Hunton & Williams Renewable Energy Quarterly, September 2009
Hunton & Williams Renewable Energy Quarterly, September 2009
Hunton & Williams Renewable Energy Quarterly, September 2009
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
<strong>September</strong> <strong>2009</strong><br />
In This Issue...<br />
Federal Climate<br />
Legislation: The End<br />
Would Be Just The<br />
Beginning....................... 1<br />
SPECIAL FEATURE:<br />
ASIAN MARKET<br />
Progress To Date in<br />
Implementing China’s<br />
<strong>Renewable</strong> <strong>Energy</strong><br />
Law of 2006................ 4<br />
<strong>Renewable</strong> <strong>Energy</strong><br />
Development<br />
Prospects of<br />
Southeast Asia’s<br />
‘Green Tigers’............. 9<br />
Recovery Act Guidance<br />
Update........................... 17<br />
Ambiguities in ‘Buy<br />
American’ Rule Hamper<br />
<strong>Renewable</strong> <strong>Energy</strong><br />
Projects......................... 22<br />
Green Investment<br />
Funds: Threshold<br />
Considerations and<br />
Challenges.................... 26<br />
Industry Happenings... 30<br />
Federal Climate Legislation: The End Would Be Just<br />
The Beginning<br />
The U.S. Congress is now the center of climate change policy in the United States, but the passage<br />
of legislation for President Obama’s signature would not mark the end of the debate. The American<br />
Clean <strong>Energy</strong> and Security Act of <strong>2009</strong>, as passed by the House on June 26, establishes only a<br />
broad framework for the reduction of greenhouse gas emissions. Essential details are delegated<br />
to the Environmental Protection Agency, the Department of <strong>Energy</strong>, the Department of Agriculture,<br />
the Federal <strong>Energy</strong> Regulatory Commission and the Commodities Futures Trading Commission for<br />
rulemaking.<br />
As a result, long after the ink from the president’s signature is dry, the EPA and other agencies will<br />
be busy crafting critical components of the bill’s programs that will determine — perhaps to a far<br />
greater extent than the legislation itself — both the obligations imposed on industry and the outcome<br />
for the environment. In other words, it will be up to the regulator in many instances to decide<br />
who wins and who loses.<br />
As it now stands, the bill contemplates no fewer than 22 agency rulemakings or major actions<br />
within the first year following enactment. An additional 20 rulemakings or actions are required within<br />
two years, and at least another 30 by 2020.<br />
If history is any guide, few of these rulemakings will be completed on time. For example, many of<br />
the rulemakings arising out of the Clean Air Act Amendments of 1990 took most of the 1990s to<br />
complete, and some key issues remain unresolved to this day.<br />
With the first compliance deadline for emitters of greenhouse gases slated for April 1, 2013, questions<br />
loom as to whether the EPA and other agencies will be able to finalize critical regulations far<br />
enough in advance for the U.S. carbon market to get off the ground. At best, it appears that a skeleton<br />
version of a cap-and-trade system could commence operation on time, but without key features<br />
designed to reduce compliance costs and provide regulatory certainty. At worst, regulatory gridlock<br />
could ensue, deterring investments in clean technology and disrupting efforts to reduce emissions.<br />
As an example, the bill provides for the distribution of “compensatory allowances” to covered entities<br />
that engage in certain types of “non-emissive” uses of greenhouse gases. The objective is to<br />
compensate businesses that, under the bill, would be forced to hold emission allowances for activities<br />
that do not result in emissions, such as the use of petroleum-based fuel as a feedstock. The bill<br />
calls for regulations providing for the creation and distribution of compensatory allowances within<br />
two years following enactment. But as noted above, this is just one of more than 40 rulemakings or<br />
major agency actions required in that time period.<br />
Covered entities eligible for compensatory allowances could face dramatically different compliance<br />
costs if such allowances were not available. This not only creates uncertainty, but it skews<br />
<strong>Hunton</strong> In The News.... 32<br />
Sahara Sun to Power Europe?............................................................................................. 30<br />
U.S. Military and Investors Help Algae Research Grow......................................................31
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
compliance costs and foils the kind of long-term planning<br />
and investment conducive to the development of new,<br />
climate-friendly technologies, products and processes.<br />
The situation is similar with respect to the offsets program<br />
established by the bill, but with far greater implications,<br />
as offsets arguably represent the only substantial cost<br />
containment mechanism in the entire bill. Despite providing<br />
a substantial amount of detail, the bill leaves some critical<br />
components of the offsets program to the EPA and the<br />
Department of Agriculture. For example, the bill does not<br />
provide a list of eligible offset project types, instead requiring<br />
the EPA and USDA to develop lists within one year of<br />
enactment.<br />
Once those are developed, the EPA and USDA would then<br />
need to develop and finalize project methodologies — complex,<br />
technical procedural requirements for an emission<br />
reduction project to be eligible to receive offset credits. The<br />
need to complete this process in two years raises concerns<br />
over when offset projects could begin generating offset credits,<br />
especially given that developing new offset projects could<br />
take years once the rules are finalized.<br />
Under the bill, the EPA and USDA<br />
would be expected to issue two billion<br />
offset credits each year.<br />
This tight timeframe becomes of even greater concern<br />
given the number of offset credits the EPA and USDA would<br />
need to issue each year to maximize the bill’s cost containment<br />
features. Existing offset programs such as the Clean<br />
Development Mechanism and various voluntary carbon market<br />
programs have never come close to issuing two billion<br />
credits over their entire multiyear lifetimes. Under the bill, the<br />
EPA and USDA would be expected to issue two billion offset<br />
credits each year. How many of those two billion would be<br />
available before the first compliance deadline in 2013 is an<br />
unanswered question.<br />
Compensatory allowances and the offsets program are<br />
just two examples of key features that will depend heavily<br />
on agency rulemaking processes that historically have<br />
been anything but expeditious. Legal challenges to agency<br />
rulemaking, which figured prominently in the rulemakings<br />
following the Clean Air Act Amendments of 1990, could add<br />
further delay to the full implementation of many of the bill’s<br />
most important provisions.<br />
Equally, if not more, significant than the timing of agency<br />
rulemakings is the extraordinary discretion the bill grants to<br />
the EPA and other agencies to alter components of the capand-trade<br />
system.<br />
Under the offsets provisions, for example, the EPA and<br />
USDA are required to revise key features of the program<br />
every five years as part of a periodic review. This authority<br />
is purportedly to ensure the environmental integrity and efficient<br />
operation of the cap-and-trade system. While these are<br />
important goals, the unchecked nature of this authority could<br />
frustrate project developers and covered entities seeking to<br />
participate in the carbon market. Most emission reduction<br />
projects take a year or more to develop and then can operate<br />
for a decade or longer.<br />
2 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
The risk that projects could lose their eligibility to generate<br />
offset credits, potentially with little notice, as a result of an<br />
EPA or USDA review could discourage investment in projects<br />
and hinder the emergence of a robust offset credit market.<br />
More broadly, even features of the cap-and-trade system<br />
seemingly carved in stone are subject to change. No more<br />
obvious example exists than the number of emission allowances<br />
the bill requires the EPA to establish for each year<br />
of the program. The precise numbers are listed in a table<br />
embedded in the text of the bill, but the EPA is authorized to<br />
change these numbers if, among other things, it determines<br />
that the underlying emissions data on which these numbers<br />
are based is inaccurate.<br />
The EPA may make such a change only once, but even a<br />
one-time change would affect the number of allowances allocated<br />
to covered entities, states, federal agencies and other<br />
groups. This in turn fosters uncertainty, raises compliance<br />
costs and could potentially destabilize the carbon market.<br />
There also are instances in which the bill delegates authority<br />
for key changes to entities outside the Executive Branch. For<br />
example, the bill requires the EPA to report to Congress on<br />
U.S. and foreign efforts to reduce emissions and to recommend<br />
additional actions to address climate change. The bill<br />
then requires the National Academy of Sciences — a private<br />
entity whose members are not appointed by the president<br />
— to review the report and issue its own recommendations.<br />
The president is then required to order agencies to use all<br />
existing authority to implement these recommendations and<br />
submit a report to Congress requesting additional legislative<br />
action where needed.<br />
Although these provisions do grant the National Academy<br />
and the president a limited amount of discretion, they<br />
nevertheless raise potential constitutional issues, as they<br />
effectively allow an entity that is untethered to the democratic<br />
process to tie the president’s hands and force potentially<br />
unpalatable action.<br />
In the end, what all this means is that as a comprehensive<br />
climate change regulatory regime inches closer to reality,<br />
its enactment will mark only the beginning of the jockeying<br />
between possible winners and losers in the new U.S. carbon<br />
markets.<br />
3 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
SPECIAL FEATURE: ASIAN MARKET<br />
Progress To Date in Implementing China’s <strong>Renewable</strong> <strong>Energy</strong><br />
Law of 2006<br />
It has been three years since the People’s Republic of<br />
China (“PRC”) passed its <strong>Renewable</strong> <strong>Energy</strong> Law. In that<br />
time the PRC has enacted several key pieces of follow-on<br />
legislation and policy that fit together to form a comprehensive<br />
renewable energy program, although some issues<br />
remain unaddressed. This article aims to provide a general<br />
review of relevant law and policy, with a view to highlighting<br />
points likely to be of interest to a renewable energy project<br />
developer.<br />
China <strong>Energy</strong> Sector Background<br />
China relies heavily on coal to meet its power generation<br />
needs. China’s installed generating capacity as of 2005<br />
was roughly 519 gigawatts (GW). 1 At that time, China’s<br />
energy generation mix was as follows: 73.41 percent coal,<br />
15.22 percent large hydropower, 7.32 percent small hydropower,<br />
1.93 percent gas, 1.35 percent nuclear, 0.19 percent<br />
wind and 0.39 percent other sources. 2<br />
China’s electricity sector has undergone significant reform<br />
in the last decade. Until 2002, China’s power industry<br />
(including both generation and transmission capacities)<br />
was monopolized by the State Power Corporation (“SPC”),<br />
which owned 46 percent of China’s generation assets and 90<br />
percent of its distribution assets. The State Council, as part<br />
of power restructuring policy, dismantled SPC to facilitate the<br />
separation of plant and grid asset ownership. Eleven smaller<br />
companies were formed, namely:<br />
ÆÆ two grid operators: State Grid Corporation<br />
headquartered in Beijing and China Southern Power<br />
Grid Company Limited headquartered in Guangzhou;<br />
ÆÆ five power generation companies: China Power<br />
Investment Corporation, China Datang Corporation,<br />
1<br />
Experts estimate that China’s total installed generating capacity<br />
will pass the 900 GW mark in <strong>2009</strong>; however, reliable data more<br />
recent than these figures from 2005 breaking down China’s energy<br />
mix was not available at the time this article was published.<br />
2<br />
McKinsey & Company. “China’s Green Revolution: Prioritizing<br />
Technologies to Achieve <strong>Energy</strong> and Environmental Sustainability.”<br />
February <strong>2009</strong>: 108.<br />
China Huaneng Corporation, China Huadian<br />
