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

Symposium Spotlights Natural Resource Damage Regulations Under DOI Review

Posted by Jeffrey Karp on 10/9/18 10:00 AM

By Jeffrey Karp and Kevin Fink

Section 301(c) of the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) authorizes the Federal government, States and federally recognized Indian Tribes to act as "trustees" on behalf of the public to pursue claims to redress injury or destruction of natural resources caused by hazardous substance releases. The measure of damages is calculated based upon the cost to restore or replace the injured or destroyed natural resources. Trustees also may recover compensation for services the resources would have provided the public pending restoration, as well as the reasonable cost of assessing injury and determining appropriate restoration.GettyImages-172777395

On August 27, 2018, the U.S. Department of Interior ("DOI") published an Advanced Notice of Proposed Rulemaking ("ANOPR") regarding "Natural Resource Damages for Hazardous Substances." The notice seeks public comment and suggestions regarding possible modifications to existing regulations for conducting natural resources damage (NRD) assessment and restoration for hazardous substance releases. The notice was published in response to CERCLA's biennial review requirement and President Trump's Executive Order 13777, which directed federal agencies to establish Regulatory Reform Task Forces to evaluate existing regulations and make recommendations regarding repeal, replacement, or modification. The public comment period for the ANOPR closes on October 26, 2018.

Concurrent with the ANOPR comment period, a Natural Resources Symposium was held at the George Washington University Law School by the Ad-Hoc Industry Natural Resource Management Group. The panel and symposium participants included representatives from the Department of Interior, Department of Energy, Department of Commerce, U.S. Environmental Protection Agency and state agencies. Representatives of non-government organizations, corporations, attorneys in private practice, scientists and economists also were among the panelists and symposium participants. In addition to discussing the current NRD regulations and caselaw under both CERCLA and the Oil Pollution Act ("OPA"), participants offered suggestions to reform those regulations, which largely tracked the issues raised by DOI in its ANOPR.

GettyImages-183844614The ANOPR requests suggestions from the public to improve efficiency and cost effectiveness of NRD assessments, as well as comments on issues of particular interest to DOI. One such issue, "Simplification and Plain Language," seeks comment regarding concerns that the CERCLA Natural Resource Damage Assessment and Restoration ("NRDAR") Program regulations are too complex and repetitive, especially when compared to the Natural Resource Damage Assessment regulations issued under the OPA. DOI also seeks comment on revising the CERCLA NRDAR regulations to encourage early scoping of restoration opportunities at NRD sites, especially at a point in the assessment process when scoping would be most cost effective and appropriate. Moreover, DOI seeks public input on the application of advance restoration and restoration banking concepts in the context of NRD regulation. The current CERCLA NRDAR regulations do not provide any explicit reference to  the use of advance restoration or restoration banking techniques.

At the Symposium, an environmental consultant suggested that restoration should not be viewed as an "exact science" with set methods or approaches for preparing restoration plans. Instead, stakeholders should establish an end goal and then identify creative and efficient methodologies to meet it. Efficiency was oft cited by participants as a necessary linchpin to speed-up the restoration process, which presently can take years or even decades to complete. Another participant suggested that a cooperative assessment process among responsible parties and trustees would be helpful to catalyze the restoration process. Technical working groups staffed by scientists and economists, without attorney involvement, were proposed to speed up restoration and decrease overall transactional costs.

Several participants also suggested adding a restoration banking option to the NRDAR regulations. Restoration banking refers to an arrangement under which a natural resource trustee accepts restoration credits from a settling party. The restoration credits, typically produced by a third party, would be provided in addition to or in lieu of NRD payments and/or the performance of restoration work, depending on the particular circumstances. In past postings, we’ve described the basic statutory and regulatory framework supporting the increasingly popular use of credits derived from restoration, or "mitigation," banking under Section 404 of the Clean Water Act.

The comment period on DOI's ANOPR remains open until October 26, 2018. Professionals working in the NRD arena should take note of potential changes that may occur and new opportunities that may arise if DOT decides to conduct a rulemaking to modify the NRD assessment and restoration regulations.

 

Topics: Environmental Law, Environmental Policy

Grid–Scale Energy Storage: Stakeholder Participation Key to Successful Implementation of FERC Order 841

Posted by Jeffrey Karp on 8/8/18 5:11 PM

In recent posts, we have discussed how Order 841 issued by the Federal Energy Regulatory Commission (“FERC”) on February 15, 2018 is expected to create new opportunities for the expansion of grid-scale (“in front of the meter”) energy storage. Order 841 is intended to encourage deployment of energy storage by addressing participation of energy storage resources in wholesale electricity markets operated by Regional Transmission Organizations (“RTOs”) and Independent System Operators (“ISOs”).  

Since FERC issued Order 841, it has become apparent that RTOs and ISOs will face challenges in revising their tariffs to develop participation models that better incorporate energy storage into the market. Stakeholders need to participate in this process, as there are many issues left open to future resolution. We have highlighted below some of these issues and their potential importance to stakeholders. 

