“ 50 Shades of Green ”— Legal Considerations in Renewable Energy Procurement

1. “50 Shades of Green”—Legal Considerations in Renewable Energy Procurement PRESENTED BY TAMMIE PTACEKMIDWEST SOLAR EXPO, MINNEAPOLIS, MN MAY 1, 2019

2. Driving Factors Behind Renewable Energy Procurement Climate Change— CO2 & Temp. Trends Drivers of Corporate Renewable Energy Procurement Source: PWC, Corporate Renewable Energy Procurement Survey Insights (June 2016) Source: climate.nasa.gov

3. Unsubsidized Levelized Cost of Energy (LCOE) This analysis shows a continued decline in cost of generating electricity from alternative energy technologies, especially utility-scale solar and wind. In some scenarios, alternative energy costshave decreased to the point that they are now at or below the marginal cost of conventional generation Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)

4. Unsubsidized Levelized Cost of Energy—Wind & Solar PV (Historical) Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)

5. Production Tax Credit (PTC)~ Typ. Wind Full Credit—Generally, $0.023/kWh (inflation adjusted) Term—First 10 years of operation Application—Power sold to an unrelated person (i.e., not self-supply) Phase-Out (Wind): Internal Revenue Code § 45, IRS Notice 2017-04 et al.

6. Investment Tax Credit (ITC)~ Typ. Solar *Placed-in-Service date requirements also apply. Credit—Generally, 30% of basis of property Application—Qualifying energy property that is depreciable (thus making it business property) and used to produce electricity (i.e., includes self-supply) Phase-Out (Solar): Internal Revenue Code § 48, IRS Notice 2018-59 et al. Capture of ITC & PTC → Tax equity financing for project

7. Levelized Cost of Energy—Effect of Federal Tax Subsidies Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12.0 (Nov. 2018)

8. Source: Rocky Mountain Institute

9. Renewable Energy Buyers Alliance The largest trade group of corporate renewable energy buyers in the U.S. Since 2014, the REBA community has grown to over 200 large energy buyers including Walmart, General Motors, Google and Facebook as well as 150 renewable power developers and service providers Participants in the REBA community have been a part of 98% of all large-scale U.S. corporate renewable energy deals to date Aims to expand the number of organizations buying renewable energy from dozens to tens of thousands and cause 60 gigawatts of new renewable energy by 2025

10. What is Renewable Energy? • Renewable Energy: • Electricity generated from natural resources that replenish themselves over short periods of time • Solar, wind, biomass, geothermal, [hydro] • Energy + Renewable Attributes (e.g., RECs) • Renewable Energy Credits (RECs): • Legal instrument that conveys to its owner the right to claim the associated environmental attributes of its generating resource • 1 REC ~ 1 MWh of Renewable Electricity • Electronic tracking systems issue, track, and retire RECs

12. “Renewable” Marketing Claims • BE CAREFUL HOW YOU REPRESENT YOUR “GREEN” OR “RENEWABLE” EFFORTS! • "[U]nfair or deceptive acts or practices in or affecting commerce...are...declared unlawful." Section 5(a) of FTC Act, 15 U.S.C. Sec. 45(a). • FTC Green Guides, 16 CFR Pt 260 • Marketers should not make broad, unqualified general environmental benefit claims like ‘green’ or ‘eco-friendly.’ • Broad claims are difficult to substantiate, if not impossible. • Utilities that sell RECs to third parties are recommended to clearly identify such sales and the effects of transferring the right to claim credit for those RECs and related environmental benefits in annual reports or other publications

13. FTC Green Guides Example • Facts: • A manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is "100% solar-powered." • The manufacturer, however, sells RECs based on the renewable attributes of all the power it generates. • Guidance: • Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling the RECs, transferred the right to characterize that electricity as renewable. • The manufacturer’s claim is therefore deceptive. • It also would be deceptive for this manufacturer to advertise that it "hosts" a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy. • It would not be deceptive, however, for the manufacturer to advertise, "We generate renewable energy, but sell all of it to others."

14. Renewable Procurement Options On-Site, Self Supply On-Site, Vendor Supply Community Solar Garden Wholesale Power Purchase (PPA) Virtual Power Purchase + RECs REC Purchase Retail/Utility-Sleeved PPA Utility/Retail Green Program

15. 1. On-Site, Self Supply (“Behind the Meter”) Buyer Payment for 40 kW Utility 100 kW 40 kW Meter 60 kW Environmental Attributes Renewable Project

16. On-Site, Self Supply (continued)(Net Metering Example) Buyer Payment / Credit for 40 kW Utility 60 kW 40 kW Meter 100 kW Environmental Attributes Renewable Project

