The Renewable Fuels Association National Ethanol Conference (NEC) concluded on February 13. During the last few quarters, ethanol margins have been at the lowest levels in many years resulting in reduced production and the permanent closure of some plants. A number of plants are seeking buyers. In this climate, the focus of the NEC was on the future of the industry. Here are some key points gleaned from multiple conference presentations.
Members of Husch Blackwell’s renewable energy team attended the 2019 Infocast Wind Power Finance & Investment Summit in Carlsbad, CA, February 5-7. Here are some of the themes from the conference:
- While there is a push to complete many projects in 2020, there was a lot of discussion about how the industry and project financing will evolve in coming years as the Production Tax Credit steps down and after it sunsets. The industry is becoming increasingly complex with ever-changing state and federal policies, an increase in C&I offtakers, increasingly complex non-traditional offtake arrangements, and new financing parties waiting in the wings. It is important to understand the challenges and opportunities that these changes create. Husch Blackwell’s renewable energy team can help you navigate these ever changing challenges and opportunities and ensure that your project is completed on time and in compliance with all state and federal policies.
Members of the Husch Blackwell bioenergy team are deep into the Winter/Spring conference season, attending major national and regional conferences in biogas, biodiesel, ethanol and biomass. Here are some of the themes that are consistent across the conferences.
The biodiesel industry is gathering at the National Biodiesel Board’s National Biodiesel Conference in San Diego starting January 19. With turmoil in the federal Renewable Fuel Standards program and low petroleum prices, the industry will be highlighting the important role biodiesel has to play in lowering carbon in the atmosphere. Biodiesel is commercially available and produces up to 90 percent less carbon emissions than petroleum diesel. Further, many biodiesel technologies are capable of using waste products as the primary input. National carbon reduction goals under the Paris Climate Accord generally are not being met, and in some cases carbon emissions are increasing. Here in the U.S., carbon emissions increased last year, largely based on increased use of transportation fuel given a stronger economy. While it seems that substantial federal action on carbon reduction is not likely until after the 2020 election cycle, there are significant carbon reduction strategies in effect or being implemented in various Canadian provinces and at the Canadian federal level. In the U.S., the primary drivers are carbon cap-and-trade programs in California and Oregon, as well as the Regional Greenhouse Gas Initiative of nine northeastern states. Conference sessions will focus on these programs and the potential for additional similar programs here in the U.S.
Husch Blackwell partners with the Texas Renewable Energy Industries Alliance (TREIA) once again to present a five-part webinar series focused on the Texas renewable energy industry. The final installment in the New Directions webinar series will discuss the upcoming 2019 regular session of the Texas Legislature and what’s in store for renewable energy.
Register for the Texas Legislative Preview webinar to be held on Monday, December 17, 2018 at 12:00pm – 1:00pm CST.
If you missed the previous installments of the New Directions webinar series, the recording for each installment can be found here or you can download the podcast.
In the latest of the eight-part Renewable Energy Projects Webinar Series, Husch Blackwell’s Chris Reeder and Linda Walsh will discuss the federal and state regulatory approvals often required for typical wind and solar energy projects. They will address the circumstances under which such regulatory approvals are required and the timing needed to apply for and receive the approvals. In addition, they will highlight the issues that commonly arise throughout the approval process.
Register here for the webinar on December 14, 2018, 12:00pm – 1:00pm CST.
If you missed previous installments of the Renewable Energy Projects Webinar Series, a description and link to the recording for each previous installment is listed below.
#1 Transaction Overview – In this first installment of the series, Husch Blackwell attorneys walk through the main stages of a development project at a high level. After a wild end to 2017 and a new tax code, the renewable energy industry adjusted for 2018 and beyond. Margins narrowed and companies searched for efficient, effective ways to cut costs. Listen now.
#2 EPC, O&M and Asset Management Agreements – In the second installment of the series, Husch Blackwell attorneys focus on best practices with respect to Engineering Procurement and Construction (“EPC”) Contracts, Operations and Maintenance (“O&M”) Agreements and Asset Management Agreements. The conversation provides an overview of key agreement provisions and how they can protect against recurrent issues as well as special considerations for negotiating and administering these agreements. Listen now.
#3 Transaction Structuring – HB attorneys discuss how renewable energy project developers can best position themselves during a project’s acquisition and development phases for a successful financing process. Presenters summarize the current PTC and ITC landscape and key qualification components, as well as examine the commercial and legal considerations a developer must keep in mind to ensure that the development and construction of its project stays on schedule and eligible for 100% of the value of available tax credits. Listen now.