  • State v. Federal Jurisdiction. RTOs and ISOs are uncertain about the overlap of federal and state authority posed by Order 841, particularly at the distribution level (as opposed to the wholesale level.)  A FERC petition filed by PJM Interconnection LLC on April 9, 2018 to address state clean energy subsidies brought to the forefront the emerging conflict between state energy policies and federal regulation of wholesale electricity markets. State and federal interests do not always align -- states have the authority to give preference to certain types of energy resources (e.g., renewables), while FERC has the obligation to ensure that electricity generated by these resources is sold at just and reasonable rates.
  • Resilience. FERC (and many states) are seeking to expand the role of energy storage in furthering the goal of grid resiliency. This issue has taken on increased importance given the lack of enthusiasm for proposals to compensate coal and nuclear facilities that maintain on-site fuel reserves.
  • Transmission and Generation Infrastructure. Advocates of energy storage contend that it is a solution to both transmission and generation needs. Questions remain, however, regarding the adequacy of current transmission incentives policies, and whether they are sufficiently inclusive.
  • Financial Viability of Energy Storage Projects. Notwithstanding the issuance of Order 841, many investors and lenders are not persuaded yet that energy storage projects will (1) provide sufficiently long-term, concrete and reliable revenue streams; (2) offer technologies that are well-proven and reliable; and (3) achieve adequate participation by creditworthy counterparties or those that have access to financial assurance instruments such as performance insurance.
  • Complexity of Participation Models. Because energy storage projects may generate economic benefits through one or more different value streams, the preparation of participation models by RTOs and ISOs will be challenging. Stakeholders will need to find a cost-efficient way to get a “seat at the table” with policy makers and regulators managing this process.
  • Federal Tax Policy. Currently, the federal investment tax credit is only available to energy storage projects that are an inherent part of a larger renewable energy project. This is believed to have created an artificial distinction between stand-alone energy storage projects and “paired” projects, and a disincentive to invest in the former.
  • Need for Policies that are “Technology Agnostic.” Although FERC Order 841 is “technology agnostic” on its face, subsequent debate on implementation has focused almost exclusively on batteries. States must be encouraged to offer a “level playing field” to historical approaches such as “pumped storage,” as well as the newer generation of energy storage technologies including advanced battery storage.
  • Permitting. Policy makers and regulators need to establish flexible requirements that allow energy storage projects to be permitted as either generation or transmission projects. Environmental permitting requirements should be reasonable so as not to deter innovation.

Implementation details of the participation models will be driven at the RTO/ISO level. Compliance filings by RTOs and ISOs originally were due on December 3, 2018, but on April 13, 2018, FERC issued a “Tolling Order” to allow it more time to consider various motions for clarification and requests for rehearing filed in response to Order 841. Nonetheless, system operators are moving forward to comply with the requirements of Order 841. The policies adopted by RTOs, ISOs and states in establishing participation models likely will have a significant impact on the advancement of renewable and energy storage resources. Thus, stakeholder involvement is critical.

Topics: FERC, Order 841, Energy Storage

Puerto Rico Update: A Busy Week as House Committee Holds Hearing on PREPA Oversight and Reform, and PREPA Reaches Preliminary Agreement with Bondholders

Posted by Jeffrey Karp on 8/6/18 4:18 PM

By Jeffrey Karp and Kevin Fink

As discussed in our posting covering continuing challenges to rebuild Puerto Rico’s electrical grid, the Puerto Rico Electric Power Authority (“PREPA”) has inhibited the recovery and redevelopment of the Island’s energy system. On July 25, 2018, the U.S. Congress House Committee on Natural Resources held an oversight hearing to discuss the “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery.” A panel of five witnesses – Bruce Walker (U.S. Department of Energy, Assistant Secretary of the Office of Electricity), Eduardo Bhatia (Puerto Rico Senate Minority Leader) and three energy and infrastructure advisors and consultants[1] – were present to testify and answer legislators’ questions. Puerto Rico’s Governor Ricardo Rosselló also was invited, but chose not to attend.

The hearing largely served to identify problems the Commonwealth of Puerto Rico currently is facing in seeking to rebuild its electrical grid, and provide perspectives regarding potential management, financial, and technical solutions. An issue repeatedly addressed was PREPA’s mismanagement of the power system, and its appropriate role in future decision-making regarding the system. Senator Bhatia emphasized PREPA’s mismanagement over the past 70 years. While he did not suggest eliminating PREPA entirely, he stressed the need for demonopolization, depoliticization, and the creation of an open energy market in which consumers could obtain energy through the deployment of microgrids. Microgrids allow for renewable energy to be generated and distributed close to the consumer, and may prove a more feasible option compared to traditional fossil fuel energy distribution, which requires transmission lines to cover many miles. If Puerto Rico’s electric grid were rebuilt, it would require construction, maintenance, and repair of transmission lines across the mountainous terrain in the populous northern portion of the island – including the capital San Juan – across to the southern portion of the Island, where most of the power generation occurs. Support for microgrid implementation, as is discussed in our prior posting, was echoed by the panel’s other witnesses.

Puerto Rico

Although absent from the hearing, Governor Rosselló did submit written testimony. On June 20, 2018, the Governor signed legislation, House Bill 1481, that provides a path forward for private sector involvement in energy generation and distribution. Regarding generation, the intent of the legislation is to either fully privatize PREPA’s assets or develop public-private partnerships. The legislation also provides that the electrical assets belong to the Commonwealth, but a consortium of companies would oversee energy distribution. The new law grants a period of 180 days for a special commission composed of the members of the Puerto Rican Senate, House of Representatives, and the Executive Branch to design a public policy and regulatory framework that will be used as a guide to award contracts and govern private sector transactions.

In his written testimony, the Governor stated that private sector involvement in the Island’s electric grid will assure a “modern, reliable, resilient, sustainable, and affordable electric system…catalyz[ing] sustained and long-term economic growth and job creation.” Several witnesses also favored privatization, which they opined may partially resolve concerns about PREPA’s history of mismanagement. The Governor further stated that, while support from the federal government is welcome, “additional legislation vastly expanding the role of the federal government… is simply not warranted.” Senator Bhatia, DOE Secretary Walker, and various House committee members agreed with the Governor’s comments that federalization of PREPA is not – and should not be – a goal of the U.S. government.

Nonetheless, the witnesses and many representatives agreed that some type of additional oversight of PREPA is necessary due to its insolvency, low credit rating, political entanglements, and history of mismanagement. One witness, Thomas Emmons of Pegasus Capital Advisors – who oversees his company’s renewable energy infrastructure investments – stated that PREPA must eliminate its debt and improve its credit to encourage private sector investment to help repower the Island. Following the hearing, on July 31, 2018, PREPA took a much needed step to improve its crippling financial condition; it reached a preliminary agreement with bondholders to restructure $9 billion of its debt. Notably, when asked at the hearing whether debt elimination and improved credit were the solution to the utility’s problems, Mr. Emmons responded that these steps are only a star; depoliticization and oversight of PREPA also are necessary.

