former Rhode Island Governor Lincoln Chaffee stated that he consistently has taken on the coal lobby during his time in the Senate and named the lobby the enemy he is most proud of combating. Although he didn’t have an opportunity to comment on energy policy, his campaign website states that he always has opposed the Keystone XL oil pipeline, as well as drilling in the Artic region.

Energy and climate change issues will remain a priority topic for the Democratic candidates on the campaign trail and it will be interesting to watch the role these issues play in future debates. Both parties appear to support building more energy infrastructure. However, they seem to diverge on the types of projects that would be promoted, with Republicans leaning towards building oil and gas pipelines with varying stances on renewables while Democrats favor solar energy development. Although the primary season has just begun and it is early in the election cycle, participants in the energy sector should be mindful of how the candidates’ energy policies may impact their business model.

Topics: Carbon Emissions, Energy Policy, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy, Wind, Oil & Gas

Can the Clean Power Plan Achieve Its Carbon Emission Reduction Goal Through Increased Renewable Energy Development?

Posted by Jeffrey Karp on 9/22/15 10:41 AM

photovoltaic cells and high voltage post.

Co authors Van P. Hilderbrand and Morgan M. Gerard

As the dust settles amidst the hoopla and angst surrounding the Environmental Protection Agency’s (U.S. EPA) final promulgation of President Obama’s Clean Power Plan (CPP or the final Plan), a theme has emerged – renewables are expected to be a major energy source. From proposal in 2014 to U.S. EPA’s final rule in August 2015, the share of renewables in the agency’s forecast of the U.S. power sector in 2030 jumped from 22 to 28 percent. Concomitantly, the final Plan further highlights the anticipated strong presence of renewable energy resources in the states’ future energy mix.

The question now arises whether enough renewable energy resources can be built to enable the states' to meet their respective carbon emissions from power plants. The answer depends on whether investors will have adequate incentives and financing mechanisms to “prime the pump” and generate the requisite megawatts of renewable energy to help meet the final Plan’s emission reduction targets.

The Final Plan’s Approach to Carbon Emission Reduction

The CPP’s goal is to reduce carbon emissions from stationary energy-generating sources such as coal and gas power plants. In the final Plan, U.S. EPA assigned each state a specific emissions reduction target. The agency then provided the states with discretion and flexibility to decide how to meet those targets within the context of the CPP’s designated “building blocks” (discussed later). However, if a state fails to submit an adequate implementation plan by the 2016 or request an extension for plan development until 2018, U.S. EPA will assign the state a federal implementation plan (FIP) that will enable that state to meet its emission reduction target. A sample FIP, which creates an opted-in cap-and-trade marketplace, was released with the final Plan on August 3, 2015.

Establishment of Emissions Reduction Rates: Section 111(d) of the Clean Air Act requires that U.S. EPA determine the “best system of emissions reduction” (BSER) for pollutants such as carbon dioxide. To achieve this result, the agency examined the technologies, strategies, and measures previously implemented by states and utilities to reduce emissions at existing power plants.

Power NightThis examination yielded three “building blocks” in the final rule that a state may use to meet emission reduction targets. It may improve heat rates at existing power plants to make them more energy efficient (Building Block 1); use more lower-emitting energy sources like natural gas rather then higher-emitting sources like coal (Building Block 2); and/or use more zero-emitting energy sources like renewable energy (Building Block 3). U.S. EPA then considered the ranges of reductions that could be achieved at existing coal and natural gas power plants at a reasonable cost by application of each building block.

The building blocks were applied to coal and natural gas plants across the three U.S. interconnection regional grids - the Western interconnection, the Eastern interconnection, and the Electricity Reliability Council of Texas interconnection. The analysis conducted by U.S. EPA produced regional emission performance rates - one for coal plants and one for natural gas plants. The agency then chose the most readily achievable rate for each source (both calculated from the Eastern interconnection) and applied the rate uniformly to all affected sources nationwide to develop rate-based and mass-based standards. Although this approach created uniformity, nonetheless, each state still was assigned a different emissions target based on its own specific mix of affected sources.