Corporation and China Guodian Corporation; and<br />
ÆÆ four related business companies.<br />
Reform policy dictates that no more than 20 percent of<br />
the capacity in each region can be controlled by any one<br />
power generation company, although all power generation<br />
and transmission companies continue to be controlled by<br />
the state. The State Electricity Regulatory Commission<br />
(the “SERC”) was also established as part of this round of<br />
reforms.<br />
The national regulator and policy maker for China’s<br />
energy sector is currently the National Development and<br />
Reform Commission (the “NDRC”). The National <strong>Energy</strong><br />
Administration, a sub-department under and supervised by<br />
the NDRC, was established in July 2008 to be in charge of<br />
national administrative work in respect to the energy sector,<br />
including the renewable energy industry.<br />
[T]he NDRC has set the goal of<br />
increasing the share of renewablebased<br />
energies to be 15 percent of<br />
the national generation mix by 2020.<br />
China has indicated it sees renewable energy as playing a<br />
significant part in meeting its future power demands. In its<br />
long-term development planning, the NDRC has set the goal<br />
of increasing the share of renewable-based energies to be<br />
15 percent of the national generation mix by 2020. 3<br />
<strong>Renewable</strong> <strong>Energy</strong> Law<br />
The <strong>Renewable</strong> <strong>Energy</strong> Law of the People’s Republic of<br />
China (the “RE Law”) came into effect on January 1, 2006.<br />
The RE Law takes the form of an umbrella document,<br />
3<br />
NDRC. “Medium and Long-Term Development Plan for<br />
<strong>Renewable</strong> <strong>Energy</strong> in China (Abbreviated Version, English Draft).”<br />
<strong>September</strong> 2007.<br />
4 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
providing the overarching framework of renewable energy<br />
policies, which are to be further detailed in ministerial-level<br />
legislation and eventually, provincial policy.<br />
The chief high-level policies touched on in the RE Law are<br />
the following:<br />
(1) Special tariffs to be set by the price authorities of the<br />
State Council or by public tender, with any cost above that<br />
of fossil fuel-based power, resulting from interconnection or<br />
otherwise, to be shared in a manner determined by the State<br />
Council;<br />
(2) Interest rate subsidies for the financing of renewable<br />
projects and tax incentives to be determined by the State<br />
Council;<br />
(3) Requirement that grid operators must connect to and purchase<br />
all available power from and provide related services<br />
to licensed renewable energy generators;<br />
(4) Conduct of resource surveying and development<br />
planning (including the setting of deployment targets) by<br />
the energy authorities of the State Council, with expert<br />
consultation;<br />
(5) Preference and support for renewable energy technology<br />
R&D and the establishment and publication of technical<br />
standards for renewable energy; and<br />
(6) The establishment of a renewable energy development<br />
fund to support research, pilot projects and rural<br />
electrification.<br />
Around the time the RE Law was enacted, a guidance<br />
document was made available titled the <strong>Renewable</strong> <strong>Energy</strong><br />
Industry Development Guidance Catalogue (NDRC <strong>Energy</strong><br />
[2005] No. 2517) (the “RE Catalogue”). The RE Law together<br />
with the RE Catalogue define renewable energy sources<br />
in customary terms as being wind, solar (both photovoltaic<br />
and concentrated), hydro, ocean (in respect to tidal and<br />
current movement and temperature differences), geothermal<br />
and biomass (including biogas). Notably, the RE law and<br />
Catalogue treat hydropower specially in some respects<br />
and expressly exclude the burning of organic material in<br />
low-efficiency stoves. The RE Catalogue further provides<br />
that government support extended under the RE Law<br />
would also be offered for ancillary activities such as design,<br />
manufacturing and support of systems, equipment, components<br />
and materials. 4<br />
The RE Law imposes many obligations on the State Council,<br />
which as of yet, have almost all been handled by the NDRC.<br />
Ambitious Development Plan<br />
Pursuant to the RE Law, in <strong>September</strong> 2007 the NDRC<br />
issued the Medium and Long-Term Development Plan for<br />
<strong>Renewable</strong> <strong>Energy</strong> in China (the “RE Plan”), a keystone<br />
policy document setting out renewable energy targets. In<br />
addition to the nationwide generation mix target mentioned<br />
above, the RE Plan sets out, among other things, nationwide<br />
installed generating capacity targets in 2010 and 2020<br />
in respect to each form of renewable energy and renewable<br />
portfolio standards (RPS) for the large generating<br />
companies.<br />
Targets set out in the <strong>September</strong> 2007 RE Plan<br />
<strong>Energy</strong> Source 2005<br />
(Actual)<br />
2010<br />
Target<br />
2020<br />
Target<br />
<strong>Renewable</strong>s as a 8.0 10.0 15.0<br />
portion of national<br />
gen. mix (%)<br />
Hydro (GW) 117 190 300<br />
Wind (GW) 1.31 5.0 30.0<br />
Biomass (GW) 2.0 5.5 30.0<br />
1All ex. Biogas and n/a 4.0 24.0<br />
MSW (GW)<br />
2Biogas (GW) n/a 1.0 3.0<br />
3Muni. Waste (GW) n/a 0.5 3.0<br />
Solar (GW) 0.07 0.30 1.80<br />
Geothermal (annual n/a 4.0 12.0<br />
utilization, Mtce)<br />
Ocean (GW) n/a none 0.10<br />
Large Generation<br />
Company RPS (%)<br />
n/a 3.0 8.0<br />
The targets set out in the RE Plan were deemed by experts<br />
as highly ambitious, but now some goals have already been<br />
met, such as the 2010 wind power target of 5GW, which was<br />
met in 2008. As a result, it is likely the medium- and longterm<br />
targets for wind and also solar power will be revised<br />
4<br />
Neal Stender, Zhihua (David) Tang and Qingsong (Kevin) Wang.<br />
“<strong>Renewable</strong> <strong>Energy</strong> Law Encourages a Hundred Flowers to Bloom.”<br />
China Law & Practice. April 2006: 12.<br />
5 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
upwards 5 (rumored targets as high as 100 GW of wind and<br />
9 GW of solar in 2020 have appeared in recent Chinese<br />
press) and there is even talk of revising the nationwide<br />
renewables target for 2010 from 15 percent to 20 percent of<br />
China’s generation mix. 6<br />
The targets in the RE Plan are based on installed generating<br />
capacity rather than actual deliveries to the grid. As such, the<br />
large power generation companies have been concentrating<br />
on deploying capacity as quickly as possible to meet<br />
the mandated RPS, sometimes without assurance that the<br />
projects will be able to connect to the grid and deliver power<br />
in a timely fashion.<br />
RE Law Implementing Regulations<br />
Under China’s institutional framework, the State Council sets<br />
the country’s general policy and appropriate government<br />
ministries are charged with formulating the rules addressing<br />
issues within the national regulation framework that pertain<br />
to their capabilities and responsibilities. The ministerial regulations<br />
then guide the provincial governments as they form<br />
the implementing rules. Many ministerial regulations and<br />
provincial implementing rules have been passed to implement<br />
the RE Law, with more regulations expected.<br />
Tariff Setting and Cost Pass Through to End Users<br />
Viable tariffs are the most important factor for developers<br />
in overcoming the cost challenges attendant to renewable<br />
energy projects. As noted above, tariffs can be set by the<br />
government (feed-in tariffs) or determined through public<br />
tender (although the RE Law stipulates that a winning price<br />
is not to exceed the rate paid to grid-connected projects of<br />
a similar nature). The ministerial regulation covering this<br />
issue is the Provisional Administrative Measures on Pricing<br />
and Cost Sharing for <strong>Renewable</strong> <strong>Energy</strong> Power Generation<br />
(NDRC Price [2006] No. 7) (the “Pricing Reg”), which came<br />
into effect on the same day as the RE Law, January 1, 2006.<br />
The Pricing Reg provides the following guidelines for tariff<br />
determination:<br />
(1) Prices for biomass projects may be either feed-in tariffs<br />
or set by bid. For feed-in tariffs, biomass projects enjoy a<br />
subsidy of RMB 0.25 per kWh for 15 years following commercial<br />
operations. The subsidy offered to new biomass<br />
projects will be reduced annually from 2010 by 2 percent.<br />
5<br />
Fu Jing. “China Considers Higher <strong>Renewable</strong> <strong>Energy</strong> Targets.”<br />
China Daily. July 6, <strong>2009</strong>.<br />
6<br />
Yu Tianyu. “Green <strong>Energy</strong> Attracts Investors.” China Daily. July<br />
10, <strong>2009</strong>.<br />
Hybrid systems employing both traditional fossil-fired and<br />
biomass components will not receive the subsidy if over<br />
20 percent of the heat consumption for power production is<br />
from traditional sources. For tariffs set by competitive bid,<br />
there is no subsidy;<br />
(2) Solar, ocean and geothermal power projects will receive<br />
government-set tariffs (but detailed calculations such as<br />
those for biomass are not provided);<br />
(3) Hydropower project tariff determination is covered under<br />
a separate existing law; and<br />
(4) The “price authorities of the State Council” will be<br />
responsible for setting tariffs or conducting competitive bid<br />
processes, as applicable, in connection with renewable<br />
energy projects.<br />
The RE Law provides the added cost of developing renewable<br />
energy will be “shared in the selling price.” This concept<br />
is further detailed in the Pricing Reg, which provides that<br />
a renewable energy surcharge be paid by all end users of<br />
electricity. The surcharge may be adjusted annually and<br />
will cover (a) the portion of the average purchase price of<br />
renewable energy paid by grid operators over the average<br />
purchase price of energy from coal-fired projects, and (b) the<br />
cost of connecting renewable energy projects to the grid.<br />
The surcharge was initially set at RMB 0.001 per kWh by<br />
the <strong>Renewable</strong> <strong>Energy</strong> Surcharge Level Regulation (NDRC<br />
Price [2006] No. 28-33).<br />
Although the Pricing Reg originally provided that wind<br />
tariffs would be determined by competitive bid, a July <strong>2009</strong><br />
NDRC announcement revealed that as of August 1, <strong>2009</strong><br />
onshore wind projects will receive fixed tariffs of RMB 0.51,<br />
RMB 0.54, RMB 0.58 or RMB 0.61, depending on geographic<br />
region. The new benchmark tariff system effectively<br />
eliminates the downward pressure on on-grid prices exerted<br />
by bid competition and allows developers to plan wind farms<br />
around a known price. Tariffs for offshore projects will be<br />
determined separately.<br />
Investment Incentives<br />
As of yet, instruction on investment incentives has been<br />
limited to the generalities of the RE Law and the provision<br />
of feed-in tariffs and subsidies in the Pricing Reg (which are<br />
only really fully explained in respect to biomass projects).<br />
Regulations dealing solely with the special financing terms<br />
and tax treatment for renewable projects mentioned in the<br />
RE Law have not yet been passed. Recent nonrenewable<br />
6 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
specific regulations have touched on tax incentives for new<br />
renewable projects and equipment manufacturers, including:<br />
(1) Reduced VAT rates or whole or partial VAT rebates for<br />
certain types of renewable power developers 7 ;<br />
(2) Three-year income tax holidays with reduced (12.5 percent)<br />
income tax rates for the three years following expiry of<br />
the holiday for “basic infrastructure projects,” including hydro,<br />
wind, ocean, solar and geothermal power projects 8 ; and<br />
energy projects to connect to the grid. The second is<br />
the Measures on Supervision and Administration of Grid<br />
Enterprises in the Purchase of <strong>Renewable</strong> <strong>Energy</strong> Power<br />
(SERC [2007] No. 25) (the “Grid Purchase Reg”). The Grid<br />
Purchase Reg provides that the national grid authority and<br />
national standards authority draft a grid code and power<br />
purchase standards and that the grid operator’s purchase of<br />
renewable-based power will be supervised by the SERC and<br />
local agencies.<br />
(3) For certain “high and new-tech” enterprises, which may<br />
include equipment manufacturers, reduced (15 percent)<br />
income tax rates and, if incorporated in special economic<br />
zones, two-year income tax holidays with reduced (12.5 percent)<br />
income tax rates for the three years following the<br />
expiration of the holiday. 9<br />
Ensuring Grid Operator Cooperation<br />