Politics has long infiltrated PREPA’s decision-making and contributed to its organizational dysfunction. As recently as July 2018, the then current CEO of PREPA resigned stating it was “very clear [that] politics related to [his] compensation made it impossible for [his] contract to be fulfilled.” The PREPA Board then named a replacement, offering a higher base salary. Governor Rosselló took exception to the deal, publicly tweeting that the PREPA Board members must reduce the offered salary or resign – further illuminating the infusion of politics into the utility’s operation. The Board members offered their resignation, and Governor Rosselló appointed a new CEO who previously had worked at PREPA and was viewed as contributing to the agency’s mismanagement.

While the recent legislation seeks to partially privatize the Island’s electrical system, changes to PREPA’s management regime were not addressed. Episodes such as described above raise concerns that the utility’s institutional problems will continue to inhibit effective management practices.

The Committee hearing provided an opportunity for knowledgeable witnesses, federal government officials, and legislators to discuss the factors inhibiting the restoration and redevelopment of Puerto Rico’s electrical grid. While the extent of any further federal government involvement remains to be seen, there was a general consensus that oversight of PREPA’s management – removed from political influence – is a necessary starting point. Also potentially helpful is the preliminary agreement reached by PREPA with its bondholders, and approved last week by the Island’s Oversight Board, to restructure $9 billion of debt. If finalized, the agreement would serve as an important first step for PREPA to overcome its insolvency. And, if adequate oversight and management best practices finally are implemented at PREPA, the private sector may find Puerto Rico’s energy sector a more attractive investment opportunity.

Jeffrey Karp is a partner and Kevin Fink is a law clerk with Boston-based law firm Sullivan & Worcester LLP.         

[1] Thomas Emmons, Partner, Pegasus Capital Advisors; James Spiotto, Managing Director, Chapman Strategic Advisors LLC; David Svanda, Principal, Svanda Consulting.

Topics: Puerto Rico, U.S. House of Representatives, Microgrid, privatization

Puerto Rico: The Continuing Challenge to Rebuild the Island’s Power System and the Role of Microgrids in a Sustainable Future

Posted by Jeffrey Karp on 7/12/18 10:34 AM

By: Jeffrey Karp, Zachary Altman and Caroline Lambert

In the nine months since Hurricane Maria, substantial progress has occurred in bringing Puerto Rico’s power grid back online. Some consumers with access to solar microgrid systems regained power as soon as a few days after the storm, while others who relied on traditional energy sources had to wait for the power grid to be repaired. Solar microgrid systems are unique; they offer solar-powered electricity in parallel with the traditional energy grid but can also disconnect from the grid in times of crisis and provide solar-powered energy to a smaller subset of consumers.

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Ninety-five percent of the island’s consumers have had their electricity restored. Those still without power are concentrated largely in rural, hard-to-reach areas. In reality, though, while those without power number around 13,000, Puerto Rico’s entire population still is reeling from the effects of Maria. The damage sustained to homes and businesses remains overwhelming and quick fix solutions such as throwing tarps over gaping holes in roofs have become the status quo. Fear of recurring blackouts and the difficulty of persevering through the recovery process has fundamentally impacted the lives of Puerto Ricans. Thousands have fled the island, and the NY Times reported that many who remain have altered their everyday habits, such as only buying a few days’ worth of groceries at a time to guard against spoilage in the event of another power outage.

A variety of players have assisted in Puerto Rico’s power restoration efforts: the federal government, corporates, states and the Puerto Rico Electric Power Authority (“PREPA”).  Immediately after Maria, the U.S. Army Corps of Engineers (the “USACE”) and the Federal Emergency Management Agency (“FEMA”) spearheaded the restoration and repair efforts. The USACE provided personnel to coordinate and manage those activities and to perform engineering and disaster-related relief, which included the delivery of over 1,000 generators to the island. More than 700 of these generators, including three “mega-generators” large enough to power hospitals and critical facilities, remain on the island ahead of the hurricane season.

Also, the USACE, with monetary and logistical support from FEMA, contracted with companies such as Fluor Corporation to perform restoration projects. Fluor reports that it installed over 493 miles of conductor wire and repaired or replaced close to 7,800 power poles. Several other companies, including Tesla, Sonnen, and Blue Planet Energy, donated and installed solar microgrid systems near community centers, water pump stations, critical infrastructure centers, and hospitals, where power grid resilience is particularly crucial. Six weeks after Hurricane Maria, PREPA requested assistance from a number of mainland states, a process that often begins in anticipation of a natural disaster. Shortly thereafter, crews of engineers, workers, and supervisors, along with equipment and replacement materials, arrived from Arizona, California, Florida, Massachusetts, and New York, and worked alongside the USACE and PREPA. 

Despite its poor procurement track record, PREPA’s primary involvement with restoration projects has been to coordinate private sector contracts. Symptomatic of the ill effects of PREPA’s poor management, one of the companies with whom it contracted, Cobra, a subsidiary of Mammoth Energy, caused over a quarter of the island to plunge back into darkness. Cobra had employed a subcontractor to conduct restoration projects on the southern coast of the island. In April, the subcontractor’s excavator hit a major distribution line, which altered the voltage causing eight major plants to fail and leaving 870,000 people without power for two additional days. Following this incident, Puerto Rico’s Governor Roselló implored PREPA to cancel its contract with Cobra, the cost of which already had been increased on three occasions and ballooned to almost five times the original amount.

The instability of the island’s power grid before the hurricane was further exacerbated by the emergency fixes and stop-gap repairs made in Maria’s wake. PREPA’s CEO Walter Higgins has stated that projects to adequately strengthen the grid will take years to complete and cost between $5 and $8 billion. And, any hope of long-term assistance from USACE or FEMA was dashed when both federal agencies announced, at the start of the 2018 hurricane season, their impending departure from the island, thus leaving PREPA in charge of the daunting grid modernization task.

Fortunately, the Department of Energy (“DOE”) has worked with PREPA and recently released a report entitled “Energy Resilience Solutions for the Puerto Rico Grid.” The report recommends reducing dependence on fossil fuels and increasing reliance on natural gas and renewable energy, along with updating the infrastructure with monopoles, which are single-tower steel transmission towers. Monopoles are much more resilient than traditional lattice towers and withstood Maria’s wrath effectively. The report also urged Puerto Rico to begin establishing renewable energy microgrids for enhanced resilience and reliability. DOE’s report states that “microgrid investment has the potential to be more cost effective than alternative system upgrades to harden the system for improved function and reliability.” Solar energy sourced microgrids also are said to be more resilient in many ways: solar panels are easy to replace, the energy is generated right where it is consumed and does not need to travel long distances to reach consumers, and panels come back online as quickly as the sun can rise after a storm without having to wait for grid repairs.