Plan Implementation: As noted, U.S. EPA has enabled the states to decide the manner in which to meet their reduction targets. Thus, the CPP does not mandate specific changes to a state’s fuel mix; rather, states are free to determine how best to meet their emission reduction targets. For example, as applicable, a state may focus solely on Building Block 1 and making efficiency improvements at existing coal and natural gas plants. Conversely, a state may focus on Building Block 3 and incentivize development of more zero-emitting energy sources. Or, all three of the building blocks may be used to achieve a state’s targets.

The CPP’s approach to achieving compliance is notable because critics have argued that, under Section 111(d) of the Clean Air Act, U.S. EPA cannot regulate beyond the “fence line” (e.g., the agency can only regulate a power plant itself, and cannot count unrelated energy efficiency measures and renewable energy development toward achieving compliance). In an apparent effort to shield the CPP from legal challenges, the agency removed demand-side energy efficiency improvements as a building block in the final rule. Moreover, by not forcing the states to utilize a particular mechanism to achieve compliance, the agency’s decision-makers seem to believe the final Rule is better positioned to withstand the inevitable appeals process.

  • Larger Role Expected for Renewables: U.S. EPA contemplates that renewable energy will play a prominent role in the evolving U.S. power sector. The draft rule estimated that by 2030, 22 percent of the country’s electricity would be generated by renewable resources. In the final Plan, EPA estimates the share of renewables at 28 percent. According to the agency, this increase is a function of market forces and a continued decline in energy prices. It also is in line with the final Plan’s deeper cuts to emissions overall. The final Plan targets a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, whereas the proposed rule had a 30 percent reduction goal. Nonetheless, whether sufficient renewable energy resources are developed to help meet the final Plan’s emission reduction targets depends on whether sufficient incentives exist and risks can be adequately minimized. Potential investors dislike uncertainty, especially when it involves committing large amounts of funding to development projects over a lengthy time horizon.
  • Incentives for Renewables: The final Plan seeks to incentivize the deployment of renewable energy through early renewable procurement under EPA’s Clean Energy Incentive Program, which makes available additional allowances or emission credits for investments in zero-emitting wind or solar power projects during 2020 and 2021, prior to the rule's 2022 implementation date. As discussed below, other incentives may be provided by the U.S. Department of Energy and Congressional action on favorable tax legislation.
  • Coordinating Role with the Department of Energy: President Obama recently announced a coordinating role for the Department of Energy (DOE) in connection with the CPP. The DOE’s Loan Programs Office (LPO) will make available up to one billion dollars in loan guarantees to support commercial-scale distributed energy projects, such as rooftop solar with storage and smart grid technology. Expanded funding also is available though DOE’s Advanced Research Projects Agency–Energy (ARPA-E), which has awarded $24 million for 11 high-performance solar photovoltaic power projects.
  • Seeking Congressional Clarity on Tax Credits: By extending the compliance deadlines from 2016 in the proposed Plan to 2018 in the final Plan, U.S. EPA provided states with additional time to build out the necessary infrastructure to achieve compliance. The deadline extension also provides more time for Congress to establish clarity regarding the federal investment tax credit (ITC). The ITC presently enables investors to credit 30 percent of a project’s costs to their taxable basis, but the credit is scheduled to decrease to 10 percent on January 1, 2017 without a Congressional extension.

70,000 solar panels await activation.For renewable energy, and particularly solar, to play a seminal role in effectuating the final Plan requires a functioning solar market. Solar projects are characterized by high upfront costs and long payout periods. Without supportive policies like the ITC, solar developers may face difficulties finding suitable power purchasers, thus negatively impacting the ability to procure financing. Further, utilities may be unable to bear the full costs of the CPP without assistance from the private market. Utilities typically procure power from already-financed projects. If required to underwrite solar on their own, utilities may need to finance such projects using their credit rating and balance sheet, thus passing along infrastructure costs to ratepayers.