Assurance that renewable energy projects will be able to<br />
interconnect to the grid and the enforcement of the grid<br />
operators’ obligation to give priority to renewable energy<br />
projects in grid connection and power purchase under the<br />
RE Law are key concerns for developers. Failure by the<br />
grid operators to honor their obligations can create delays,<br />
reduce profits and increase risks, all effective barriers to the<br />
commercialization of renewable energy.<br />
Two regulations have been<br />
enacted that address these<br />
two key components. The<br />
first is the Regulation on<br />
the Administration of Power<br />
Generation from <strong>Renewable</strong><br />
<strong>Energy</strong> (NDRC <strong>Energy</strong> [2006]<br />
No. 13) (the “Administration<br />
Reg”), which principally provides<br />
that the grid operators<br />
are obliged to allow renewable<br />
7<br />
Notice of the Ministry of Finance and the State Administration of<br />
Taxation about Policies regarding the Value Added Tax on Products<br />
Made through Comprehensive Utilization of Resources and Other<br />
Products (MOF [2008] No. 156); and Notice of the Ministry of<br />
Finance and the State Administration of Taxation on the Application<br />
of Low Value Added Tax Rates and Policies on Collecting Value<br />
Added Tax by the Simple Approach to Some Goods (MOF [<strong>2009</strong>]<br />
No. 9).<br />
8<br />
Regulation on the Implementation of the Enterprise Income Tax<br />
Law of the People’s Republic of China.<br />
9<br />
Administrative Measures for Determination of High and New Tech<br />
Enterprises (MOF and SAT [2008]).<br />
The China Wind <strong>Energy</strong> Association<br />
has reported that more than 20 percent<br />
of China’s installed wind farms did not<br />
generate any power in 2008 because<br />
of delays in connecting to the grid.<br />
So far special grid codes have only been passed to provide<br />
technical standards for the interconnection of wind, geothermal<br />
and solar PV power plants. Existing regulations have<br />
so far proved to be insufficient and grid interconnection<br />
has been a serious issue for developers. The strain on the<br />
resources of grid operators in upgrading the grid to connect<br />
to renewable energy projects is proving to be too high and in<br />
many cases the transmission companies are not complying<br />
with the RE Law. The China Wind <strong>Energy</strong> Association has<br />
reported that more than 20 percent of China’s installed wind<br />
farms did not generate any power in 2008 because of delays<br />
in connecting to the grid.<br />
Government Approvals / Power Purchase Agreements<br />
Developers face the risk that required government approvals<br />
for a project in China will be costly and difficult to obtain,<br />
excessively delayed and<br />
not actually available until<br />
the late stages of the<br />
development process. To<br />
help mitigate these risks, a<br />
streamlined and transparent<br />
approval process is key.<br />
The Administration Reg<br />
provides that NDRC approval<br />
is required for renewable<br />
energy projects of 250 MW<br />
or more (or for wind projects<br />
50 MW or more), hydro projects located on major waterways<br />
and projects that require state policy or funding support.<br />
Other projects may be approved by the development and<br />
reform commission offices at the province level. In addition,<br />
compliance is needed from the grid operators in order to<br />
connect and sell power to the grid, which as noted above, is<br />
not always timely (notwithstanding the grid operator’s connection<br />
and purchase obligations under the RE Law and the<br />
Administration Reg). Other standard types of project approvals,<br />
including in respect to foreign investment, if applicable,<br />
will be required.<br />
7 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Also of concern for developers is the document that memorializes<br />
the agreement between the developer and the grid<br />
operator with respect to the sale and purchase of power. As<br />
of yet, model power purchase agreements` have not been<br />
published.<br />
Recent Solar Announcements, Proposed Amendments<br />
to the RE Law and Market Outlook<br />
Several key recent announcements have made investment<br />
in solar projects more interesting and indicate that the<br />
government is now turning its attention to solar after its initial<br />
focus on wind power. First, in March <strong>2009</strong>, the Ministry of<br />
Finance (“MOF”) announced the government would provide<br />
subsidies of RMB 20 per watt generated during peak hours<br />
by solar projects attached to buildings with capacities of<br />
greater than 50 kW. Then, in July <strong>2009</strong>, the MOF announced<br />
that government subsidies would be offered for 50 percent<br />
of the investment in grid-connected solar power projects<br />
and 70 percent of the investment in remote, off-grid solar<br />
power projects. To qualify, the projects must have generating<br />
capacities of more than 300 kW, be completed in one<br />
year and be operative for at least 20 years. 10 Although the<br />
MOF announcements are light on detail and some unanswered<br />
questions remain in respect to the subsidies and<br />
feed-in tariffs for solar PV projects, the <strong>September</strong> <strong>2009</strong><br />
announcement that U.S. firm First Solar Inc. plans to build<br />
a 2 GW solar power plant complex in Inner Mongolia is a<br />
strong sign that developers are responding to the favorable<br />
investment environment cultivated by the PRC. 11 An NDRC<br />
10<br />
Jim Bai and Leonara Walet. “China Offers Bid Solar Subsidy.”<br />
Reuters. July 21, <strong>2009</strong>.<br />
11<br />
“U.S. Firm Says it Will Build China’s Largest Solar <strong>Energy</strong> Plant.”<br />
China Daily: <strong>September</strong> 14, <strong>2009</strong>.<br />
announcement which addresses outstanding solar PV concerns<br />
is expected sometime before the end of <strong>2009</strong>.<br />
The NDRC has recognized the power transmission upgrade<br />
bottleneck which is preventing many projects from being able<br />
to connect to the grid. A draft amendment to the RE Law has<br />
been submitted to the Standing Committee of the National<br />
People’s Congress. The draft has not been disclosed to the<br />
public, but reports indicate that the amendments will focus<br />
on measures designed to directly or indirectly accelerate grid<br />
development, such as (1) establishing a government fund to<br />
support R&D of renewable energy and smart grid technology;<br />
(2) requiring ministries to formulate concrete plans for<br />
meeting China’s medium and long-term renewable energy<br />
development targets; and (3) setting a nationwide annual<br />
purchase quota for renewable energy. 12<br />
Additional areas of concern for developers that could be<br />
further addressed in guidance regulations include tax<br />
incentives, tariff-setting methods for ocean and geothermal<br />
energy, special loan arrangements, grid codes for certain<br />
types of energy and resource assessment methodology.<br />
As legislation continues to be passed, the picture will<br />
become clearer for developers. The enactment of the <strong>Energy</strong><br />
Conservation Law on April 1, 2008, the endorsement of<br />
a climate change resolution on August 27, <strong>2009</strong> and the<br />
imminent passage of the new <strong>Energy</strong> Law, which is under<br />
discussion and expected to be enacted in the near future,<br />
and several other policy and legislative developments do and<br />
will continue to underpin government commitment to renewable<br />
energy development, and developers should certainly<br />
take note.<br />
12<br />
Li Jing. “China Plans for <strong>Renewable</strong> <strong>Energy</strong>”. China Daily:<br />
August 25, <strong>2009</strong>.<br />
8 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
<strong>Renewable</strong> <strong>Energy</strong> Development Prospects of Southeast Asia’s<br />
‘Green Tigers’<br />
The nations of Southeast Asia have some of the most<br />
abundant renewable energy resources in the world. As<br />
governments formulate policy reforms to encourage the<br />
development of renewable energy, we take a look at the<br />
markets and regulatory regimes in three countries that could<br />
be set to take off: the Philippines, Indonesia and Thailand.<br />
The Philippines<br />
More than 10 years after the act had first been introduced,<br />
the Philippine legislature finally enacted the Republic Act<br />
No. 9513 or the <strong>Renewable</strong> <strong>Energy</strong> Act of 2008 (the “RE<br />
Act”), a landmark piece of legislation providing a regulatory<br />
framework for the renewable energy industry, which could<br />
make the Philippines one of the first Southeast Asian nations<br />
to have a renewable energy market as sophisticated as the<br />
United States, Germany, Spain and other developed nations.<br />
<strong>Renewable</strong> <strong>Energy</strong> Sector Background<br />
To date most renewable energy efforts in the Philippines<br />
have related to hydro and geothermal power. At the end<br />
of 2007, the total electricity-generating capacity of the<br />
The Philippines is the world’s secondlargest<br />
producer of geothermal<br />
power, with a current generating<br />
capacity of 1,900 MW.<br />
archipelago nation was 15,937 MW. Hydropower constituted<br />
20.64 percent of the generation mix, geothermal<br />
12.29 percent and other types of renewable energy less than<br />
1 percent. 1 The Philippines is the world’s second-largest<br />
producer of geothermal power, with a current generating<br />
capacity of 1,900 MW. 2<br />
In addition to hydro and geothermal, the government also<br />
sees other forms of renewable energy as being an important<br />
1<br />
“Power Sector Situationer, 2007.” Philippine Department of<br />
<strong>Energy</strong> website. Accessed July <strong>2009</strong>. http://www.doe.gov.ph/EP/<br />
powerstat.htm<br />
2<br />
“Philippines Data Page” International Geothermal Association<br />
website. Accessed July <strong>2009</strong>. http://www.geothermal-energy.org/<br />
geoworld/geoworld.php?sub=map®ion=asia&country=philippines<br />
part of its future energy mix. With over 7,000 islands,<br />
electrifying outer-lying rural communities is a serious issue.<br />
Small-scale solar, wind and micro-hydro generators are<br />
ideal for villages located in far-flung areas where connecting<br />
to regional grids would be prohibitively expensive. The<br />
Department of <strong>Energy</strong> (the “DOE”) has stated plans to<br />
develop these and other renewable energy sources in the<br />
Philippines’ Power Development Plan 2004-2013.<br />
<strong>Renewable</strong> <strong>Energy</strong> Act<br />
On December 16, 2008, more than a decade after it was<br />
first introduced, President Gloria Arroyo signed and thereby<br />
passed into law the RE Act. The RE Act generally provides<br />
incentives and increased grid and market access for renewable<br />
energy projects, while also, among other things, setting<br />
policies for rural (off-grid) electrification and a green pricing<br />
mechanism to promote the consumer’s option to purchase<br />
power generated from renewable sources.<br />
Regulatory Structure<br />
The RE Act establishes a formal regulatory structure for the<br />
renewable energy industry. The National <strong>Renewable</strong> <strong>Energy</strong><br />
Board (the “NREB”), a president-appointed advisory panel<br />
created under the RE Act to oversee its implementation,<br />
comprises industry stakeholders, including representatives<br />
from concerned governmental departments, developers,<br />
distribution utilities, government financial institutions, NGOs<br />
and others. The <strong>Renewable</strong> <strong>Energy</strong> Management Bureau<br />
(the “REMB”), a sub-department under the DOE also created<br />
under the RE Act, is charged with carrying out the information<br />
dissemination, research, monitoring and supervision<br />
functions made necessary by the policies outlined in the RE<br />
Act. The IRR (defined below) appoints the DOE to be lead<br />
agency mandated to implement the RE Act’s provisions.<br />
The RE Act also establishes the <strong>Renewable</strong> <strong>Energy</strong> Trust<br />
Fund to be administered by the DOE as a special account for<br />
government financial institutions such as the Development<br />
Bank of the Philippines, the Land Bank of the Philippines,<br />
the Philippine Export-Import Credit Agency (“PhilEXIM”) and<br />
others. The fund is to support the development of renewable<br />
energy by providing capital to finance R&D (especially<br />
the development of new resources to maintain national<br />
competitiveness), conduct nationwide resource and market<br />
assessment studies, and support knowledge accrual by<br />
providing grants to research institutions.<br />
9 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Implementing Rules and Regulations (IRR)<br />