The DOE’s findings regarding microgrids are consistent with prior experience in Puerto Rico, albeit on a limited scale. Solar-powered microgrids were implemented before Maria, and fared well during the storm. The Casa Pueblo community and ecology center, located in a rural section of Puerto Rico, installed microgrid solar panels over twenty years ago. Although FEMA was unable to reach Casa Pueblo’s mountain city of Adjuntas for weeks after the storm, Casa Pueblo regained power immediately after Maria passed. The community thus had electricity, and could provide food, water, tarps and medical treatment. As the DOE report notes, microgrids sourced by renewable energy can be deployed across the island and have the potential to curtail blackouts and prevent the months-long disruption to the electric system as occurred after Hurricane Maria. The DOE already has acted on its report recommendations, launching a pilot program to install half-a-dozen microgrids on the island in an effort to lessen weather-related risk and attract more outside investment.

Further, noting that the island’s grid is a “highly fragile and vulnerable system,” on June 20, 2018, Governor Rosselló removed from PREPA’s bailiwick the grid restoration by signing a bill to privatize the state-owned utility. The bill enables PREPA to sell its power generation plants and assets, seeks to facilitate public-private partnerships to modernize the power grid, and prevents a single entity from monopolizing the entire energy system. Many legislators view privatization as an opportunity to boost Puerto Rico’s economy while building a resilient and energy-efficient grid. Others prefer that PREPA be overhauled and remain in government hands, fearing that privatization will lead to higher prices for a dwindling customer base. Puerto Rico’s Power Union also has expressed skepticism that the grid’s low consumption rate coupled with its substantial infrastructure needs will dissuade private sector investors from entering into public-private partnerships as the bill envisions. Even some analysts who favor privatizing Puerto Rico’s power system have expressed concern that the bill enables the government to retain excessive controls over the envisioned private electric utilities.

A further concern is that the legislation fails to address PREPA’s and the Commonwealth’s bankruptcy status. The risks posed by the enormous debt make potential private sector investors nervous about repayment, although some of the obligations likely will be satisfied by PREPA’s sale of its assets and power plants. Also, both the DOE and Puerto Rico’s Financial Oversight and Management Board have projected that over $60 billion in federal funding will be provided to the island during the next decade, some of which likely will be earmarked for updating the energy grid.

On the heels of privatization, the Puerto Rico Energy Commission (“PREC”), the independent body created by Puerto Rico’s legislature to oversee the island’s energy policies and reforms, has promulgated regulations for microgrid development. Under these regulations, PREC will oversee a bidding process and select applicants to develop microgrid systems. While it is too soon to prognosticate the manner in which the private sector will respond to these regulations, corporates already have expressed interest in providing the technologies for the next phase of the rebuilding process. AES Corporation, which operates both a coal plant and solar plant on the island, repeatedly has suggested that a regionally-based microgrid system be implemented. Tesla also remains committed to the island’s energy development, and has discussed installing a back-up, high-capacity battery storage system for solar energy sourced microgrids that would provide alternative power in the event of another blackout.

Presently, patience is the name of the game. It is unknown whether recent legislative and regulatory developments will facilitate the necessary level of private sector involvement to successfully rebuild and strengthen Puerto Rico’s power system.

Topics: Solar Energy, Microgrid, Puerto Rico, Hurricane Maria

Northeast States See Surge in Plans for Offshore Wind Projects, But Developers Must Address Remaining Barriers

Posted by Jeffrey Karp on 6/18/18 12:37 PM

Offshore-Wind-Farm_trans_NvBQzQNjv4BqZyr7RvqrFlHdIeGHHfdSfl4_WL6q5zndbubD7CiBKV0By Jeffrey Karp and Kevin Fink

As previously discussed, offshore wind is  well-developed outside the United States. In Europe, the first offshore wind facility was installed in 1991, and a record 3,148 MW of capacity was added in 2017. In comparison, the first and only operating offshore wind farm in the U.S. is Block Island, a 30 MW facility off the coast of Rhode Island, which began operation in 2016. While the U.S. lags behind European wind energy leaders, Northeast states have sought to facilitate large scale offshore wind development by setting goals and awarding contracts to offshore lease areas. These recent activities have been met with optimism and promise; however, there still are challenges beyond initially securing leases that must be met before offshore wind projects in the U.S. are successfully implemented from start to finish.

Within the past year, New York, New Jersey, Massachusetts, and Rhode Island have announced intentions to incorporate offshore wind resources into their respective energy portfolios. In January 2018, the New York State Energy Research and Development Authority (NYSERDA), issued an Offshore Wind Master Plan, which identified four areas for proposed offshore wind projects, each capable of supporting at least 800 MW. Acting on NYSERDA’s request, the Bureau of Ocean Energy Management (BOEM), the federal agency responsible for approving offshore lease areas beyond state jurisdiction (3 nautical miles offshore), sought public comment on the proposed areas (BOEM published a “Requests for Nominations: Commercial Leasing for Wind Power on Outer Continental Shelf in New York Bight”  in the Federal Register, which gave the public until May 29, 2018 to respond). In May 2018, BOEM extended the comment period to July 30 at the request of New Jersey Governor Phil Murphy to enable the state to adequately address commercial fishing industry concerns. Also in May, Governor Murphy signed legislation committing New Jersey to develop 3,500 MW of offshore wind.

Recently, Massachusetts and Rhode Island also committed to facilitate offshore wind projects. In May 2018, Massachusetts acted on 2016 legislation -- which committed the state to 1,600 MW of offshore wind -- by awarding Vineyard Wind LLC an 800 MW wind farm on the Southern Coast of Martha’s Vineyard. Additionally, Rhode Island chose Deepwater Wind to develop a 400 MW wind farm.