Although some solar proponents believe the ITC step-down will not negatively affect the market’s vitality because the price of renewables is now cost competitive enough to survive the shift, others in the industry dispute this view. Irrespective, the upcoming ITC step-down creates uncertainty in the market. The Production Tax Credit (PTC), generally associated with wind projects, recently passed through the Senate Finance Committee, provides the potential for a similar ITC revival. With the additional compliance period granted to the states in the final rule, Congress now has the opportunity to provide clarity by acting favorably on both of these tax credits by late-2016.

State Incentives

Renewable energy-friendly states have enacted legislative, promulgated regulatory enforcement mechanisms, and provided financial incentives to encourage the development of renewable energy resources. For example, some states participate in cap-and–trade programs (e.g., Regional Greenhouse Gas Initiative (RGGI)), have enacted renewable energy portfolio standards, provide favorable treatment under public utility commission regulations (e.g., favorable net-metering schemes and third-party financing for renewable energy development), and offer other state or local tax credits. The impact of such programs on carbon emission reduction is reflected in the lower targets assigned under the final Plan, for example, to California and Massachusetts - 13.2 percent (126 lbs. CO2 / MWh) and 17.8 percent (179 lbs. CO2 / MWh), respectively.

Despite Emphasis in the Final Plan, Uncertainty Still Remains Regarding Renewables Development

The final Plan provides a level of regulatory clarity, but the path forward remains uncertain in light of looming legal battles regarding whether the Plan oversteps U.S. EPA’s authority under the Clean Air Act and political divisiveness in Congress. It also is unknown whether the next U.S. President will support the rule or try to dismantle the Plan.

These uncertainties, coupled with concern over the future of the ITC, may lead to substantial implementation delays, or even complete eradication or substantial revision of the final Plan. Even if the CPP withstands challenge, nonetheless, some states may be unable to meet their emission reduction targets if adequate renewable energy financing mechanisms have not developed by 2018, the time by which state's must submit their emission reduction plans. Understandably, potential investors may be leery about committing substantial funds to renewable energy projects unless or until the likely outcome of legal challenges to the CPP can be better assessed, and regulatory and political risks more accurately calculated.

While renewable energy resources seem to be a favored approach under the final Plan, a comprehensive strategy that effectively facilitates the financing of such projects is essential to achieve the Plan’s emission reduction targets.

Topics: Utilities, Carbon Emissions, Energy Policy, Structured Transactions & Tax, Energy Efficiency, Power Generation, Microgrid, Energy Finance, Legislation, Distributed Energy, Energy Management, Renewable Energy

Offshore Wind Update: Is the Tide Finally Turning for Offshore Wind in the United States?

Posted by Jeffrey Karp on 9/10/15 9:54 AM

Offshore Wind Turbines ThinkstockPhotos-472311594

Co-authors Jim Wrathall and Van Hilderbrand

For more than a decade, offshore wind has been viewed as the next big thing in the U.S. energy mix. In Europe, billions of euros have been invested in 82 offshore wind farms — 10.4 GW of capacity, according to the European Wind Energy Association (EWEA) — roughly equivalent to the power production of 10 large nuclear power plants. Meanwhile, the United States market stalled completely, mired in regulatory uncertainties, litigation, and lack of financing.

However, there are several reasons to believe the sector has reached an inflection point in 2015. Macro energy supply, economic considerations, and climate-related concerns support development of U.S. offshore wind projects (now more than ever), particularly in the New England and mid-Atlantic regions. Traditional coal-burning power plants are rapidly being retired, and they’re not being replaced. Offshore wind is one of the few resources offering the necessary scale to fill the coming void. Wind energy is also becoming far less costly, given technology improvements, and is increasingly supported by federal and state policies addressing climate change.