17. Net Metering—Regulatory Developments • Basic Concept:  • Customer consumes 50 MWh, produces 50 MWh • Customer pays utility for 0 MWh • Cost-Shifting Issue—Customer depends on utility and grid infrastructure to ensure it has reliable 24-hour power but is not paying for it • Alternatives (States with high levels of solar adoption—e.g., AZ, HI, CA): • Net metering + fixed monthly fee on solar owners • Compensate excess output at lower than retail rate (e.g., “Value of Solar”) • Compensate all output at lower than retail rate (two meters, “buy-all, sell-all”) • Technological “End-Around”: Energy Storage…

18. Source: DSIRE, N.C. Clean Energy Technology Center at N.C. State University, available at www.disreusa.org

19. On-Site, Self Supply (continued)(Storage Example) Buyer Utility 60 kW 40 kW Meter 100 kW Environmental Attributes Battery

20. Outlook for Capitalized Cost of Storage by Technology Source: LAZARD’S LEVELIZED COST OF STORAGE ANALYSIS—VERSION 4.0 (Nov. 2018)

21. On-Site, Self Supply (continued) Summary of Legal Considerations • Permitting • Public Utility Commission Need/Site Permit (Large Projects) • Zoning/Conditional Use Permit • Building Permit • Environmental (SWPP, wetlands, etc.) • Utility Tariff—Interconnection, Net Metering/Solar Rate • Incentives—Federal Tax, State Agencies, Utility Programs • Contracts • Module Supply—Product & Output Warranty, Term, Exclusions • O&M—Scope of Services, Pricing Structure, Term • Insurance—Property and Commercial General Liability

22. 2. On-Site, Vendor Supply (PPA) Buyer Payment for 40 kW Utility 100 kW 40 kW Meter Env’tl Attributes 60 kW Payment for 60 kW Renewable Project

23. On-Site, Vendor Supply (continued) • Power Purchase Agreement (PPA) • Long Term, Fixed/Scheduled Price • Common and useful method for developers to finance projects • Advantages • Shift construction/installation burden • Shift O&M responsibility, focus on core business • Shift tort liability • Regulatory Issue – Avoid becoming a “public utility” or violating “exclusive service area” of a public utility…

24. Source: DSIRE, N.C. Clean Energy Technology Center at N.C. State University, available at www.dsireusa.org

25. 3rd-Party PPA Case #1 (Indiana) • U.S. Steel Corp. v. N. Ind. Pub. Serv. Co., 951 N.E.2d 542 (Ind. Ct. App. 2011) • U.S. Steel sold a “Plate Mill” facility within its large “Gary Works” complex to ArcelorMittal. • U.S. Steel had been self-supplying electric power within the complex, including to the Mill, and continued to supply power to the Mill after sale. • Parties file for IURC declaration recognizing right to continue arrangement. • IURC found U.S. Steel was a “public utility” (and thus violating NIPSCO’s exclusive service area) • “Public Utility” means any company “that may own, operate, manage, or control any plant or equipment within the state for the . . . production, transmission, delivery, or furnishing of heat, light, water, or power.” Ind. Code § 8-1-2-1(a).

26. 3rd-Party PPA Case #1 (continued) • Ind. Court of Appeals reversed: • “It is an essential requirement that a business or enterprise must in some way be impressed with a public interest before it may become a public utility.” • “[P]ublic” means “[t]he community or peoples as a whole; the members of the community collectively” (quoting Oxford English Dictionary) • Distinguishing factors: • Providing electricity to “only one customer located within its industrial complex pursuant to a special agreement.” • Never attempted to compete with or displace NIPSCO or simply “cherry-pick” profitable customers. • Arrangement was the result of a unique circumstance, out of convenience and as a continuance of its previous self-supply. • No legitimate concern regarding discrimination in services and rates. • Electric service was ancillary to primary business of steel production

27. 3rd-Party PPA Case #2 (Iowa) SZ Enterprises, LLC d/b/a/ Eagle Point Solar v. IUB, 850 N.W.2d 441 (Iowa 2014) Eagle Point Solar (EPS) sought IUB declaration that it could install solar panels on city building and sell power to city without being a “public utility” IUB held such activity would make EPS a public utility. Iowa district court reversed. Iowa Supreme Court (4-2 with one abstention) upheld district court, holding that EPS would not be a public utility. The Supreme Court applied an eight-factor test and found that most factors favored finding that EPS was not a public utility and that a few were neutral. By contrast, the lower court had found that a few of the factors did support finding that EPS was a public utility but were ultimately outweighed by those factors supporting that EPS was not.