While the offshore wind industry in the U.S. is gaining momentum through lease awards, there still are several barriers that must be addressed if the industry is to successfully construct and operate wind farms. One such potential barrier is the federal Merchant Marine Act of 1920, more commonly known as the Jones Act. Originally enacted to ensure that a domestic merchant fleet could meet shipping needs in case of an international shipping conflict, the Jones Act, among other things, requires shipments made between U.S. ports to be conducted on U.S. vessels manned by U.S. citizens or permanent residents. Additionally, in the context of wind turbines, once a monopile -- the vertical piece struck into the seabed to secure the turbine -- is set into the seabed, it becomes a “point” under the Jones Act, triggering the “U.S. built and manned vessel” requirement. An exception to this requirement is that merchandise may be transferred by foreign crane in conjunction with U.S. vessels transporting materials between points. This method was used to install the 30 MW Block Island Wind Farm; however, industry experts have commented that while the approach worked for a small scale wind farm, it may be too costly for larger scale projects. Therefore, a major consideration may arise shortly because no U.S. entity presently owns Jones Act-compliant vessels capable of transporting and installing large scale offshore wind turbines.

However, some stakeholders have questioned whether the Jones Act applies to offshore wind projects. The Jones Act’s jurisdiction reaches three nautical miles from shore, and the proposed offshore wind projects in the Northeast are beyond that range. Thus, clarification is required as to whether activity occurring outside three nautical miles from shore is subject to the Jones Act. The applicability of another federal law, the Outer Continental Shelf Lands Act (OCSLA), to offshore wind installations also needs to be clarified. The OCSLA initially was enacted to address the exploration, development, and production of mineral resources, but in 2005 Congress amended the law to include licensing requirements for “alternative energy” projects. There still is ambiguity regarding whether the OCSLA applies to offshore wind installations. If both the Jones Act and OCSLA are determined to apply to offshore wind projects, development may be stymied from both a transportation standpoint (via point to point shipments), and in the licensing and construction of projects.

Various approaches to address these potential constraints have been proposed to eliminate any further delay once the leasing stage of a wind farm is completed. A long-term solution, to build Jones Act compliant vessels, already has begun with the first vessel expected to be delivered by the end of 2018. However, some short-term measures also could be taken to further facilitate offshore wind development. Regarding the ambiguity surrounding the jurisdictional reach of the Jones Act, a waiver could be pursued for renewable energy projects until the supply chain side of the industry is mature enough to handle all of the transportation and construction phases domestically. Additionally, an advisory ruling could be sought from U.S. Customs and Border Protection (CBP) regarding whether the OCSLA applies to offshore wind projects.

A second challenge facing offshore wind developers is that U.S. ports will require infrastructure upgrades to handle wind turbine parts that are more than 800 feet tall with blades the length of a football field. Currently, there are no ports or manufacturing facilities in the Northeast capable of adequately handling these parts. In January 2018, the Coalition for More Efficient Ports -- whose members include the Port Authority of New York and New Jersey -- sent a letter to President Trump highlighting the need for ports to receive adequate federal funding. Moreover, Orsted A/S, a Denmark power company with offshore wind projects worldwide, publicly called for East Coast states to expand their ports to accommodate offshore wind development.

Thirdly, delays have ensued due to stakeholder litigation over potentially negative impacts from turbine construction and operation. For example, Statoil (now Equinor), which was awarded a lease for an offshore wind facility off the coast of New York in December 2016, has faced considerable delays from a lawsuit filed against BOEM by the Fisheries Survival Fund and other commercial fishing organizations, businesses, and three municipalities alleging violations of several federal environmental laws, including the National Environmental Policy Act (NEPA). The case, Fisheries Survival Fund v. Jewell, No. 16-cv-2409, is ongoing in U.S. District Court for the District of Columbia. Thus, developers must be cognizant of opposition from interest groups, and be prepared to address their concerns.

Therefore, while states in the Northeast are ramping up plans for large scale offshore wind farms, it is important that developers fashion strategies to address impediments, including the potential impact of Jones Act and OCSLA requirements, port expansion needs, and stakeholders’ environmental and other concerns.

Jeffrey Karp is a partner and Kevin Fink is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

 

Topics: Offshore Wind, New York, New Jersey, Massachusetts, Rhode Island, Jones Act, Port Infrastructure, Shipping, Renewable Energy, Outer Continental Shelf Lands Act

A Possible Formula for Puerto Rico's Hurricane Recovery: Distributed Renewable Energy

Posted by Jeffrey Karp on 2/13/18 3:02 PM

By Jeffrey Karp, Zachary Altman, Ryan Rosenblatt and Kevin Fink

In September 2017, Hurricane Maria swept through the Commonwealth of Puerto Rico decimating the island, taking hundreds of lives and demolishing infrastructure on an enormous scale. In the hurricane’s immediate aftermath, Puerto Rico lost 100% of its power usage.

GettyImages-903919174.jpgThe energy infrastructure, which is 98% fossil fuel dependent, was severely damaged to the point that some observers considered repair impractical. In the first few months after the hurricane, power only had been restored to 70% of the Island’s residents. 

In addition to the destruction Hurricane Maria imposed on Puerto Rico’s energy infrastructure, the Puerto Rico Electric Power Authority (“PREPA”), the main governmental authority with jurisdiction over energy and infrastructure, exacerbated the problems. With $9 billion of debt, in July 2017, PREPA filed for bankruptcy relief due to the cumulative impact of years of mismanagement, mounting operation and maintenance problems, the failure to recover the costs of providing power to its customers, years’ long battles with creditors, and a diminished workforce. Further, PREPA was unprepared for a major storm of Maria’s magnitude. As Governor Ricardo Rosselló publicly acknowledged, none of the storm response plans could account for years of poor maintenance of a broken-down electric grid.

Following the hurricane, PREPA sought outside assistance to repair and improve the Island’s energy infrastructure; however, this effort was unsuccessful. On October 17, 2017, PREPA entered into a $300 million contract with Whitefish Energy to rebuild its power grid. Due to Whitefish’s small size, lack of credentials and some questionable contract terms, investigations were initiated by the House Committee on Natural Resources and the FBI, and, Governor Rosselló canceled the Whitefish contract on October 29.

