Climate Change Report : Climate Change Lawyer & Attorney : K&L Gates Law Firm : Global Climate Law, Carbon Emissions

By Fred Greguras (Palo Alto) and Stan Lewandowski (Palo Alto)

The power purchase agreement (“PPA”) is the primary source of revenue in a solar project financing for debt service to a lender as well as for returns to other investors and the project developer. If the solar facility must be removed from the rooftop or ground site because of foreclosure or other superior rights, then the project cannot generate any more electricity which means there will not be any more revenue from the PPA, from electricity production subsidies such as production-based incentives or from the sale of renewable energy credits or certificates. The predictability of the revenue (or lack thereof) is the key factor in the financeability of the project. There cannot be any revenues if the solar facility is no longer operating. The value of the installed solar equipment by itself is not adequate to protect lenders or investors. While the security interests in a loan financing will include a UCC-1 filed on the solar equipment, the equipment has little resale or salvage value once it is installed and will have little value for a lender or other investor.

Site control means control over the rooftop or ground site where a solar facility will be located for the term of the PPAso that the PPA revenues can be generated without any interruption. A key business objective in financing due diligence is to identify and implement site control protections which increase the probability that the solar facility will generate such revenues for the life of the PPA. A lender will want site control for the term of its loan. The borrower/project owner will want the revenues to continue for the life of the PPA to provide a return for itself and other investors. The investors and project owner have a common interest which should drive cooperation on these issues.   

The title report for the property where the project will be located will identify the deeds of trust, easements for utilities, rights-of-way, mineral and other rights and encumbrances which may restrict or prevent the use of the land for the development of the solar project. For example, a project owner may be leasing the rooftop of a building which is subject to a financing party’s deed of trust. The most common encumbrances on a title report that must be addressed are deeds of trust or mortgages held by parties that financed the property. The risk to the solar project owner is removal of the solar facility if the land owner defaults and foreclosure occurs. The title report should be ordered and reviewed at the outset of the project to identify what site protections may be needed to mitigate the financing risks and to quickly determine if they can be obtained.

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By Dirk Michels (Palo Alto)

Today, the promise of solar PV is not about technology, but rather about creating the financial, legal and regulatory frameworks that allow for significant cost reduction, especially for the residential and commercial distributed solar sectors. Together with the utility-scale solar sector, significant growth in the distributed solar sector may be the game changer that makes solar power a viable alternative to traditional fuels.

According to GTM Research, the U.S. solar PV market was at an installation pace of 878 MWp (DC) with 636 MWp (DC) in residential and commercial distributed installations in 2010. The research also indicated that the U.S. solar PV market will grow to annual installations of more than 5,000 MWp (DC) by 2015. If the majority of new installations are utility-scale solar facilities, the residential and distributed commercial/municipal sectors could fall behind in overall growth.

To prevent that loss of market share, the sectors will need to address the most significant factor affecting their success: cost competitiveness. The installed costs for residential and distributed commercial/municipal installations are rather high, at approximately US$5.71~US$6.98. That compares to utility installations, which are already at a much lower price point of between US$4.05 and US$4.80 for the year 2010. Further, it is expected that a large number of the currently available state and federal incentives will terminate, which further complicates ‘small-scale’ solar’s attempt to achieve cost competitiveness. In the coming years, the residential and distributed commercial/municipal sectors still have some catching-up to do before they can claim their fair share of future growth in the market.

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By Fred M. Greguras, Charles D. Holland (Palo Alto)

Steven Chu, Secretary of the U.S. Department of Energy, announced on April 20, 2011 that up to $130 million will be available in a fourth round of funding to be provided by the Advanced Research Projects Agency – Energy (ARPA-E).[1] The deadline to submit concept papers for qualifying technology areas is May 19, 2011 at 5:00 PM Eastern time. The deadline to submit full papers is not set as of this date.

The five technology areas include:

1.         Plants Engineered To Replace Oil (“PETRO”). PETRO seeks to develop plants that are more suited to be converted into fuel. Today, a small fraction of plant matter can be converted into fuel, but PETRO seeks to harness more of the energy from sunlight and plants’ processes to make fuel and plants that require less processing to make fuel. Up to $30 million is available for PETRO.

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Following extensive consultations with industry participants, the French Government enacted three new decrees on March 4, 2011 following the initial announcement by the French Prime Minister, François Fillon, of the new regulatory framework on February 23, 2011.

Those decrees have drastically redesigned the solar subsidies framework and will affect both businesses and investments in this sector. The main changes concern medium-sized and large installations, and involve a purchase price cut and a soft cap of 500 MW per year for new installation applications.