The DOE issued the department circular titled the<br />
Implementing Rules and Regulations (IRR) of Republic Act<br />
No. 9513 (the “IRR”) on May 25, <strong>2009</strong>. The IRR sets out<br />
clear, detailed guidelines as to how each of the high-level<br />
policies of the RE Act are to be carried out. In addition to providing<br />
regulations for the development of renewable energy<br />
resources, the IRR also clarifies the responsibilities of the<br />
government entities to be involved in the renewable energy<br />
industry and their relationship to the NREB.<br />
Key Policies Further Detailed in the IRR<br />
Employing the framework set out in the RE Act, the IRR<br />
restates key policies, names the entities responsible for carrying<br />
them out and provides time frames for their completion.<br />
Detailed rules are to be formulated, reviewed and enacted<br />
within one year of the passage of the RE Act in most cases.<br />
Key policies mentioned in the RE Act and further detailed in<br />
the IRR include:<br />
(1) the creation of renewable portfolio standards (RPS)<br />
pursuant to which power generators, distribution utilities and<br />
suppliers must source or produce a certain percentage of<br />
their electricity from renewable-based sources;<br />
(2) the establishment of feed-in tariffs and priority privileges<br />
to be enjoyed by generators employing certain types of<br />
renewable resources (notably, not geothermal) for at least<br />
12 years;<br />
(3) the development of a net-metering protocol, whereby<br />
qualified end users may connect and supply power to the<br />
grid (including small-scale home and office solar PV units)<br />
to be netted against electricity delivered by the distribution<br />
utility; and<br />
(4) the formation of a renewable energy market for the trading<br />
of “RE Certificates.”<br />
Incentives for Developers and Other <strong>Renewable</strong>s<br />
Stakeholders<br />
As is true elsewhere in the world, the generation of electricity<br />
in the Philippines from renewable resources is an expensive<br />
proposition. To help offset the requisite exploration and/or<br />
technology costs, the IRR details a comprehensive set of<br />
incentives to entice investors to develop renewable projects<br />
and reward those who have invested in existing renewable<br />
projects.<br />
The incentives are offered to developers possessing a<br />
Certificate of Endorsement issued by the DOE through the<br />
REMB, including developers of hybrid systems utilizing both<br />
renewable- and non-renewable-based energy sources, in<br />
proportion to and to the extent of their project’s renewable<br />
energy component.<br />
Incentives include the following:<br />
(1) Seven-year income tax holiday, available for new or<br />
existing projects, in each case starting from the commercial<br />
operations date. New and additional investments in an existing<br />
project also qualify for this, but only in respect to income<br />
attributable to the new investment and any one project may<br />
not enjoy the tax holiday for more than 21 years;<br />
(2) Duty-free import of machinery and equipment needed<br />
for the project (regardless of whether the same is available<br />
in the Philippines) for 10 years from the registration of the<br />
project;<br />
(3) Special realty tax rate of 1.5 percent on net book value of<br />
civil works, equipment, machinery and other improvements<br />
used for renewable energy facilities;<br />
(4) Carryover of net operating loss from the first three years<br />
of commercial operations as a deduction from gross income<br />
for the next seven consecutive taxable years;<br />
(5) Corporate tax rate of 10 percent after expiration of the<br />
income tax holiday (or for qualified existing projects, upon<br />
10 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
the effectivity of the RE Act), provided that the developers<br />
pass on the savings to end users in the form of lower rates;<br />
(6) For projects failing to receive an income tax holiday<br />
before full operations, accelerated depreciation at twice the<br />
normal rate;<br />
(7) Zero percent value-added tax on the sale of power or<br />
fuel from renewable sources; the purchase of local goods,<br />
properties and services for project development purposes;<br />
and payment for services in connection with the exploration<br />
and development of renewable sources;<br />
(8) Tax-free sale of carbon emission credits; and<br />
(9) Tax credit equivalent to 100 percent of the value-added<br />
tax and customs duties that would have been paid on<br />
machinery, equipment, materials and parts purchased locally<br />
had they been imported, provided that the purchase is made<br />
from a DOE-approved Philippine supplier.<br />
In addition to incentives offered to developers, the IRR<br />
goes on to detail incentives for manufacturers of renewable<br />
energy generation equipment and farmers who plant<br />
biomass resources, as well as incentives for end users to<br />
promote rural electrification and the use of net metering.<br />
Resource Development Contracts and Foreign Investor<br />
Limitation Controversy<br />
The IRR provides that all sources of potential energy are<br />
owned by the state and that each developer must enter<br />
into a <strong>Renewable</strong> <strong>Energy</strong> Service/Operating Contract (“RE<br />
Contract”) with the government (through the president or<br />
the DOE) under which the developer will have an exclusive<br />
right to explore and develop a particular area for a specified<br />
period. The RE Contract may have a term of up to 25 years<br />
(renewable for up to 25 years) and will cover two stages:<br />
pre-development (preliminary assessment and feasibility<br />
study up to financial close) and development (construction<br />
and installation of facilities up to operations). As consideration<br />
for granting the exclusive right to utilize Philippine<br />
natural resources to the developer, the government<br />
receives 1 percent (or 1.5 percent in case of geothermal RE<br />
Contracts) of the gross income received by developers attributable<br />
to sale of renewable energy. This “Government Share”<br />
is split, with 60 percent to go to the national government and<br />
40 percent to the local government. The Government Share<br />
is not collected for biomass projects or projects on a micro<br />
scale less than 100kW.<br />
The DOE has provided some further detail on RE Contracts<br />
in its circular titled Guidelines Governing a Transparent<br />
and Competitive System of Awarding <strong>Renewable</strong> <strong>Energy</strong><br />
Service/Operating Contracts and Providing for the<br />
Registration Process of <strong>Renewable</strong> <strong>Energy</strong> Developers (the<br />
“Guidelines”), issued on July 12, <strong>2009</strong>. Under the Guidelines,<br />
RE Contracts can be awarded by competitive bid or by direct<br />
negotiation or arrangements for existing projects can be converted<br />
to RE Contracts in order for the projects to avail of the<br />
incentives provided under the RE Act. Direct negotiation can<br />
only be used to award new RE Contracts if there is only one<br />
applicant for a project or for areas for which there is limited<br />
technical data (dubbed ‘Frontier Areas’).<br />
Under the IRR and the Philippine Constitution, RE Contracts<br />
may only be entered into by Filipino citizens or corporations<br />
or associations at least 60 percent of whose capital is<br />
owned by Filipinos, although a special exemption is made<br />
for large-scale geothermal contracts under the Guidelines.<br />
The Joint Foreign Chambers of Commerce in the Philippines<br />
have expressed disapproval at this limitation on foreign<br />
developer investment in wind, solar and ocean energy and<br />
have requested a review of the interpretation of the IRR and<br />
the Constitution on the grounds that this limitation seems<br />
to conflict with the policy objectives at the heart of the RE<br />
Act. 3 There is also some controversy as to whether allowing<br />
wholly foreign corporations to invest in geothermal projects<br />
under the Guidelines is in fact constitutional. 4<br />
Looking Forward<br />
As noted above, within the next year or so the rules and<br />
regulations outlined in the IRR will be formalized, concerns<br />
surrounding foreign investment will likely be addressed<br />
and the picture will become clearer for developers. The<br />
response from the private sector has already been positive;<br />
the Philippine Star reported on July 14, <strong>2009</strong>, that there are<br />
now over 100 renewable energy projects in the pipeline for<br />
investors influenced by the attractive incentives offered by<br />
the RE Act.<br />
Indonesia<br />
The government of geothermal resource-rich Indonesia has<br />
recently announced a second phase of its “crash program”<br />
3<br />
Ben Arnold O De Vera. “Equity Cap on <strong>Energy</strong> Projects Antiinvestor.”<br />
Manila Times. August 27, <strong>2009</strong>.<br />
4<br />
Myrna M. Velasco “Foreign Investors Bat for Clarity in<br />
Re-Classification of Geothermal as RE Resource.” Manila Bulletin.<br />
<strong>September</strong> 9, <strong>2009</strong>.<br />
11 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
whereby it expects to develop 10 GW of installed generating<br />
capacity by 2014. A large portion of this has been set<br />
aside for geothermal power plants. The government will<br />
offer up most of the projects to private investors, and some<br />
projects have already been awarded. This section provides<br />
a brief history of geothermal development and legislation<br />
in Indonesia to date, and describes certain obstacles that<br />
discourage developers from investment.<br />
Abundant Resources, But Limited Development<br />
The Ministry of <strong>Energy</strong> and Mineral Resources (“EDSM”)<br />
has estimated that Indonesia has the geothermal resources<br />
to develop more than 27,000 MW of installed generating<br />
capacity. 5 As of July <strong>2009</strong>, however, just 1,057 MW of<br />
geothermal-based capacity had been developed. 6<br />
Currently government representatives estimate that renewable<br />
energy represents roughly 4.5 percent of Indonesia’s<br />
generation mix (roughly 3 percent being hydro and 1.5<br />
percent being geothermal based). 7<br />
Regulatory Structure<br />
In Indonesia, EDSM is charged with formulating energy<br />
policy. PT Perusahaan Listrik Negara (“PLN”) is the state<br />
power transmission, generation and distribution enterprise.<br />
Geothermal resource development and electricity production<br />
may be undertaken by the public or private sector.<br />
PT Pertamina (“Pertamina”), the state-owned oil and gas<br />
company, has previously acted as the regulator, as well as<br />
a developer, for geothermal exploitation and remains a key<br />
player in the industry.<br />
<strong>Renewable</strong> <strong>Energy</strong> Plans<br />
Indonesia has passed several laws intended to facilitate the<br />
development of renewable energy technologies. A recent<br />
piece of legislation, Presidential Decree No. 5/2006 (the<br />
“<strong>Energy</strong> Plan”), demonstrates Indonesia’s commitment<br />
to develop renewable energy-based power generation.<br />
The <strong>Energy</strong> Plan sets out targets for the energy sector in<br />
2025, namely setting the goal that renewables account for<br />
17 percent of Indonesia’s installed generating capacity (with<br />
5<br />
“Indonesia has 27,000 MW of Potential Geothermal <strong>Energy</strong><br />
Sources.” Antara News. November 12, 2007.<br />
6<br />
“Wayang Windu II Geothermal Powerplant Begins Operation.”<br />
EDSM Press Release. June 22, <strong>2009</strong>.<br />
7<br />
Montty Girianna. “<strong>Renewable</strong> <strong>Energy</strong> and <strong>Energy</strong> Efficiency<br />
in Indonesia.” ADB Workshop on Climate Change and <strong>Energy</strong>,<br />
Bangkok. March 26–27, <strong>2009</strong>: 1.<br />
5 percent to come from biofuel; 5 percent from geothermal;<br />
5 percent from a combination of biomass, hydro, solar, wind<br />
and nuclear; and finally 2 percent from liquefied coal).<br />
Previous Geothermal Program and Geothermal<br />
Legislation<br />
The government has recognized the country’s tremendous<br />
geothermal potential for quite some time. In 1991 the first<br />
geothermal program was introduced by which public and<br />
private enterprises would be allowed to participate in the<br />
development of geothermal-based resource exploitation and<br />
electricity generation. At that time Pertamina was the entity<br />
responsible for managing geothermal resources for the government.<br />
The implementing regulation for the campaign was<br />
Presidential Decree No. 45/1991, by which 11 joint operating<br />
contracts were granted to private developers to exploit as<br />
The Ministry of <strong>Energy</strong> and Mineral<br />
Resources has estimated that Indonesia<br />
has the geothermal resources to<br />