In light of PREPA’s inability to restore power to its customers, in November 2017, the United States Army Corps of Engineers (“USACE”) assumed primary control of the energy recovery efforts. Armed with emergency funding allotments from the U.S. Congress, USACE entered into an $860 million contract with the Louis Berger Group to supply temporary power to residents through the end of September 2018, and an $831 million contract with Fluor Energy to help restore electricity to the Island’s residents via improved energy infrastructure.

More recently, in late January 2018, Governor Rosselló announced plans to privatize PREPA. Under the Governor’s proposal, although the Commonwealth would retain ownership of PREPA’s transmission and distribution systems, a private operator would be selected to operate the systems for a period of years. The privatization plan has been met with skepticism, in part based on the past failed attempt to privatize another Puerto Rico utility, the Aqueduct and Sewer Authority. Also, concerns were expressed that the savings promised by private operators may not materialize due to future economic development decisions being left in the hands of those primarily concerned with the return on investment to shareholders.

Regardless of whether the Island’s electric utility is privatized, energy infrastructure experts have suggested that the focus shift to developing distributed renewable energy resources to be delivered both on an upgraded power grid and a series of microgrids. A microgrid is a segment of a larger electric grid that can detach and operate on its own to provide localized electricity during, for example, a larger grid shutdown or failure. When operating in tandem with the main grid, a microgrid’s ability to produce energy locally enables customers to draw far less power from the main grid, thereby reducing strain on the main grid. Microgrids also can operate independently, thus offering protection during peak usage hours, primary power outages, or if the main grid becomes unstable.

Additionally, wind, solar, biomass, geothermal and small hydro are more practical for use in microgrids because such renewable energy resources typically are decentralized, meaning that generation and transmission occur within a smaller service area. This decentralization lowers costs and reduces carbon emissions. In contrast, conventional power stations that operate on fossil fuel have higher carbon emissions and are centralized, requiring electricity transmission over longer distances at a higher cost.  

Puerto Rico has endured large-scale destruction, especially to its energy infrastructure. Critical regulatory and policy decisions must be made in the coming months. These decisions will impact the manner in which Puerto Rico redevelops its energy infrastructure and the energy resources that are deployed by the Commonwealth. Regardless of the outcome of the privatization efforts, the development of renewable energy sources and the use of microgrids appear to be a step in the right direction for Puerto Rico’s infrastructure renovation.

The New Administration’s Efforts to Deconstruct the Obama Climate Initiatives

Posted by Jeffrey Karp on 8/11/17 2:22 PM

President Trump is spearheading a government-wide roll back of Obama Era climate initiatives. The president and his EPA Administrator, Scott Pruitt, have delivered a one-two punch.  They both have denied the impact of human activity on climate change, while seeking to resurrect the moribund fossil fuel sector.  In March 2017, the President issued a wide-ranging “Energy Independence” Executive Order requiring review and reconsideration of any rule that might burden development of domestic energy sources, particularly oil, gas, coal and nuclear energy. After much drama, in June 2017, President Trump fulfilled a campaign promise to withdraw the United States from the Paris Climate Accord (“Accord”).  Moreover, in seeking to implement the new Administration’s energy independence strategy, government departments and agencies are pursuing delay or repeal of regulations aimed at curbing greenhouse gas (“GHG’) emissions, most notably EPA’s targeting for elimination the Clean Power Plan rule (“CPP”).

Under the Accord, the United States had pledged to reduce its greenhouse gas emissions 26-28% below 2005 levels by 2025, and to contribute up to $3 billion in aid to an international fund that helps the world’s poorest nations mitigate the effects of climate change.  It was expected that one of the President’s first acts following the inauguration would be to withdraw the country from the Accord.  On the campaign trail, Mr. Trump had not minced words about his view of the Accord, and his belief that climate change was a hoax.  Nonetheless, the President delayed his decision, while considering the views of many who advocated that the United States remain in the Accord, including several of his advisors, former Vice President Gore, the leaders of the G-7 nations, state governors and corporate executives.  President Trump, however, announced on June 2, 2017 the country’s withdrawal from the Accord, declaring the overarching need to protect United States workers and businesses from intrusive environmental restrictions, and negative impacts on economic growth.  In response to the President’s decision, a coalition of states, companies, and institutions have pledged to fulfill the United State’s emissions reduction commitment.

The withdrawal from the Accord appears unlikely to affect ongoing domestic efforts to reduce GHG emissions.  Currently, 29 states and the District of Columbia have enacted renewable portfolio standards (RPS) to increase the amount of electricity generated from renewable energy sources.  Since the beginning of 2016, seven states have even increased their commitments for additional wind and solar-generated power. 

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Furthermore, according to an EPA report, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2015 (April 15, 2017), GHG emissions have decreased in all major economic sectors since 2005.

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Between 2005 and 2015, GHG emissions decreased by roughly 20% in the electricity sector, 10% in the transportation sector, 4% in the industry sector, and 0.7% in the agriculture sector.

In addition to negating the impact of global warming, the Trump administration seeks to resuscitate the fossil fuel sector by removing regulatory impediments to growth.  As noted, on March 28, 2017, President Trump issued an EO that instructed EPA to reconsider the CPP and “as soon as practicable, suspend, revise or rescind” the rule.  Promulgated in 2015 under the Clean Air Act, the CPP is expected to facilitate a reduction in carbon dioxide emissions from the utility power sector by 32 percent below 2005 levels by 2030.  However, the rule has been tied up in litigation.  Shortly after promulgation, the Supreme Court stayed the CPP’s implementation.  A ruling on the CPP’s validity is awaited from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”)  following an en banc hearing in September 2016.  In the meantime, on April 4, 2017, EPA issued a notice of intent to review the CPP, while seeking to delay the D.C. Circuit’s impending decision on the rule’s validity.  On April 28, 2017, the court denied the EPA’s request to indefinitely delay the litigation while the Agency reconsiders the need for the CPP.  Instead, the D.C. Circuit agreed to hold the litigation in abeyance for 60 days, and ordered the parties to submit briefs addressing whether the court should continue to delay its decision or dismiss the litigation and remand the rule to the EPA.  After reviewing the parties’ briefs, on August 8, 2017, the court ordered that the cases remain in abeyance for an additional 60 days, and that EPA submit status reports in 30-day intervals. 