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By Steven D. Cox (London) and Bonny Hedderly (London)

K&L Gates, through its London Office, has agreed to be co-sponsor of a new commercial real estate index in the UK called the IPD Sustainable Property Index (or ISPI for short). 

In the United States, research has shown that energy efficient buildings can command higher rents and capital values than less efficient buildings, but in the UK there has been only limited corresponding research.  This means that whilst many fund managers feel instinctively that sustainable buildings are a better investment because they should be more attractive to tenants in terms of lower running costs, less danger of obsolescence, improved indoor air quality etc, there is no hard data to support this view. 

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By Alidad Vakili (San Diego) 

By many accounts, there appears to be a shift in the winds that have for the past several years kept many an investor on the sidelines. Although the economy has not recovered anywhere near its height in 2007, the winds of change are slowly being felt throughout the country. The 4^th quarter of 2010 brought with it more deals…more mergers, acquisitions, private equity transactions, etc. and indications are that this upwards trend is likely to continue. 

All this increased activity seems to be ushering in a sense of better times ahead for many an industry. The cleantech sector also appears to be getting a bit of a boost from the recovering economy. More and more companies, at all stages of the business life cycle, are keeping a watchful eye on cleantech and not a few are investing in new and better technologies and business ventures (e.g., solar energy, wind energy, biofuels, battery technology, carbon capture, etc.). The number of global cleantech mergers and acquisitions and initial public offerings have increased in recent months with the retail investors' penchant for publicly traded cleantech businesses increasing over the past several months[1]. 

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By Fred Greguras (Palo Alto) and Charles Purcell (Seattle).

The Section 1603 cash grant program was extended through December 31, 2011 as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 which was signed into law on December 17, 2010 (the "2010 Tax Act"). The cash grant was the most important policy for driving renewable energy growth in the United States during 2009 and 2010. The 2010 Tax Act also created another important incentive for renewable energy project finance for 2011 -- 100% bonus depreciation.

These incentives will stimulate investment in renewable energy projects in 2011. The cash grant extension will strengthen job creation in the construction and operation of renewable energy projects and the bonus depreciation could cause significant investment in manufacturing plants in a number of business sectors which could also result in many new jobs.

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By Fred Greguras (Palo Alto)

I see a number of press releases about large pipelines for solar project development. But many of these projects may never be built because they can't get financing. There are a number of important considerations involved in obtaining financing -- including the creditworthiness of the offtaker -- but the terms of the power purchase agreement (PPA) and site lease agreement (SLA) for the solar facility are the starting point for legal review.

A key economic consideration for the lender is the certainty of the facility’s revenue stream. And yet, PPA terms may not provide enough certainty that revenue will actually be received from the offtaker. Similarly, the terms of the SLA may not provide enough certainty that the facility will have the land rights needed to operate throughout the duration of the PPA. The terms in these agreements vary widely and each agreement must be carefully reviewed. Based on my experience in working with lenders, it seems that many developers sign these agreements without careful review -- either because they hope that changes can be made later using the leverage of an investor or because they simply don't realize the terms present financing risks.

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By Fred Greguras (Palo Alto)

The June 30, 2010 Arizona Corporation Commission (ACC) decision to permit Solar City to sell electricity under a power purchase agreement (PPA) to government, schools and non-profit customers without being subject to regulation as a public service corporation highlights the state law issue facing PPA providers.  The AAC decision does not address whether electricity may be sold by Solar City or other PPA providers to residential and for-profit (commercial) customers.  That will be the subject of a separate ACC decision. Solar City’s petition to the ACC only asked for a ruling on government, schools and non-profit customers.  The ACC decision ignored the recommendation by an Arizona administrative law judge that such PPA providers be defined as a regulated utility based on the statutory definition.

The PPA structure is an important financing stucture needed to accelerate the pace of deployment of solar energy. Customers of all types like the approach because they pay for electricity as used at a kWh price less than they would pay to a utility. The PPA provider incurs the  capital and operating costs for the solar facility and bears the responsibility under the PPA for delivering electricity for a period of 20-25 years.

There are four basic sets of customers that PPA providers target: 

1. utilities;
2. government, schools, and non-profit entities;
3. commercial or business customers such as a grocery store and
4. residential customers. 

Each state's law controls whether a PPA provider may sell electricity in the state. As in Arizona, as a historical matter to protect the public, most states laws have a broad definition of what is a  utility and either a public utitities commisssion (PUC) ruling or statutory change is needed in order for a PPA to be used with other than a utility customer.  Some states laws may be so broad as to bring a lease arrangement within the definition of a utility. Most if not all states would permit PPAs to be used in a solar project when the purchaser under the PPA is a utility because the utility is between the PPA provider and the general public.  Florida, an important solar market, only permits  PPAs to be used when selling to utilities. California, Colorado, Hawaii, Nevada and New Jersey permit electricity sales under PPAs to all 4 sets of customers. The legal position of a number of states on this issue is unclear. (survey of the current status under state laws).