develop more than 27,000 MW of<br />
installed generating capacity.<br />
much as 3,000 MW of geothermal power. Other fields with<br />
estimated capacity of 1,500 MW were allotted to Pertamina<br />
for development. Most projects were derailed by the 1997<br />
Asian financial crisis, and as a result, only a small fraction<br />
of Indonesia’s geothermal potential has been developed to<br />
date.<br />
Each of the projects that was completed operates under<br />
one of two different schemes. The first is that Pertamina or<br />
its joint operation contractor operates the steam production<br />
facility and sells steam to PLN or others that generate<br />
electricity using their own plants. The alternative is that<br />
Pertamina or its joint operation contractors operate both the<br />
steam facility and the power facility, with electricity being sold<br />
off to PLN or others.<br />
Private developers participate by operating the steam<br />
production fields, and in some cases the power generation<br />
facilities, under Joint Operation Contracts with Pertamina as<br />
resource holder. Power is purchased by PLN under dollar-<br />
12 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
denominated <strong>Energy</strong> Sales Contracts on a take-or-pay basis<br />
for 30 years or more. Electricity tariffs offered for the 1991<br />
program were between 7 and 8 U.S. cents/kWh (most later<br />
renegotiated). The government receives compensation for<br />
the exploitation of the steam resource via royalties calculated<br />
at 34 percent of net operating income under the power<br />
offtake agreement. 8<br />
During the economic turmoil in the years following the<br />
financial crisis, geothermal contracts for private developers<br />
were suspended and later renegotiated or cancelled. Those<br />
projects that were already producing power eventually renegotiated<br />
lower tariffs under the existing contracts. Others that<br />
had not yet developed the steamfields opted to transfer the<br />
assets back to the government by arbitration or cancellation<br />
of contract.<br />
After several years of no geothermal development, the<br />
government sought to reignite the geothermal program with<br />
the passage of Law No. 27/2003 (the “Geothermal Law”)<br />
on October 22, 2003. The Geothermal Law shifts regulatory<br />
authority from Pertamina to EDSM, requires that future<br />
steamfields (not awarded under the 1991 program) must<br />
be competitively bid out and also provides that provincial<br />
governments (not the central government) are responsible<br />
for confirming the existence of geothermal resources by<br />
surveying and drilling. The Geothermal Law allows developers<br />
that were awarded fields in the 1991 program to retain<br />
control of the development rights. It should be noted that<br />
the Geothermal Law provides high-level policies, and few<br />
implementing rules and regulations have been implemented<br />
to date. 9<br />
Two recent regulations, Government Regulation No. 59/2007<br />
and Ministerial Regulation No. 14/2008 (“Geothermal Price<br />
Regulations”), have further detailed that the electricity tariff<br />
for geothermal power plants will vary based on capacity:<br />
plants greater than 55 MW will receive 85 percent of PLN’s<br />
production cost, plants greater than 10 MW but less than<br />
55 MW will receive 80 percent, and the tariff for smaller<br />
plants will be provided for under separate regulations.<br />
8<br />
“Indonesia’s Geothermal Development,” U.S. Embassy Jakarta<br />
website. Accessed July <strong>2009</strong>. http://www.usembassyjakarta.org/<br />
download/geo2002.pdf<br />
9<br />
World Bank. “Project Appraisal Document on a Proposed Global<br />
Environment Facility (GEF) Grant of a US$4 Million to the Republic<br />
of Indonesia for a Geothermal Power Generation Development<br />
Project.” May 1, 2008: 86–87.<br />
The Second 10 GW Crash Program and Expected<br />
Geothermal Rate Ceiling<br />
Faced with a dangerously low power reserve capacity, in<br />
2007 Indonesia announced plans for a “crash program” to<br />
construct installed coal-fired generating capacity of 10 GW<br />
by 2010. The government has now announced that a second<br />
crash program will be carried out with another 10 GW to be<br />
added to the grid from <strong>2009</strong> to 2014. Of this new capacity,<br />
4,733 MW will be geothermal. 10<br />
In June 2008 EDSM tendered bids for three West Java<br />
geothermal projects: the 220 MW Tangkuban Perahu,<br />
45 MW Cisolok Sukarame and 50 MW Tampomas. Bids<br />
from 17 companies, including Chevron and Medco Energi<br />
International, were received. 11 American firm Raser<br />
Technologies, Inc., was awarded the Tangkuban Perahu<br />
project. 12 The winners of the other two projects have not yet<br />
been publicly identified.<br />
EDSM announced in August <strong>2009</strong> that PLN would soon set<br />
a ceiling on rates it would pay privately owned geothermal<br />
power plants in order to encourage investment by resolving<br />
tariff uncertainties. PLN plans to determine an appropriate<br />
ceiling price without the help of an independent advisor and<br />
the price will vary based on project capacity and location. 13<br />
Recent Indonesian press has reported the ceiling price may<br />
be between 6.5 and 7 US cents/kWh. 14<br />
Barriers to Geothermal Development<br />
Even with some legislation in place for the development of<br />
geothermal-based power generation and the announcement<br />
of the second crash program, there are still several obstacles<br />
for developers and PLN alike. First, there are some fundamental<br />
deficiencies in the bid tender process for geothermal<br />
projects that some companies may exploit. Bidders are not<br />
required to post a bid bond or agree to a Power Purchase<br />
Agreement (“PPA”) prior to bid submission, so winning bidders<br />
have limited contractual obligations and financial stake<br />
10<br />
Girianna 1.<br />
11<br />
Ika Krismantari. “Chevron, Medco to tap RI geothermal<br />
potential.” Jakarta Post. June 17, 2008.<br />
12<br />
“Raser Wins West Java Geothermal Development Concession.”<br />
Raser Technologies, Inc. Press Release. http://www.rasertech.<br />
com/geothermal/raser-wins-west-java-geothermal-developmentconcession<br />
<strong>September</strong> 3, 2008.<br />
13<br />
Yessar Rosendar. “PLN to Put a Cap on Geothermal Prices.”<br />
Jakarta Globe. August 17, <strong>2009</strong>.<br />
14<br />
Reva Sasistiya. “Star <strong>Energy</strong> to Push PLN for Big Hike in Price<br />
of Geothermal <strong>Energy</strong>.” Jakarta Globe. <strong>September</strong> 15, <strong>2009</strong>.<br />
13 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
in developing a geothermal project awarded to them. The<br />
lack of a standard, published PPA also can lead to lengthy<br />
contract negotiations. Second, the Geothermal Law shifted<br />
the onus of confirming geothermal resource areas onto<br />
provincial governments, which may not possess the funding<br />
and expertise to carry this out, often leading to poor resource<br />
data. 15 Third, the high up-front costs required to develop the<br />
steam resource can represent a major risk, because it is<br />
usually difficult to determine if a particular field will generate<br />
sufficient steam to power a generating plant for the 30-plus<br />
years necessary to recoup the initial investment. 16 The<br />
guarantee of a set power offtake price should mitigate this<br />
somewhat. Finally, as noted above, a robust set of implementing<br />
rules and regulations for the Geothermal Law has<br />
not yet been put in place, so there is still some uncertainty<br />
in respect to bid processes, the role of central and provincial<br />
governments, and other issues.<br />
Conclusion<br />
It is clear that Indonesia has a massive potential to develop<br />
renewable energy, particularly geothermal-based energy.<br />
The government recognizes this and has set lofty goals for<br />
geothermal-based power generation. With the expected setting<br />
of a rate ceiling for private geothermal projects, the price<br />
uncertainty standing in the way of investor involvement may<br />
soon be removed and investors have shown significant interest,<br />
but it remains to be seen whether the projects are now<br />
“bankable” under existing legislation.<br />
Thailand<br />
Thailand has had legislation and policy in place to support<br />
renewable energy development for some time, but has yet<br />
to utilize renewable resources for a significant portion of its<br />
power generation. In July 2007 Thailand had an installed<br />
generating capacity of roughly 28.5 GW. 17 Approximately<br />
13.2 percent of that capacity was hydropower (mostly large<br />
scale, which is generally excluded when discussing renewable<br />
energy sources under Thailand’s energy policy) and<br />
1 percent was based on renewable sources. 18<br />
15<br />
Girianna 5–6.<br />
16<br />
Andrew Symon. “Indonesia Gets into Hot Water.” Asia Times.<br />
May 15, 2008: 3.<br />
17<br />
Including plants in Laos and Malaysia that sell power to Thailand<br />
under long-term PPAs.<br />
18<br />
Prutichai Chonglertvanichkul. “Thailand Power Development<br />
Plan (PDP 2007)” High Level Forum on Lao-Thai Partnership in<br />
Sustainable Hydropower Development, Bangkok: <strong>September</strong> 7,<br />
2007.<br />
SPP and VSPP Program Background<br />
Although renewable energies currently represent a small<br />
portion of Thailand’s generation mix, the Kingdom has indicated<br />
that it would like to scale back its reliance on natural<br />
gas (currently over 60 percent of generation capacity is<br />
gas-based) and address climate change by encouraging the<br />
development of renewable energy-based power generation.<br />
To serve this end, Thailand’s Small Power Producer (“SPP”)<br />
Program was introduced in 1992. It currently covers power<br />
developers wishing to sell power to the grid in a range of 10<br />
MW to 90 MW. The regulations governing the SPP Program<br />
were modeled after the Public Utility Regulatory Policies<br />
In July 2007 Thailand had an installed<br />
generating capacity of roughly<br />
28.5 GW. Approximately 13.2 percent<br />
of that capacity was hydropower.<br />
Act (PURPA) implemented in the U.S. in 1978. 19 The SPP<br />
Program was re-launched in 2007 with the passage of regulations<br />
for cogeneration, renewables and “non-firm” projects<br />
(the “SPP Regulations”). In January <strong>2009</strong>, the National<br />
<strong>Energy</strong> Policy Council (the “NEPC”) announced the approval<br />
of the revised Power Development Plan, which provides for<br />
the SPP bidding of roughly 2,000 MW, with construction to<br />
begin in 2010 and finish in 2013.<br />
Generally, SPPs can be classified as “firm” or “non-firm”<br />
based on their obligations under PPAs to deliver power to<br />
the Electricity Generating Authority of Thailand (“EGAT”),<br />
the national utility. By regulation, firm SPPs are required<br />
to meet capacity, reliability, availability and delivery obligations<br />
and are rewarded therefore with capacity payments in<br />
addition to energy payments. In contrast, non-firm SPPs are<br />
not required to meet these obligations and are paid only for<br />
power actually delivered to the offtaker.<br />
Building on the success of the SPP Program, the Very Small<br />
Power Producer (“VSPP”) Program was introduced in 2002<br />
to provide procedures for small self-sustaining business<br />
operations in rural and remote areas to sell power of 1 MW<br />
or less to the grid to offset their power consumption costs.<br />
19<br />
Dr. Piyasvasti Amranand. “Alternative <strong>Energy</strong>, Cogeneration<br />
and Distributed Generation: Crucial Strategy for Sustainability of<br />
Thailand’s <strong>Energy</strong> Sector.”<br />
14 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
The program was re-launched in 2006 to increase the<br />
capacity for eligible VSPPs to above 1 MW, but not exceeding<br />
10 MW. VSPP PPAs are non-firm, and VSPPs receive<br />
payment for power actually delivered under a “net-metering”<br />
mechanism. VSPP regulations consist of regulations for<br />
cogeneration projects, regulations for renewables projects<br />
and synchronization regulations (the “VSPP Regulations”),<br />
and are based on net-metering laws in the U.S. and other<br />
countries. 20<br />
When first introduced in 1992, the SPP Program allowed<br />
for generation by combined heat and power (cogeneration)<br />
methods or the utilization of renewable-based energy<br />
sources. During the first six years or so, the program saw<br />
applications mainly for cogeneration projects. When the<br />
Asian financial crisis crippled Thailand’s power demand and<br />
precipitated an excess reserve capacity, the Thai Cabinet<br />
granted a 1998 ruling providing that EGAT no longer needed<br />
to accept new cogeneration projects. After a rush to sign up<br />
cogeneration projects before the ruling took effect, EGAT<br />
has since almost exclusively accepted renewable projects,<br />