More recently, EPA attempted unsuccessfully to secure a lengthy delay in implementing another Obama Era emissions reduction regulation.  That rule requires that oil and gas companies fix methane leaks and upgrade equipment at extraction sites.  Siding with the NGOs, who challenged EPA’s announced two year delay, the D.C. Circuit ruled that EPA lacked authority under the Clean Air Act to stay the regulation while the Agency reconsiders it.  On August 10, 2017, the D.C. Circuit rejected industry groups and states’ request to reconsider the ruling.

Moreover, the President’s Energy Independence EO lifts the moratorium on leasing federal land for coal mining, and instructs the Department of Interior (“DOI”) to consider rescinding the 2015 regulation of hydraulic fracturing on federal and tribal lands.  In June 2016, a Wyoming federal judge struck down the rule, which subsequently was appealed to the Tenth Circuit.  DOI’s Bureau of Land Management (“BLM”) has requested the Tenth Circuit to stay the litigation while it reviews the need for the regulation.  On July 25, 2017, BLM published a proposal in the Federal Register to rescind the 2015 regulation, asserting that it  needlessly burdens industry with unjustified compliance costs.  The Tenth Circuit has yet to rule on BLM’s stay request.

To further assist the domestic energy sector, President Trump’s Energy Independence EO also seeks to ease permitting of fossil fuel energy projects.  In particular, the EO rescinds an Obama Era directive that federal agencies performing National Environmental Policy Act (“NEPA”) project reviews must consider GHG and climate change impacts.  Shortly after taking office, President Trump approved the permits for the TransCanada Corp’s Keystone XL pipeline and the Dakota Access pipeline.  In response, the Standing Rock Sioux Tribe and other Native American tribes challenged issuance of the final permit to complete construction of the Dakota Access pipeline in the U.S. District Court for the District of Columbia.  On June 14, 2017, the court ruled that aspects of the Army Corps of Engineers’ (Corps) environmental assessment were inadequate, and ordered the Corps to conduct further  review.  But, the court refused to grant the plaintiffs’ requested injunctive relief to halt oil pumping operations pending the Corps performance of further environmental review, which is expected to be completed by the end of the year.

Despite President Trump’s efforts to provide a “leg up” to the fossil fuel sector, it seems doubtful that the decline in coal-fired power generation will be reversed for several reasons. First, coal is not competitive with lower-priced and widely-available natural gas.  Second, the cost of developing renewable energy resources continues to drop.  Third, state RPS programs and corporate commitments to reduce greenhouse gas emissions continue to drive the growth of the renewables market.  Fourth, carbon emissions from power plants have fallen by 5% during each of the last two years, which is largely due to the switch by the utility sector, coal’s largest customer, to natural gas and renewables.  Currently, coal’s market share is in the low 30% range, and is unlikely to increase despite the new administration’s efforts to revitalize the industry.

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Furthermore, withdrawal from the Paris Climate Accord is unlikely to have short-term impacts in the United States.  Carbon dioxide emissions from United States’ energy sources are expected to hit a 25-year low in 2017, and to continue to decrease.  Thus, it appears that the train already has left the station regarding  the overriding support by many corporations and states for the increased development of renewable energy resources, and the ongoing conservation and sustainability measures to further reduce greenhouse gas emissions.  In light of the foregoing developments, it seems that market forces, not President Trump’s EO or government agencies’ efforts, will dictate the fate of the fossil fuel industry.

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

Topics: Trump Administration, Climate change, Energy Independence Executive Order, Paris Climate Accord, clean power plan

The New Administration’s Deregulatory Agenda and its Impact on Environmental & Energy Policy

Posted by Jeffrey Karp on 7/28/17 8:24 AM

As seen in the first six months of President Trump’s Administration, the country is on a rollercoaster ride.  There is much uncertainty regarding the implementation of new policies and the status of existing programs throughout the government.  Nowhere is this sentiment more evident than in the environmental and energy arenas.  President Trump is quickly trying to undo the Obama Administration’s programs through executive orders seeking to roll back regulations; the appointment of faithful supporters of deregulatory agenda to key positions; significant budget cuts that substantially reduce agencies’ head counts and defund targeted programs; and the helping hand of a Republican-controlled Congress.

However, achieving this desired goal is easier said than done.  President Trump’s objectives may be tempered by legal, procedural and resource constraints, bureaucratic resistance combined with delays in filling key agency decisions, and higher priority domestic agenda items and world events.  This article will examine what already has occurred and what may be in store on significant issues involving energy and the environment.  It also will highlight aspects of the Trump Administration’s deregulatory efforts and the proposed budgetary impacts.

Out of the gate, the new administration has pursued an aggressive deregulatory agenda. President Trump’s operative goal is to “deconstruct the administrative state.”  His administration is building on campaign rhetoric to “roll back” “economy-choking regulations,” and implementing his campaign promise to “Drain the Swamp” by reining in and shrinking the federal bureaucracy.  For example, in January 2017, President Trump issued the “2-for-1” Executive Order (EO) on Reducing Regulation and Controlling Regulatory Costs, which specifies that agencies must repeal two existing regulations for every new significant regulatory action.  The EO further requires cost balancing between new and repealed regulations and a net cost of zero for any new regulations.  In response, Non-Governmental Organizations (NGOs) and others, led by the Natural Resources Defense Council (NRDC), are challenging the validity of the EO in the U.S. District Court for the District of Columbia, arguing that the executive order is “arbitrary, capricious, an abuse of discretion, and not in accordance with law.”  In April 2017, the Department of Justice filed a motion to dismiss the complaint on the President’s behalf, and the NGOs moved for summary judgment in May.  Attorneys General from 14 states filed a brief in support of the EO.  The case is in limbo, as the court has not yet ruled on the parties’ motions.