Can the U.S. offshore wind market finally turn the corner? Recent developments suggest that it could.

Please see our publication in Wind Systems Magazine starting at page 14 for more information on offshore wind: Is the Tide Finally Turning for Offshore Wind in the United States?

Topics: Renewable Energy, Wind

Offshore Wind Has Come to the U.S.; EPCs Can Help It Gain Momentum

Posted by Jeffrey Karp on 8/27/15 10:08 AM

Co-authors Jim Wrathall, Van Hilderbrand and Morgan Gerard

Offshore wind energy could add 4.2 million megawatts to the generating capacity of the U.S., according to the National Renewable Energy Laboratory, but the U.S. market has stalled almost completely, hindered by regulatory uncertainties, political opposition, litigation and a lack of available financing. Recently, however, several broad market and regulatory themes have emerged—record low energy prices, technology improvements, the start of construction of the first commercial offshore project near Rhode Island’s Block Island and increasingly favorable federal and state policies for renewables such as the Clean Power Plan—that give reasons to believe that the sector has reached an inflection point in 2015. The question now is how to build and sustain the momentum.

Please see our publication on ENR.com for more information about offshore wind: Offshore Wind Has Come to the U.S.; EPCs Can Help It Gain Momentum

Topics: Utilities, Energy Policy, Structured Transactions & Tax, Power Generation, Energy Finance, Legislation, Wind

Managing the Risks of Renewable Energy Projects in Developing Countries

Posted by Jeffrey Karp on 5/18/15 10:46 AM

Risk Reward-180977510

Co-author Morgan M. Gerard

Driven by rapid expansion in developing countries, renewables are becoming a significant source of the world’s power. According to the United Nations Environmental Programme’s (UNEP) 9th “Global Trends in Renewable Energy Investment 2015,” investment in developing countries was up 36% in 2014, totaling $131.3 billion. China ($83.3 billion), Brazil ($7.6 billion), India ($7.4 billion) and South Africa ($5.5 billion) were all in the top 10 of investing countries while more than $1 billion was invested in Indonesia, Chile, Mexico, Kenya and Turkey. As renewables continue to expand into developing nations, it is incumbent upon developers to understand the risk features of some of these environments.

Best Practices for Renewable Development in Developing Countries

Geo-Political Risk

Renewable developers need to be mindful of the politics when they locate their projects. Unstable governments may expropriate projects, change laws, or even change regimes due to war or internal uprisings during the life of a long-term Power Purchase Agreement (PPA). Political risk insurance may be available, but coverage plans may be costly or incomplete. Partnering with an international organization like the World Bank or International Finance Corporation (IFC) may ease some of these worries since even unstable regimes look to these international organizations for financial stability and support in the global markets in the event of government default.

Legal Risk

Developing countries may lack the general rule of law that provides for predictability and transparency of business transactions. In some countries, bribing government officials to obtain required permits may be the norm. Additionally, local courts may not offer developers relief for their claims as judicial officers may also request bribes or be closely aligned with the government decision-makers. U.S. companies need to be mindful to steer clear of engaging with such officials to avoid allegations of violating the Foreign Corrupt Practices Act (FCPA). Corruption risk may extend beyond just bribery; there are reported instances of local counsel threatening projects and extorting foreign developers to pay increased legal fees.

Currency Risk

A developing country’s local currency may fluctuate greatly, and if their currency inflates the project’s revenue stream loses its value in international markets. To protect against currency risk, developers should either negotiate their PPAs to receive payment in a predictable currency or hedge this risk. Although, financial institutions offer exchange rate hedging instruments, such as currency swaps or currency futures options, the upkeep on these agreements may be expensive if the developer negotiates a good position on a volatile currency.