mainly large biomass-based plants. One impetus for this<br />
shift in policy was a common complaint from EGAT and<br />
SPPs alike that steam use efficiency requirements were too<br />
lax, resulting in little to no gain in efficiency over traditional<br />
combined cycle gas turbine projects. 21<br />
From the launch of the VSPP Program in 2002, a much<br />
wider range of energy sources was incorporated than under<br />
the SPP Program. Whereas under the SPP Program the<br />
majority of projects utilized gas- or coal-fired cogeneration<br />
rather than renewable sources, the majority of applicants for<br />
the VSPP Program were pig farms, food processing plants<br />
and other small-scale rural businesses producing organic<br />
waste that could be used to fuel power generation. 22 Under<br />
the VSPP Regulations as originally issued in 2002, VSPPs<br />
could generate electricity from renewable sources, such as<br />
solar, wind, micro-hydro, biogas and biomass. Part of the<br />
2006 re-launch was an expansion of the VSPP Program to<br />
include clean fossil-fired cogeneration plants, with efficiency<br />
requirements based on Germany’s cogeneration program,<br />
which are more stringent than those of the SPP Program. 23<br />
As of April 2008, there were 61 SPPs in operation, supplying<br />
2,286 MW of power to EGAT. Taking into account power<br />
offtake by industrial customers located near the SPP plants,<br />
the total installed capacity of the SPPs was 3,877 MW. As of<br />
June 2008, there were 100 VSPPs supplying 215 MW to the<br />
grid, with total installed capacity of 540 MW. 24<br />
Regulatory Provisions and Model Power Purchase<br />
Agreements<br />
From time to time, the <strong>Energy</strong> Policy and Planning Office<br />
makes publicly available model standard form PPAs to be<br />
used for SPP and VSPP projects. These, together with the<br />
SPP and VSPP Regulations, form the legislative basis for<br />
the programs. SPP PPAs are made between the SPP and<br />
EGAT. Conversely, VSPPs contract directly with one of two<br />
national distribution companies, Metropolitan Electricity<br />
Authority (“MEA”) for projects situated in Bangkok or<br />
Provincial Electricity Authority (“PEA”) for projects located in<br />
other provinces.<br />
SPPs may also execute bilateral PPAs with industrial customers<br />
located in the vicinity of the power plant. This practice<br />
is common within Thailand’s industrial estates.<br />
The SPP Regulations for firm SPPs reference contract terms<br />
of 20 to 25 years. The term for non-firm SPPs under the<br />
SPP Regulations is one year from commercial operations,<br />
and may be renewed for an indefinite number of additional<br />
periods of one year each by notice from one party to the<br />
other party.<br />
The initial term of the VSPP PPAs commences on the signing<br />
date and continues for one-year periods up to five years.<br />
The term automatically renews on a continuing basis, each<br />
time for an additional period equal to the duration of the initial<br />
term. The number of renewals is indefinite, and only the<br />
VSPP may unilaterally terminate the PPA where there is no<br />
breach of the agreement.<br />
SPP PPAs and VSPP PPAs are governed by Thai law.<br />
20<br />
Chris Greacen. “An Emerging Light: Thailand Gives the<br />
Go-Ahead to Distributed <strong>Energy</strong>.” Cogeneration and On-Site Power<br />
Production. March–April 2007: 68.<br />
21<br />
Greacen 66.<br />
22<br />
Dr. Pallapa Ruangrong. “Thailand’s Approach to Promoting<br />
Clean <strong>Energy</strong> in the Electricity Sector.” Forum on Clean <strong>Energy</strong>,<br />
Good Governance and Regulation, Singapore: March 16–18,<br />
2008: 1.<br />
23<br />
Greacen 70.<br />
24<br />
Amranand 6.<br />
15 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Current Adders and Adders Proposed at NEPC Meeting 24<br />
Tariff Subsidies for <strong>Renewable</strong> Projects<br />
partly due to its clear policy on renewable energy. 25<br />
In May 2001, as encouragement for developers to build and<br />
operate costly renewable-energy-based generation facilities,<br />
an incentive program was introduced whereby certain SPPs<br />
supplying renewable-based energy in Thailand enjoy a per<br />
kWh incentive or “adder” based on actual amount of energy<br />
supplied to the grid. In mid-2002 MEA and PEA announced<br />
Project<br />
Type and<br />
Size<br />
Current<br />
Adder<br />
(Baht /<br />
kWh)<br />
New<br />
Adder<br />
(Baht /<br />
kWh)<br />
Special<br />
Adder**<br />
(Baht /<br />
kWh)<br />
Special<br />
Southern<br />
Adder***<br />
(Baht /<br />
kWh)<br />
similar adder schemes for the VSPP Program. Several modifications<br />
1.Wind<br />
to the adder programs for both SPPs and VSPPs<br />
< = 50 kW 3.50 4.50 1.50 1.50<br />
have since been introduced (almost all being positive for the<br />
> 50 kW 3.50 3.50 1.50 1.50<br />
developer).<br />
2. Solar 8.0 8.0 1.50 1.50<br />
Eligibility for the adder is based on location, size and type of<br />
fuel or energy source. Wind and solar projects receive the<br />
3. Biomass<br />
< = 1 MW 0.30 0.50 1.00 1.00<br />
highest adders, followed by hydro (micro and mini), biomass,<br />
> 1 MW 0.30 0.30 1.00 1.00<br />
biogas and waste. To compensate developers for a higher<br />
4. Biogas<br />
degree of risk in Thailand’s three southernmost provinces,<br />
< = 1 MW 0.30 0.50 1.00 1.00<br />
Yala, Pattani and Narathivath, due to political unrest, special<br />
adder rates are offered for renewable energy SPPs and<br />
> 1 MW 0.30 0.30 1.00 1.00<br />
VSPPs developed in these provinces.<br />
5. Municipal Waste<br />
Landfill / 2.50 2.50 1.00 1.00<br />
On March 9, <strong>2009</strong>, the NEPC approved a proposal to further Gasification<br />
increase adder rates for certain types of projects and offer<br />
Thermal 2.50 3.50 1.00 .100<br />
a new special adder for renewable energy projects located<br />
Process<br />
in the vicinity of diesel-fired plants (which are considered<br />
6. Mini / Micro Hydro Power<br />
undesirable due to high fuel cost and emissions).<br />
50 kW 0.40 0.80 1.00 1.00<br />
Adder rate changes for SPPs took effect on August 4, <strong>2009</strong>,<br />
under an EGAT Declaration and for VSPPs on August 19,<br />
- 200kw<br />
< 50kw 0.80 1.50 1.00 1.00<br />
<strong>2009</strong> under separate Notifications from MEA and PEA.<br />
* For projects located in an area generating electricity from<br />
Looking Forward<br />
diesel.<br />
Thailand’s renewables future is bright and interest from<br />
** For projects located in one of three southern border<br />
developers in the latest SPP bidding round has been high.<br />
provinces.<br />
In response to the announcement and enactment of the new<br />
adders, plans for Thailand’s first privately developed industrial<br />
scale solar and wind projects have been announced. No<br />
24<br />
<strong>Energy</strong> Policy and Planning Office. “Summary of Improvement<br />
doubt this interest will be further bolstered by the announcement<br />
in July <strong>2009</strong> that the World Bank and International <strong>Energy</strong>” trans. Palida Rattanawiboon.<br />
of Guidelines for Promoting Electricity Generation from <strong>Renewable</strong><br />
Finance Corporation will make available US$700 million in<br />
low-interest loans to develop clean energy projects. Thailand<br />
was the first of 10 countries selected to receive the support,<br />
25<br />
Yuthana Praiwan. “World Bank to Give Clean<br />
<strong>Energy</strong> Gift.” Bangkok Post. July 14, <strong>2009</strong>.<br />
16 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Recovery Act Guidance Update<br />
Treasury Grant Program<br />
On July 9, <strong>2009</strong>, the U.S. Treasury Department (“Treasury”)<br />
released guidance related to the Treasury Grant program<br />
enacted under Section 1603 of the American Recovery and<br />
Reinvestment Tax Act of <strong>2009</strong>. Generally, Section 1603<br />
provides a 10 percent or a 30 percent cash grant in lieu of<br />
investment tax credits for certain renewable energy facilities<br />
that are (a) placed in service in <strong>2009</strong> or 2010 (regardless of<br />
when construction began) or (b) placed in service after 2010<br />
but before the applicable placed-in-service deadline for such<br />
facility, but only if the construction of such property began<br />
during <strong>2009</strong> or 2010. The Treasury Grant is available only<br />
for property that is used in a trade or business or held for the<br />
production of income. Accordingly, nonbusiness energy property<br />
and residential energy-efficient property eligible for tax<br />
credits under Section 25C and 25D of the Internal Revenue<br />
Code (the “Code”) do not qualify for a Treasury Grant.<br />
This article is only a summary of certain aspects of the<br />
Treasury Grant program guidance. Complete details regarding<br />
the application process and the program guidance are<br />
available at http://www.treasury.gov/recovery/1603.shtml.<br />
Application. In addition to the program guidance, the<br />
Treasury also released an application and other related<br />
documents. Applications must be submitted online at https://<br />
treas1603.nrel.gov/. For property placed in service in <strong>2009</strong> or<br />
2010, an application cannot be submitted for a project until<br />
after the project is placed in service, and must be submitted<br />
before October 1, 2011. For projects that are under construction<br />
in <strong>2009</strong> or 2010, but not placed in service until after<br />
2010, applications must be submitted after construction has<br />
begun, but before October 1, 2011.<br />
Payment of the cash grant will be made within 60 days<br />
from the later of (a) the date of the completed application or<br />
(2) the date the property is placed in service. For projects<br />
that are not placed in service when the application is submitted,<br />
the application process may include two stages (an<br />
initial application and supplemental information).<br />
Certain documentation must be submitted with the application<br />
to demonstrate that the property is eligible property that<br />
has been placed in service or, if placed in service after 2010,<br />
that construction began in <strong>2009</strong> or 2010. The types of documentation<br />
that must be submitted depend on the type of and<br />
other facts relating to the facility.<br />
Eligible Applicants. Certain entities are not eligible for<br />
Treasury Grants, including (a) federal, state or local governments<br />
(or any political subdivision, agency or instrumentality<br />
thereof), (b) any organization described in Section 501(c) of<br />
the Code and exempt from tax under Section 501(a) of the<br />
Code, (c) any entity described in Section 54(j)(4) of the Code<br />
or (d) any partnership or other pass-thru entity that has any<br />
of the entities described in (a) through (c) above as a direct<br />
or indirect partner, unless such ineligible entity owns an indirect<br />
interest in the applicant-partnership through a taxable C<br />
corporation. The guidance clarifies that a foreign person or<br />
entity is eligible for a cash payment if at least 50 percent of<br />
the income of the person or entity (or shareholder) is subject<br />
to U.S. income tax (the exception provided under Section<br />
168(h)(2)(B) of the Code).<br />
Beginning of Construction. When construction begins is<br />
important for projects on which construction begins in <strong>2009</strong><br />
or 2010 but the project is not placed in service until after<br />
2010. It has no impact on projects in which construction<br />
began before <strong>2009</strong>, if those projects are indeed placed in<br />
service in <strong>2009</strong> or 2010.<br />
The guidance provides that construction begins when physical<br />
work of a significant nature begins and provides a safe<br />
harbor rule. In the case of self-constructed property (the<br />
applicant manufactures, constructs or produces property<br />
for its own use in a trade or business or for the production<br />
of income), construction begins when physical work of a<br />
significant nature begins. Physical work does not include<br />
preliminary activities (planning, designing, securing financing,<br />
exploring, researching, clearing site, test drilling, etc.).<br />
The guidance provides, for example, that construction<br />
begins when work begins on the excavation for a foundation,<br />
the setting of anchor bolts into the ground or the pouring of<br />
concrete foundations. If the energy property is assembled<br />
from modular units off-site, construction begins when physical<br />
work of a significant nature commences at the off-site<br />
location.<br />
In the case of property that is manufactured, constructed or<br />
produced for the applicant by another person under a written<br />
binding contract, construction begins when physical work of<br />
a significant nature begins under the contract. A contract is<br />
a binding contract if it is enforceable under state law against<br />