#4 Site Assembly – In the fourth installment, HB attorneys discuss best practices for early- and mid-stage site control efforts that will save time and money in later stages, as well as how to avoid common pitfalls. Presenters provide a practical checklist and other tools that can be used during site development to help ensure that due diligence efforts at financing or sale of the project go smoothly. Listen now.
#5 Project Permitting – Husch Blackwell Environmental attorneys discuss the federal, state and local environmental and development permits required for typical wind and solar energy projects. They address the circumstances that trigger the need for a permit, the studies and assessments that are generally performed to evaluate the applicability of permitting requirements, and the timing to apply for and obtain permits. Listen now.
#6 Project Acquisition and Disposition – HB attorneys discuss current issues that arise in the acquisition and disposition of renewable energy projects and how to increase efficiencies throughout the life of the transaction. They address common issues that typically require significant negotiation between the parties, as well as novel issues that require thoughtful consideration, planning and negotiation. Listen now.
#8 – Purchase Power Agreements (Coming in January 2019)
A new legislation signed into law in August, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), will expand vastly the types of foreign investment transactions that the Committee on Foreign Investment in the United States (“CFIUS”) may review. Under the new law, a wide range of foreign investments affecting the U.S. energy sector will be subject to the federal scrutiny.
Overview of the CFIUS Review Process
CFIUS has the authority to review “covered transactions” that might raise national security concern. CFIUS is a US government interagency process, chaired by the Treasury Department. Under the previous law, a “covered transaction” is one that results in foreign control over a U.S. business engaged in interstate commerce, and CFIUS is interested in reviewing a transaction if it raises risk of impairing national security, where the foreign entity is controlled by a foreign government, or if it involves any “critical infrastructure” that could impair the national security.
Critical infrastructure has been defined to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on security, national economic security, national public health or safety, or any combination of those matters.” Through a series of directives, the Department of Homeland Security (DHS) has identified 16 sectors of the economy as with assets potentially critical to the U.S. infrastructure, including the energy sector.
For each transaction that it reviews, CFIUS’s analysis considers:
- Threat – whether the foreign acquirer has the capability or intent to exploit or cause harm;
- Vulnerability – whether the nature of the US target asset creates susceptibility to impairment of national security;
- Consequences – to US national security of the combination of the threat and vulnerability
This process may result in transactions being suspended, blocked, or modified.
Expansion of “Covered Transactions”
Previously the CFIUS only had jurisdiction to review foreign investments or acquisitions that could result in foreign control over a U.S. Business. After FIRRMA, the new legislation now calls for CFIUS to review a wide range of non-controlling investments made by foreign persons. Among the expanded categories of “covered transactions,” what is particularly relevant to the energy sector is that FIRRMA directs CFIUS to review all investments in US businesses that own, operate, manufacture, supply, or service “critical infrastructure” such as electricity transmission line, pipelines, oil and gas facilities, nuclear, hygro and other power plants, or US businesses that produces, designs, tests, manufactures, fabricates, or develops “critical technologies.” Such foreign investments, even though non-controlling, are subject to review if they afford the foreign person access to any material non-public technical information, membership or observer rights on the board of directors, or any involvement (other than through voting of shares) in substantive decision-making of the business in connection with critical infrastructure or critical technology.
FIRMMA provides the general contours for CFIUS reform, but not the specifics. To achieve broad-based support among competing interests and various US agency members of CFIUS, many concepts of FIRRMA, and especially key definitions relevant to the expansion of the non-controlling “covered transactions” relevant to the “critical infrastructure” and “critical technologies,” are left subject to the regulations to be prescribed by CFIUS. For example, FIRRMA continues to define “critical technologies” to mean “systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and asses would have a debilitating impact on national security.” And what type of assets will meet this bar are subject to interpretation in the regulations to be prescribed by the Committee. Congress also deferred to CFIUS to prescribe regulations to limit the application of the expanded “covered transactions” to “certain categories of foreign persons.” How broad or narrow those “categories of foreign persons” are and what criteria CFIUS will use to define the categories, remain to be seen.