28. 3rd-Party PPA Case #2 (continued) • Iowa Supreme Court applied an eight-factor test: • (1) What the corporation actually does. • (2) A dedication to public use. • (3) Articles of incorporation, authorization, and purposes. • (4) Dealing with the service of a commodity in which the public has been generally held to have an interest. • (5) Monopolizing or intending to monopolize the territory with a public service commodity. • (6) Acceptance of substantially all requests for service. • (7) Service under contracts and reserving the right to discriminate is not always controlling. • (8) Actual or potential competition with other corporations whose business is clothed with the public interest. • Iowa Supreme Court found that (1) most factors → not public utility, (2) a few factors →neutral. • Lower court had found that (1) a few factors → is a public utility, but (2) other factors → not public utility, outweighed the others.

29. 3rd-Party PPA Statute? (Minnesota) Minn. Stat. § 216B.02 Subd. 4: "Public utility" means persons, corporations, or other legal entities . . . operating, maintaining, or controlling in this state equipment or facilities for furnishing at retail . . . electric service to or for the public or engaged in the production and retail sale thereof. . . . No person shall be deemed to be a public utility if it produces or furnishes service to less than 25 persons.”

30. On-Site, Vendor Supply (continued) Contracting Considerations • PPA + Lease/Easement (with cross-termination) • Conditions Precedent/Early “Outs” • Price (fixed/escalating), Term/Renewal, Quantity (versus load) • Allocation of RECs • Allocation of Permitting/Utility Interconnection Obligations/Risk • Allocation of Insolation/Solar Obstruction Risk • Access/Non-Interference with Buyer Operations & Vendor Output • Protection of Property/Roof • Indemnity & Insurance • Limitation of Liability/Consequential Damages • Purchase or Removal Option/Obligation at End of Term (and associated tax issues)

31. 3. Community Solar Garden (CSG) Buyer Bill Credits Utility (Proportional to Subscription) Environmental Attributes (Opt.) Electrical Output Subscription Payment Renewable Project (Off-Site)

32. Community Solar Garden (cont.) • Subscribe” for participation in a portion of a remote solar facility • Pay subscription fee to sponsor/owner of the solar project • “Virtual net metering”— Receive bill credits from your retail utility based on output of the project • Advantages: • Avoid ownership and operation liability • Avoid O&M and administrative responsibility • Avoid interference with business operations and/or diminution of property value • Optimal installation locations (insolation, interconnection, access, etc.) • Possible economies of scale

33. States with CSG Programs (2018) Source: solstice.us/solstice-blog; see also seia.org/initiatives/community-solar

34. Example CSG Programs (MN v. NY)

35. Community Solar Garden (continued) Subscription Agreement—Contracting Considerations • Primary Commercial Terms • Price—Fixed, Escalating, Retail Minus Discount, … • Allocation of RECs (affects price) • Conditions Precedent/Early “Outs” • Quantity—Restrictions based on customer’s retail load? Guaranteed output? • Term—Long-term commitment (e.g., Minnesota typically 25 years) • Exit/Transferability if Customer Moves/Abandons Location • Termination or transferability rights? • State/utility location restrictions? • Liquidated damages for lost income? • Mitigation obligations?

36. 4. Wholesale Power Purchase (PPA) Buyer PPA Retail Price Payment Fixed Price Payment Utility Environmental Attributes Energy at Load Energy at Project Node Renewable Project Floating Price Payment (Nodal Market) Energy at Project Node RTO/ISO Market

37. Wholesale Power Purchase (continued) • Power Purchase Agreement (“PPA”) • FERC Regulatory Requirements: • “Sale of electric energy at wholesale in interstate commerce” is subject to FERC jurisdiction under FPA, 16 U.S.C. § 824(b)(1) • Generally applicable to all wholesale sales unless limited to AK, HI, or TX-ERCOT markets • “Wholesale” = sale for resale • Must obtain Market-Based Rate (MBR) authority, 18 C.F.R. Pt. 35 • Initial application based on formulaic “market power” screens • 60-day review period • Update for “change in status” (e.g., add’l 100 MW within geo. market) • Must file Electric Quarterly Reports (EQRs), 18 C.F.R. § 35.10b • Other compliance obligations—Anti-manipulation, etc. • RTO/ISO Participation • Must become “Market Participant” in applicable RTO/ISO • Must satisfy credit requirements (guaranty or other performance assurance)

38. Wholesale Power Purchase (continued) Contracting Issues • Conditions Precedent (permitting, land, financing, board approval) • Commercial Terms • Price (fixed/escalating)—Imperfect hedge of retail load costs • Term/Renewal • Quantity (typ. full output; flexibility for development risk?) • Credit Support (guaranty, letter of credit, bond, cash; pre/post-COD) • Accommodation of Financing Parties (collateral assignment and consent issues) • RTO Products—Energy, Capacity, Ancillary Services • Production Guarantees • Allocation of RECs • Allocation of Change-In-Law/RTO Rules Risk (e.g., PTC/ITC) • Allocation of Curtailment Risk (RTO/reliability, regulatory, market pricing) and Payment for “Deemed Energy” (including lost PTC) • Purchase Option or Right of First Offer (ROFO)