Physical Risk

In negotiating the terms of PPAs and debt financing agreements, project sponsors should consider the potential impact on their projects of adverse weather/climate conditions or other natural disasters. Thus, developers should be mindful that, if for example completion or ongoing operation of their projects could be delayed or interrupted by flooding or other impacts from a major storm, they may need to invoke a force majeure clause due to an unavoidable event or occurrence.

Counterparty Risk

The offtaker in many of these countries may be the government-sponsored utility. If the utility refuses to accept the project’s renewable power or fails to make payments, developers could find themselves seeking relief in a government-sponsored court. Developers should ensure that their PPA agreements provide for arbitration in a neutral venue to help alleviate this concern. Additionally, involvement by the World Bank or IFC could help developers navigate such situations.

If you have any questions regarding assessing risk or developing risk management strategies for renewable energy projects in developing countries, please contact our Energy Finance practice.

 

Topics: Energy Policy, Energy Finance, Distributed Energy, Renewable Energy, Public/Private Partnership

Puerto Rico—Lots of Sunshine, Little Solar Energy, but a Bright Future

Posted by Jeffrey Karp on 5/15/15 9:30 AM

Sunny, tropical Puerto Rico may finally have a break through in solar development and investment. Although the island represents a solar opportunity today, renewable generation only represented 1% of the Caribbean territory’s energy mix in 2012, despite high electricity prices and renewable friendly policies. The reason for the lack of solar development is likely due to poor investor confidence in the local utility as offtaker.

Puerto Rico Post- condado beach-147006704Despite a troubled recent past, the island’s solar market outlook appears to be brightening. In 2014, the Puerto Rico Electric Power Authority (PREPA) lifted its ban on renewable procurement and reached final agreements with six solar companies that had to renegotiate contracts approved under the former administration. The moratorium on entering new offtake agreements was put in place the previous year as PREPA sought to renegotiate a number of finalized Power Purchase and Operating Agreements (PPOA), which all had materially the same terms with the exception of the pricing of the renewable energy credits (RECs), to help alleviate some of its debt concerns. The signed PPOAs offered solar developers 15¢ per kilowatt-hour (kWh) and a REC of 2.5¢ to 3.5¢ a kWh. Moreover, the contracts contained an escalation factor of about 2% annually, which was applied to both rates. Although unconfirmed, prior to its moratorium, PREPA’s new offer was 10.4¢ per KWh, plus a variable energy charge of 2.6¢. This 2.6¢ charge would increase 2% annually.

Additionally, despite a credit downgrade in 2014, earlier this year a group of U.S. bondholders offered to invest $2 billion in energy production and other measures to help improve the finances and infrastructure of Puerto Rico’s power company amid fears it will go bankrupt. Puerto Rico has few conventional energy resources, and petroleum imports are the dominant energy source for the island. During the time of high petroleum prices, PREPA sought to improve its generating assets and has struggled to pay back the $9 billion in bondholder debt issued to finance the upgrade, resulting in a debt downgrade and a negative outlook by Moody’s Investor Services.

The increased investor participation with PREPA may serve to foster solar development projects under the mandatory Renewable Portfolio Standard (RPS) that became effective this year. The RPS requires that PREPA obtain 12% of its electricity from renewable sources starting in 2015, scaling up to 15% by 2020 and 20% by 2035. If bondholders can stabilize PREPA as an offtaker, the risks for solar investors and developers may become less precarious in the sunny territory. Moreover, there may be workable solutions to avoid PREPA altogether, such as entering into PPOAs with stable offtakers. For example, Ballester Hermanos, a food, wine, spirits and food-service distributor, entered a PPOA with Yarotek, a Miami based solar generation firm, to install a 874-kilowatt, roof-mounted solar array on Ballester Hermanos’ distribution warehouse. Additionally, there may be microgrid opportunities as PREPA may support alternative grid infrastructure given its financial constraints.

Please contact any member of our energy practice if you have any questions on PREPA or the renewable landscape in Puerto Rico.

 

 

Topics: Utilities, Energy Policy, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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