In February 2017, President Trump issued another EO, on Enforcing the Regulatory Reform Agenda, which requires designation of regulatory reform officers and task forces in all agencies and departments.  Each task force must identify “all regulations that are unnecessary, burdensome and harmful to the economy.”  In addition to internal deliberations, the task forces have asked stakeholders to help identify troublesome regulations.  For example, the Commerce Department sought public comment on government regulations interfering with domestic manufacturing.  Of the 168 comments submitted, 79 called out the EPA, the majority of which cited the Clean Air Act (CAA) and Clean Water Act (CWA).

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President Trump is particularly focused on curtailing EPA programs from the Obama Administration’s regulatory agenda.  For example, the EO on Enforcing the Regulatory Reform Agenda requires EPA to review, and either rescind or revise, the Clean Water Rule promulgated by the Obama Administration in 2015 under the CWA.  The CWA regulates discharge of pollutants to “navigable waters,” defined as waters of the United States (WOTUS).  The 2015 WOTUS Rule was issued by EPA and the Army Corps of Engineers (Corps) after a series of court decisions failed to adequately clarify the EPA’s jurisdictional scope.  The 2015 WOTUS Rule created quite a controversy because it applies to streams serving as tributaries to navigable waters, as well as wetlands adjacent to traditional navigable waters or interstate waters.  For the rule to apply, the wetlands and tributaries must be “relatively permanent.”  Under prior court decisions, this means such water bodies could be “intermittent.”  The Sixth Circuit stayed the 2015 WOTUS Rule soon after its promulgation.  Therefore, it was never implemented or enforced.  On January 13, 2017, the U.S. Supreme Court agreed to resolve the jurisdictional dispute over whether a district court or a court of appeals should decide the rule’s validity.

On March 6, 2017, EPA’s “Notice of Intent to Review and Rescind or Revise the Clean Water Rule” was published in the Federal Register.  In Senate testimony delivered on June 27, 2017, EPA Administrator Scott Pruitt stated that the agencies intend to revoke the 2015 WOTUS Rule, contending that the rule has created substantial uncertainty for farmers, ranchers, and landowners because they cannot tell whether their streams or dry creeks are “relatively permanent.”  Pruitt further stated that the rule inhibits development because landowners face substantial civil penalties if they incorrectly assess the rule’s coverage and the property is determined to be subject to federal jurisdiction.  

Revising or revoking rules is not a perfunctory or simple process. The agency that promulgated the rule must follow the same Administrative Procedure Act (APA) notice and comment procedures to rescind or change it.  Thus, an agency cannot simply revoke a rule and subsequently replace it to satisfy the policies of a new administration.  Rather, an agency first must create an Administrative Record (AR) that supports revoking an existing rule, and then the agency must conduct a separate rulemaking proceeding to promulgate a new revised rule.  Ultimately, the AR must justify a different outcome than the record upon which the existing rule was issued.  This same process must be followed for each rule that an agency desires to abolish or revise.

On June 27, 2017, EPA and the Corps announced a plan to replace the 2015 WOTUS Rule in two steps: 1) repeal the stayed Obama-era rule, and 2) commence a second rulemaking to replace it.  However, on July 12, 2017, a House subcommittee approved an energy and water spending bill that would allow EPA and the Corps to withdraw the 2015 WOTUS Rule “without regard to any provision of statute or regulation that establishes a requirement for such withdrawal.”  Essentially, if the bill is passed, the agencies could bypass the APA procedures, including the public notice and comment period, and repeal the 2015 WOTUS Rule.  The House is expected to vote on the bill in the next few weeks.  The Senate Appropriations Committee’s version of the energy and water bill does not include language allowing the Trump Administration to bypass APA procedures.  Thus, a reconciliation of the bills likely will be necessary.

The Administration’s effort to eradicate Obama Era environmental regulations is further complicated because many rules presently are tied up in court proceedings awaiting oral argument or court rulings.  The EPA sought to stay challenges to such rules while the new administration reconsiders their scope and breadth.  In several cases in which oral arguments have not been heard yet, the requested relief was granted.  However, the agency’s strategy was foiled in the case challenging the Clean Power Plan, the most contentious of the Obama Era rules.  In that case, an en banc ruling is pending in the D.C. Circuit.  On April 28, 2017, rather than grant EPA’s request for an indefinite stay, the court agreed only to hold the litigation in abeyance for 60 days, while ordering the parties to file briefs addressing whether the case should remain on hold, or whether the court should close it and remand the rule to EPA for disposition.  On May 15, 2017, both parties submitted their briefs.  The motions are pending.

President Trump also is seeking to use the budget process to pursue his deregulatory goals.  The Administration’s 2018 proposed budget, sent to Congress on May 23, 2017, would reduce EPA’s funding by nearly one-third, eliminate thousands of jobs, and scrap dozens of existing programs.  The budget proposal would increase funding in a select few areas — for water and air rulemaking, and the TSCA-Chemical risk review and reduction program; however, it is expected that much of the additional TSCA funding would be offset by a “pay to play” scheme under which the companies requesting such reviews would be required to pay for them.  On the other hand, government wide programs that address climate change and global warming would be obliterated.  The Integrated Risk Information System (IRIS) program, which assesses the health risk of toxic chemicals, is specifically targeted for termination.  The Science Advisory Board is recommended for an 85% cut, and EPA’s categorical grants to states to operate and enforce delegated programs are slated for a 45% reduction.  The Chesapeake Bay and Great Lakes initiatives would be eliminated, as would programs supporting energy efficiency and R&D, and loan guarantees for clean energy technologies.  Nevertheless, Congress has the final say over President Trump’s budget proposals, and it remains to be seen whether there is sufficient support for his substantial proposed budget cuts.

We anticipate a steady stream of lawsuits will be filed by NGOs and, perhaps, some activist states challenging the Trump Administration’s deregulatory actions.  We also expect an uptick in “citizens suits” seeking to enforce environmental laws and regulations due to EPA’s diminished role as the “cop on the beat.”  Further, the impact of President Trump’s budget proposal largely will depend on the willingness of the Republican majority in Congress to eliminate or reduce funding for programs with traditional bi-partisan support.

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

Topics: Environmental Policy, Energy Policy, Trump Administration, Deregulatory Agenda, Executive Orders

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

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

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