the applicant, does not limit damages to an amount less than<br />
17 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
five percent of the total contract amount, and various other<br />
requirements.<br />
In the case of either self-constructed property or property<br />
constructed under a written binding contract, an applicant<br />
may treat physical work of a significant nature to have begun<br />
if (a) an accrual basis applicant incurs under Section 461(h)<br />
of the Code or (b) a cash basis applicant pays more than<br />
5 percent of the total cost of the property (excluding preliminary<br />
activities).<br />
In the case of multiple units of property that are located at<br />
the same site and will be operated as part of a larger unit<br />
(such as series of solar panels that are able to be operated<br />
independently, but will be placed in service in a series as<br />
part of a single project), the owner may elect to treat all the<br />
units (except units placed in service prior to January 1, <strong>2009</strong>)<br />
as a single unit of property for purposes of determining when<br />
construction commences and the date the property is placed<br />
in service. If an applicant makes this election, the total cost<br />
of the project is taken into account for purposes of the safe<br />
harbor described above, and the failure to place the entire<br />
project into service will not preclude the receipt of a cash<br />
payment. However, only the units that are placed in service<br />
prior to the applicable deadline will be eligible for a cash<br />
payment.<br />
Original Use; Leases. The guidance provides that the<br />
original use of the property must begin with the applicant.<br />
However, the sale-leaseback rules are applicable and if<br />
property is placed in service by a person, sold to an applicant<br />
and then leased back by the applicant to the person<br />
who placed the property in service within three months of<br />
the placed-in-service date, the original use begins with the<br />
applicant/lessor and the property is considered to be placed<br />
in service when it is first used under the leaseback.<br />
In a sale-leaseback, the lessee may receive the cash payment<br />
if the following three conditions are satisfied: (1) the<br />
lessee must be the person who originally placed the property<br />
in service; (2) the property must be sold by and leased back<br />
to the lessee within three months of the placed-in-service<br />
date; and (3) the lessee and lessor must not make an election<br />
out of the sale-leaseback rules.<br />
The guidance also permits a lessor (who is eligible to receive<br />
a Treasury Grant) to pass through the cash payment to a<br />
lessee (who is also eligible to receive a Treasury Grant). In<br />
order to make the election, the property must be eligible to<br />
receive a Treasury grant if such property were owned by<br />
the lessee. If an election is made, the lessee will be treated<br />
as having acquired the property for an amount equal to the<br />
independently assessed fair market value of the property<br />
on the date the property is transferred to the lessee. The<br />
election will generally follow the rules in the Code and<br />
the Treasury regulations governing lessee pass-through<br />
elections. The guidance provides additional rules and<br />
requirements regarding the election.<br />
Grant-Eligible Property. Only tangible property (not including<br />
a building) that is an “integral” part” of the facility and for<br />
which depreciation (or amortization) is allowable is eligible<br />
property for purposes of determining the cash grant. The<br />
tangible property is tangible personal property and other<br />
tangible property as defined in Sections 1.48-1(c) and (d) of<br />
the Treasury regulations.<br />
The basis of the eligible property is determined in accordance<br />
with the general tax rules for determining the basis of<br />
property and includes all properly capitalized costs. Only the<br />
basis of property placed in service after 2008 is eligible for a<br />
cash grant. Thus, if property is placed in service in a qualified<br />
facility that was placed in service in an earlier year, only<br />
the basis of property placed in service in <strong>2009</strong> is eligible for a<br />
cash grant. Applicants must submit a detailed breakdown of<br />
the costs included in the basis of the property. For properties<br />
with a cost basis in excess of $500,000, an applicant must<br />
also submit an independent accountant’s certification regarding<br />
the accuracy of the claimed cost basis.<br />
Recapture. The Treasury Grant will vest ratably over a fiveyear<br />
period in the same manner as the investment tax credit.<br />
The following events will trigger recapture: (a) disposition of<br />
the property to a disqualified person, (b) the property ceases<br />
to qualify as specified energy property (i.e., use of the property<br />
predominantly outside of the United States, permanent<br />
cessation of production, etc.) and (c) certain other events<br />
that are specific to the type of facility at issue. A property<br />
may be sold to an entity other than a disqualified person<br />
without triggering recapture provided that (a) the property<br />
continues to be specified energy property and (b) the<br />
purchaser of the property agrees to be jointly liable with the<br />
applicant for any recapture.<br />
Required Documentation. Applicants must submit documentation<br />
that the property is eligible property and has been<br />
placed in service, including (a) final engineering design<br />
documents stamped by a professional engineer, (b) a commissioning<br />
report from the project engineer, equipment<br />
vendor or an independent third party that the equipment<br />
18 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
has been installed, tested and is ready and capable of its<br />
intended use and (c) an interconnection agreement for properties<br />
that are connected to a utility.<br />
Miscellaneous<br />
ÆÆ Applicants may request that the payment be assigned<br />
to a third party provided that certain requirements are<br />
met.<br />
ÆÆ The requirements of the National Environmental<br />
Policy Act (NEPA) and the Davis-Bacon Act do<br />
not apply to property for which a Treasury Grant is<br />
sought.<br />
ÆÆ Treasury Grant payments must be normalized under<br />
the rules of former Code Section 46(f).<br />
ÆÆ A Treasury Grant payment is not includible in the<br />
income of the applicant, but the basis of the property<br />
is reduced by 50 percent of the amount of the<br />
The requirements of the National<br />
Environmental Policy Act and the Davis-<br />
Bacon Act do not apply to property for<br />
which a Treasury Grant is sought.<br />
Treasury Grant (unless the property is the subject of a<br />
lessee pass-through election).<br />
ÆÆ The applicant is required to provide certain reports<br />
(including a project performance report) and<br />
certifications to Treasury and must maintain certain<br />
records as set forth in a terms and conditions<br />
document that the applicant must agree to and sign.<br />
Manufacturing Investment Tax Credit Program<br />
On August 13, <strong>2009</strong>, the Internal Revenue Service (the<br />
“Service”) issued Notice <strong>2009</strong>-72 (the “Notice”) establishing<br />
the qualifying advanced energy project program under<br />
Section 48C of the Internal Revenue Code (the “Code”). The<br />
American Recovery and Reinvestment Act of <strong>2009</strong> enacted<br />
a 30 percent investment tax credit for certain property used<br />
in a “qualified advanced energy project” — a project that<br />
re-equips, expands or establishes a manufacturing facility for<br />
the production of certain energy-related property.<br />
The tax credit is subject to a certification and allocation<br />
process. Thus, a taxpayer must be “awarded” an allocation<br />
of tax credits in order to claim the credit. The 73-page<br />
Notice describes in detail the application process, which is<br />
subject to tight deadlines — a preliminary application for the<br />
program was due by <strong>September</strong> 16, <strong>2009</strong>. The Secretary of<br />
the Treasury (the “Secretary”) is authorized to allocate up<br />
to $2.3 billion in such tax credits (which represents approximately<br />
$7.7 billion of investment in qualified advanced<br />
energy projects).<br />
This article is only a summary of certain aspects of the<br />
manufacturing investment tax credit program guidance.<br />
Complete details regarding the application process and the<br />
program guidance are available at http://www.energy.gov/<br />
recovery/48C.htm.<br />
Qualifying Advanced <strong>Energy</strong> Project and Eligible<br />
Property<br />
In order to qualify for the tax credit, the project must reequip,<br />
expand or establish a “manufacturing facility” for<br />
the production of “specified advanced energy property” or<br />
property that, after further manufacture, will become specified<br />
advanced energy property. A manufacturing facility<br />
is a facility that makes, or processes raw materials into,<br />
finished products (or accomplishes any intermediate stage<br />
in that process). Accordingly, the tax credit is for facilities<br />
that manufacture certain equipment (e.g., equipment that<br />
manufactures solar panels), and not for projects that use the<br />
equipment that is manufactured (e.g., a solar system that<br />
incorporates such solar panels). In addition, manufacturing<br />
facilities for the production of certain components of<br />
specified advance energy property are also qualified for the<br />
credit. For example, a project that manufactures wind turbine<br />
blades for a wind turbine is a qualifying project. Specified<br />
advanced energy property is:<br />
ÆÆ Property designed for the use in the production of<br />
energy from the sun, wind, geothermal deposits or<br />
other renewable resources;<br />
ÆÆ Fuel cells, microturbines or an energy storage system<br />
for use with electric or hybrid-electric motor vehicles;<br />
ÆÆ Electric grids to support the transmission of<br />
intermittent sources of renewable energy, including<br />
property for the storage of such energy;<br />
ÆÆ Property designed to capture and sequester carbon<br />
dioxide and to sequester carbon dioxide emissions;<br />
19 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
ÆÆ Property designed to refine and blend renewable<br />
fuels (but not fossil fuels) or to produce energy<br />
conservation technologies (including energyconserving<br />
lighting technologies and smart grid<br />
technologies);<br />
ÆÆ New plug-in electric drive motor vehicles as defined<br />
in Section 30D of the Code, qualified plug-in electric<br />
vehicles as defined in Section 30(d), or components<br />
that are designed specifically for use with such<br />
vehicles, including electric motors, generators and<br />
power control units; or<br />
ÆÆ Other property designed to reduce greenhouse gas<br />
emissions as may be determined by the Secretary<br />
in published guidance or in the letter notifying the<br />
taxpayer that the Service has accepted the taxpayer’s<br />
application for Section 48C certification.<br />
Eligible property for purposes of the tax credit is property<br />
(other than a building or its structural components) that is<br />
necessary for the production of specified advanced energy<br />
property listed above. The property must also be tangible<br />
personal property or other tangible property (not including a<br />
building or its structural components) that is used as an integral<br />
part of the qualifying advanced energy project. Finally,<br />
depreciation or amortization must be allowable with respect<br />
to the property.<br />
Application Process<br />
The Secretary of the Treasury is<br />
authorized to allocate up to $2.3 billion<br />
in such tax credits (which represents<br />
approximately $7.7 billion of investment<br />
in qualified advanced energy projects).<br />
In order to compete for an allocation of tax credits, a<br />
taxpayer must submit (a) a preliminary application and a<br />
final application for recommendation by the Department of<br />
<strong>Energy</strong> (“DOE”) and (b) an application for certification by<br />
the Service. Separate applications must be submitted for<br />
each separate qualifying advanced energy project. If an<br />
application for DOE recommendation does not contain all the<br />
information required by the Notice, the DOE may decline to<br />
consider the application. The information required to be contained<br />
in each submission is set forth in detail in the Notice<br />
and Appendix B to the Notice. If an application for Service<br />
certification does not contain all the information required by<br />
the Notice, the Service will not consider the application. The<br />
chart below contains a table of deadlines for various submissions<br />
and requirements to qualify for the tax credit. The<br />
deadline for the Project Information Memorandum already<br />