39. 5. Virtual Power Purchase + RECs Swap + RECs Buyer Retail Price Payment Fixed Price Payment Utility Floating Price Payment Environmental Attributes Energy at Load Renewable Project Energy at Project Node Floating Price Payment RTO/ISO Market

40. Virtual Power Purchase + RECs(continued) • Financially-Settled Transaction Between Parties • No physical transfer of power between the parties • Buyer receives standard retail power from utility • Imperfect hedge • Fixed price payment to Seller • “Offsetting” market price payment to Seller/retail price payment to utility • Accommodates restricted retail access • Buyer avoids need for FERC MBR status, RTO participation • Geographic flexibility—Advantage for Buyer with scattered footprint or limited access to good projects • “Additionality” claims—Finances development of project • Contracting—Non-phys. items of PPAs + regulatory issues • Disadvantages—More complicated “story,” swap regulation…

41. Virtual PPAs—Swap Regulation Dodd–Frank Wall Street Reform and Consumer Protection Act (2010) → Swap Provisions of Commodity Exchange Act, 7 U.S.C. §§ 1-27f → Commodity Futures Trading Commission (CFTC) Swap Rules • Eligible Contract Participant (ECP) Requirement • Only ECPs can trade in off-exchange swaps, 7 U.S.C. §2 • Generally, any company with assets > $10,000,000, 7 U.S.C. §1a(18) • Swap Recordkeeping, 17 C.F.R. §45.2 • “[F]ull, complete, and systematic records, together with all pertinent data and memoranda, with respect to each swap” • Maintain during life of swap and 5 years following termination • Must be retrievable within 5 business days

42. Virtual PPAs—Swap Regulation (continued) • Swap Reporting, 17 C.F.R. Pts. 43, 45 • Each swap must be reported to a swap data repository (SDR) • Only one party reports—either the “swap dealer” or by agreement • Each party must have a legal entity identifier (LEI) • Other (often not applicable)—17 C.F.R. Pts. 1-199

43. 6. REC Purchase REC Purchase Buyer Utility Retail Price Payment REC Payment Energy at Load Environmental Attributes Renewable Project Energy Sale (?)

44. REC Purchase (continued) • Separate Renewable + Energy Procurement • Purchase and retire RECs • Purchase standard retail energy service from utility/retail provider • Advantages: • Flexibility—purchase RECs from any project anywhere • Avoid FERC, CFTC, and state utility regulatory issues • Avoid long-term commitment to any renewable project(s) • Disadvantages: • Exposed to REC market risk unless long-term purchase • Diminished renewable “story” but can still make green claims • Provides no hedge/savings of power costs

45. 7. Retail/Utility Sleeved PPA Sleeved PPA Buyer Retail PPA-Based Payment Fixed PPA Price Retail Provider or Utility Environmental Attributes Environmental Attributes Energy at Load Energy at Project Node Renewable Project Payments for Imbalance Energy Imbalance Energy RTO/ISO Market

46. Retail/Utility Sleeved PPA(continued) • PPA with Renewable Project, Intermediated by Utility • Provides a long-term price hedge in addition to RECs • Buyer avoids need for FERC MBR status, RTO participation • Nexus to specific renewable project(s) • Retail Choice (Deregulated States) • Wide flexibility to structure transaction • Regulated Utilities • “Green Tariff” • Price structure offered by local utility & approved by state PUC • Purchase energy & RECs from renewable project(s) at large scale, up to 100% of load • One-on-One Renewable Energy Deal • “Special contract” negotiated with utility under PUC rules/approval (not generally available) • Limited transparency • Structures Blend Into Standardized “Green Programs”

47. Sleeved PPA* Availability Source: World Resources Institute, U.S. Renewable Energy Map: A Guide for Corporate Buyers

48. Retail/Utility Sleeved PPA(continued) Contracting Issues • Legal authorization for arrangement (reps & warranties) • Commercial Terms • Price (fixed/escalating)—Full hedge of retail load costs • Retail Service Fees • Term/Renewal • Quantity • Full/partial output • Full/partial requirements (with targets, minimums, makeup) • Fixed quantity (MW) block • Layering of renewable over generic service • Right/prohibition of adding on-site generation

49. Retail/Utility Sleeved PPA(continued) Contracting Issues Credit Support Allocation of Change-In-Law or RTO Rule Risk Allocation of RECs See also § 4. Wholesale PPAs

50. 8. Utility/Retail Green Program Green Program Buyer Green Retail Payment PPA Prices Utility or Retail Provider Environmental Attributes Environmental Attributes Energy at Load Energy at Project Node Third Party Renewable Project(s) Utility/Provider Renewable Project(s)