FIRRMA contains an important carve-out for indirect investments made by a foreign person into an investment fund. In particular, an indirect investment does not constitute investment subject to CFIUS jurisdiction if the investment fund is managed exclusively by a non-foreign general partner; any advisory board membership associated with the investment does not come with an ability to control the fund’s investments or the activities of any portfolio company; and the indirect investor does not as result of advisory board membership, gain access to “material nonpublic technical information.
Declarations – Fast Track Process
One of the most important procedural reforms of FIRRMA is to allow the more simplified “declaration” process for parties who wish to submit them. These declarations will be shorter than fully written notices (i.e., no more than five pages), and FIRRMA requires that CFIUS provide responses to declarations within 30 days. CFIUS may notify the parties that they should file a compete notice, initiate a full review on its own, or clear the transaction. This could be used as a fast track process for parties with less sensitive transactions to secure a confirmatory declaration with a much shorter process.
Effects on CFIUS Filing Process
While FIRRMA aims at reforms that enhance the protection of national security, it does continue to emphasize on the value of continued attraction of foreign investment into the U.S. To that end FIRRMA pointedly directs, that the CFIUS should continue to review transactions for the purpose of protecting national security, and should not consider commercial purposes, or to advance trade or other industrial policy goals.
Some FIRRMA changes to the review process came into effect immediately upon enactment, but the most significant changes will only take into effect until CFIUS certifies the implementing regulations. For example, the expanded “covered transactions” relating to “critical infrastructure” does not go into effect until the implementing regulation is adopted or a pilot program is put in place.
The announcement of the Office of the U.S. Trade Representative (“USTR”) on January 22, 2018, that the Trump Administration is granting relief for the domestic solar panels and modules industry under section 201 of the Trade Act of 1974, confirmed the fears of many consumers that substantial additional duties would be imposed on those products. USTR announced that the relief would come in the form of a tariff increase of 30% in the first year, decreasing to 25% in year two, 20% in year three, and then to 15% in year four. On January 23, 2018, President Trump signed the Proclamation implementing the relief. The relief will go into effect on February 7, 2018.
Despite the above tariffs, the relief announced provides that the first 2.5 gigawatts of imported cells are excluded from the additional tariffs. The use of the exemption for the first 2.5 gigawatts makes the relief a form of a “tariff rate quota,” meaning that tariffs only apply if imports rise above a certain quota amount. This type of relief has been imposed in the past, including on certain steel products. The ITC Commissioners made various recommendations to the President in this case, some of which included types of tariff rate quotas.
The nature of the relief will mean that exporters now are likely want to rush to import their products in order to be within the 2.5 gigawatt exclusion. The Proclamation states that the quota of 2.5 gigawatts “shall be allocated among all countries except those countries the product of which are excluded from such tariff rate quotas…” While this statement seems to imply that there will be a base time period used to determine different market shares within the total quota for different countries, our discussions with government officials indicate that this was not what was intended. Instead, the intention was to have one worldwide quota of 2.5 gigawatts that will apply to all countries, without any allocation among countries. Regardless of whether allocations are made among countries or there is just one overall quota, if shipments are made in the hope that they will fall within the exclusion but the 2.5 gigawatt quota already is filled at the time of entry, the 30% tariff that then will be applied may change the economics of a deal if the possibility of a tariff has not been taken into account. It is not clear at this time whether there will be some kind of pre-clearance for such imports before the time of exportation, or whether there will be a free-for-all at the time of entry. Continue Reading Solar Panels and Modules Trade Decision Creates New Uncertainty for Purchasers
The renewables industry can breathe easier this weekend as details emerge from whirlwind negotiations that appear to clear the path toward passage of the first comprehensive tax bill in more than 30 years.
The final language, released by the Conference Committee last night, scraps a House provision which would have effectively gutted Production Tax Credits (PTCs) critical to the wind industry; eliminates the corporate Alternative Minimum Tax; and takes the teeth out of the so-called BEAT (Base Erosion Anti-Abuse) Tax Continue Reading Congressional Compromise Mollifies Renewable Industry Concerns
Renewable energy developers believed to have dodged a bullet in the Senate’s tax reform bill face newfound concerns as the upper chamber works toward expected final passage this week. While the Senate bill preserves important Production Tax Credits (PTCs) that had been significantly rolled back in the House, it also contains a provision which would severely undercut the value of tax equity credits relied upon by institutional investors to justify upfront investments in wind and solar projects. Continue Reading “Base Erosion Tax” Poses Newfound Threat to Wind and Solar Development