PPA providers targeting residential customers must also comply with both federal and state consumer protection laws such as the Song-Beverly Consumer Warranty Act in California. 
The U.S. must  rapidly speed up the deployment of renewable energy. This requires a portfolio of solutions including solar PPAs. State PUCs need to move into this century and authorize solar PPAs for all types of customers.

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by Stephen K. Rhyne (Charlotte)

Uncertainty seems to pervade almost any discussion of climate change and its consequences. This is especially true when discussing climate change legislation and regulation.

Notwithstanding, the Securities and Exchange Commission (SEC) in January sought to bring some clarity to the question of whether climate change and its consequences, including pending legislative and regulatory proposals, are appropriate matters of disclosure for public companies. In its detailed interpretive release, the SEC sets forth the analytical framework and process for a public company to follow in determining whether climate change and its consequences are to be disclosed in the company’s public filings.

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Authored by Chistopher Tung (Hong Kong)

“One country, two systems”, has been the guiding constitutional and policy blue print for Hong Kong since the return of the territory to China in 1997. This principle guaranteed the common law legal system of Hong Kong within the Chinese civil law system for 50 years until 2047.   Over a decade later, it is increasingly clear that the economies and communities of Hong Kong and Mainland China have integrated and converged. While “One country, two systems” broadly holds true, so that Hong Kong remains a distinct legal jurisdiction, both legal systems have been exerting increasing influence on each other over the years. It is therefore crucial for investors to understand the real policy and regulatory dynamics in both places to successfully navigate through business opportunities and risks straddling both jurisdictions.

2010 is a watershed year in this continuing convergence and there is no single policy and development issue that is more pressing than the transition of the Mainland Chinese and Hong Kong economies to a low carbon basis.

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Written by Martin E. Garza (Dallas), Dr. Christian Hullmann (Berlin)

The key to making some projects and investments viable, especially in today's tough real estate market, may be the continued expansion and use of sustainable development initiatives adopted by federal, state and local governments, as well as by private entities such as electric utilities and non-profit organizations. While the basic tools used are not new, their application in the sustainable development arena may provide significant opportunities in 2010 and beyond. This e-alert highlights PACE financing and other examples of such incentives.

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Written by Charles H. Purcell, Eric E. Freedman, Dirk Michels, Darcie L. Christopher

On July 9, 2009, the Department of the Treasury ("Treasury") issued detailed guidance (the "Guidance") on the alternative energy grant program that was created by Section 1603 of the American Recovery and Reinvestment Act of 2009 (the "2009 Recovery Act"), which was signed by President Obama on February 17, 2009.

Under the grant program, taxpayers may, in lieu of claiming any available federal investment tax credit or production tax credit, apply to the Secretary of the Treasury for a cash grant payable when "specified energy property" is placed in service. Generally, the term "specified energy property" includes wind facilities, closed- and open-loop biomass facilities, geothermal facilities, landfill gas facilities, trash facilities, certain hydropower facilities, marine and hydrokinetic renewable energy facilities, solar energy property, geothermal energy property, qualified fuel cell property, qualified microturbine property, combined heat and power system property, and geothermal heat pump property.

The grant reimburses the taxpayer for a portion -- from 10% to 30% -- of the cost of such facilities. Although Treasury officials expect to make grants totaling approximately $3 billion under the grant program, Treasury is not limited in the amount of grants it may disburse to qualified applicants.

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Written by Fred M. Greguras (Palo Alto), Stan Lewandowski (Palo Alto), Catherine L. Matterson (Palo Alto), Aaron D. Schapiro, Lily M. Toy (Palo Alto)

This Alert summarizes the key incentives under the American Recovery and Reinvestment Act of 2009 (also known as the Stimulus Package) for renewable energy companies. It discusses the key renewable energy provisions, and discusses how the Stimulus Package can be used to benefit start-ups, early-stage companies and companies in need of project finance.

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Written by Eric E. Freedman (Seattle), Dirk Michels (Palo Alto), Scott C. Nelson (Portland), Charles H. Purcell (Seattle), Roger S. Wise (Washington, D.C.)

On February 13, 2009, the House and Senate passed, and on February 17, 2009, President Barack Obama signed, the American Recovery and Reinvestment Act of 2009 (the "2009 Recovery Act"). The 2009 Recovery Act added a new investment credit, the "qualifying energy credit," under Section 46 of the Internal Revenue Code of 1986, as amended (the "Code").

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