has passed — as of <strong>September</strong> 16, <strong>2009</strong>, and final applications<br />
will be due in less than a month, October 16, <strong>2009</strong>.<br />
Eligibility and Evaluation Criteria<br />
The Service will consider a project under the program only<br />
if the DOE provides a recommendation and ranking for the<br />
project. In turn, the DOE will recommend a project only if the<br />
DOE determines that the project is an advanced energy project<br />
that has a reasonable expectation of commercial viability<br />
and merits a recommendation based on the evaluation criteria<br />
set forth below. The criteria are equally weighted:<br />
ÆÆ Greatest job creation (both direct and indirect) during<br />
the credit period (February 17, <strong>2009</strong> through February<br />
17, 2013)<br />
ÆÆ Greatest net impact in avoiding or reducing air<br />
pollutants or anthropogenic emissions of greenhouse<br />
gases<br />
ÆÆ Greatest potential for technological innovation<br />
and commercial deployment, as indicated by<br />
(a) the production of new or significantly improved<br />
technologies, (b) improvements in levelized costs and<br />
performance and (c) manufacturing significance and<br />
value<br />
ÆÆ Shortest time from certification to completion<br />
The DOE will also take into account four program policy<br />
factors: (a) geographic diversity, (b) technology diversity,<br />
(c) project size diversity and (d) regional economic<br />
development.<br />
The DOE will rank only the recommended projects in<br />
descending order and the #1 ranked project will receive<br />
its full allocation of tax credits. The #2 ranked project will<br />
then receive an allocation of tax credits and so on until the<br />
$2.3 billion in tax credits is exhausted. If the $2.3 billion is<br />
not completely allocated in the first allocation round, another<br />
allocation round will be held the following year. (However, it<br />
is expected that all of the tax credits will be allocated in the<br />
first round.) The Service will determine the amount of the tax<br />
credits to be allocated to a project at the time the Service<br />
20 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
accepts the application for certification (the “Acceptance<br />
Date”). Accordingly, if the Service accepts the taxpayer’s<br />
application for certification, the acceptance letter will state<br />
the amount of the tax credits allocated to the project.<br />
Other Requirements<br />
If a taxpayer receives an allocation of Section 48C tax<br />
credits, it must meet certain other requirements in order to<br />
maintain its ability to claim the tax credits. First, it must enter<br />
into an agreement (similar to a closing agreement) with the<br />
Service regarding the tax credits. Second, within one year<br />
of the Acceptance Date, the taxpayer has to provide to the<br />
Service documents that establish that the taxpayer has<br />
(a) received all federal, state and local permits necessary to<br />
begin construction of the project and (b) completed all steps<br />
that must be accomplished during the one-year period beginning<br />
on the Acceptance Date if the project is to be placed<br />
in service within three years of the issuance of certification.<br />
Finally, the project must be placed in service within three<br />
years of the issuance of certification.<br />
All submissions to the DOE and the Service must be signed<br />
and dated by the taxpayer. The person signing for the<br />
taxpayer must sign under penalties of perjury and have personal<br />
knowledge of the facts contained in the document.<br />
Deadlines and Timelines<br />
Event<br />
Deadline<br />
Taxpayer Preliminary Application for DOE Recommendation Due Sept. 16, <strong>2009</strong><br />
Taxpayer Final Application for DOE Recommendation Due Oct. 16, <strong>2009</strong><br />
Taxpayer Application for Certification Due to the Service Dec. 16, <strong>2009</strong><br />
DOE Recommendations Provided to Service Dec. 16, <strong>2009</strong><br />
Service Accepts or Rejects the Taxpayer’s Application for Certification (Acceptance Jan. 15, 2010<br />
Date)<br />
Taxpayer Executes and Returns Agreement Mar. 15, 2010<br />
Service Executes and Returns Agreement Apr. 16, 2010<br />
Taxpayer Provides Evidence that Requirements of Certification are met<br />
One Year from Acceptance Date<br />
Service Makes a Decision regarding Certification of the Project (Issuance of<br />
One Year from Acceptance Date<br />
Certification)<br />
Project must be Placed in Service<br />
Three Years from Issuance of<br />
Certification<br />
Forfeiture of Tax Credits<br />
Numerous actions or inactions can result in the forfeiture or<br />
recapture of the Section 48C tax credits, including, but not<br />
limited to:<br />
ÆÆ Not placing the qualifying advanced energy project in<br />
service within three years of the date of issuance of<br />
the certification. Note that the Service does not have<br />
the discretion to extend this period;<br />
ÆÆ Failure to receive certification for the project as<br />
required in the Notice; or<br />
ÆÆ Plans for the project change that would have been<br />
relevant to the DOE in recommending or ranking<br />
the project or the Service in accepting the project<br />
application.<br />
Tax credits that are returned or forfeited may be reallocated<br />
in an additional allocation program in the future.<br />
Miscellaneous<br />
Section 48C provides an investment tax credit for certain<br />
types of property. Accordingly, the Notice provides that<br />
the investment tax credit-related rules such as the at-risk<br />
rules of Section 49 and the recapture and other special<br />
rules in Section 50 also apply to the Section 48C tax credit.<br />
The Notice also explains the application of the rules for<br />
claiming the Section 48C tax credits on qualified progress<br />
expenditures.<br />
There is no conference or appeals process available with<br />
respect to decisions made by the DOE and the Service<br />
under the program. If a taxpayer does receive an allocation<br />
of tax credits, the Service will disclose the name of the<br />
taxpayer and the amount of the tax credit allocated to the<br />
project.<br />
21 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Ambiguities in ‘Buy American’ Rule Hamper <strong>Renewable</strong><br />
<strong>Energy</strong> Projects<br />
I. Introduction<br />
In February <strong>2009</strong>, Congress passed the American Recovery<br />
and Reinvestment Act (ARRA). The ARRA includes a large<br />
number of funding opportunities and tax incentives to support<br />
investment in clean energy at the local level. These<br />
incentives are designed to strengthen the economy and to<br />
promote clean and renewable energy. The ARRA contains<br />
significant direct spending programs, tax incentives, loan<br />
guarantees and bond programs to support the development<br />
of renewable and clean energy technologies. Among<br />
the more controversial portions of the ARRA are the Buy<br />
American provisions. Although the Obama administration<br />
has issued two sets of interim guidance for implementing<br />
the Buy American rules at the federal, state and local levels,<br />
many ambiguities remain that have the potential for delaying<br />
or scuttling renewable energy projects. This article provides<br />
background on the Buy American rules of the ARRA and<br />
discusses some of the ambiguities for renewable energy<br />
projects.<br />
II. Basics of Buy American Rules of ARRA<br />
Section 1605 of the ARRA requires that all of the iron and<br />
steel and “manufactured goods” used in ARRA-funded<br />
projects for construction, alteration, maintenance or repair<br />
of “a public building or public work” be “produced in the<br />
United States.” Section 1605 also specifies that the provision<br />
shall be “applied in a manner consistent with United States<br />
obligations under international agreements.” Exceptions are<br />
allowed where<br />
ÆÆ the head of the federal agency concerned determines<br />
adherence would be “inconsistent with the public<br />
interest,”<br />
ÆÆ the iron/steel/manufactures are not produced in the<br />
U.S. in sufficient and available quantities, or<br />
ÆÆ the inclusion of U.S. products would increase overall<br />
project cost by 25 percent.<br />
The Buy American rules of the ARRA generated a lot of<br />
controversy because governments around the world promised<br />
not to engage in protectionist measures in fighting the<br />
recession. To foreign suppliers and their governments, the<br />
new Buy American rules are very protectionist. On the other<br />
hand, to many U.S. companies, use of federal funds means<br />
that the projects should be reserved for U.S. companies.<br />
A. Similarity To Other Domestic Content Statutes<br />
The ARRA’s Buy American rules borrow provisions from two<br />
existing U.S. domestic content laws: the “Buy American Act”<br />
and the “Buy America” statute. The former applies when the<br />
federal government directly buys products or itself builds<br />
public buildings or works via a procurement covered by the<br />
Federal Acquisition Regulations, while the latter applies<br />
principally to highway- and transit-related projects. However,<br />
although similar, there are many aspects of the ARRA’s<br />
Buy American provisions that are significantly different from<br />
either the Buy American Act or the Buy America statute.<br />
B. The Obama Administration Interpretation Of The<br />
ARRA’s Buy American Provision<br />
Because the Buy American provisions of the ARRA contained<br />
very little guidance on how they should be applied,<br />
the Obama administration issued regulatory guidance.<br />
Unfortunately, three different sets of rules have been issued,<br />
depending on the type of contracting.<br />
ÆÆ On March 31, <strong>2009</strong>, an interim rule amending the<br />
Federal Acquisition Regulation (FAR) was issued by<br />
the Civilian Agency and Defense Acquisition Councils<br />
(FAR Councils) imposing the ARRA’s Buy American<br />
provision on federal construction contracts funded<br />
with ARRA appropriations.<br />
ÆÆ On April 3, <strong>2009</strong>, the Office of Management and<br />
Budget (OMB) issued guidance to federal agencies as<br />
to how the Buy American provision is to be applied to<br />
ARRA grants and loans to states and municipalities.<br />
ÆÆ Finally, the Federal Transit Administration and Federal<br />
Highway Administration (FTA/FHA) have determined<br />
to apply the ARRA Buy American provision by simply<br />
imposing their existing Buy American regulations to<br />
ARRA grants.<br />
Because the bulk of the renewable energy projects will be<br />
funded through ARRA funds for federal construction or state<br />
and municipal grants, this article focuses on the main provisions<br />
affecting renewable energy projects.<br />
1. Iron And Steel Products<br />
The U.S. steel industry was one of the major driving forces<br />
behind the Buy American provisions. As such, one of the<br />
main aspects of the Buy American provisions of the ARRA<br />
22 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
concerns iron and steel. For iron and steel products procured<br />
by federal contractors for use as construction material in covered<br />
projects, all manufacturing processes must take place<br />
in the United States (except metallurgical processes related<br />
to refining steel additives).<br />
2. Manufactured Goods<br />
A. FAR Rules<br />
Manufactured goods used as construction materials also<br />
must be produced in the United States. Unfortunately,<br />
the interim rules fail to define precisely what is required<br />
for manufactured construction material to be considered<br />
“produced” or “manufactured” in the United States. The<br />
standard espoused in the interim rules issued by the FAR<br />
Council states that a construction material will be considered<br />
“produced/manufactured” in the United States when<br />
it results from processing into a specific form and shape<br />
or combining of raw material into a property different from<br />
the individual raw materials, and that processing/combining<br />
occurs in the United States. Although this would appear to<br />
be a low standard, it has left many companies in the dark<br />
about whether their U.S. manufacturing activities meet this<br />
amorphous standard. Thus, unlike the criteria for steel in<br />
which all manufacturing processes must take place in the<br />
U.S., for manufactured goods, the use of components or<br />
subcomponents of foreign origin is allowed. Foreign components<br />
— including steel components — can be used to<br />
manufacture a product in the United States. However, the<br />
components have to be incorporated into a further manufactured<br />
or assembled product away from the construction site<br />
(otherwise, they would be considered construction materials<br />
themselves and not components).<br />
B. OMB Interim Guidance<br />
OMB’s definition of “manufactured” differs slightly from the<br />
definition in the FAR. Under OMB’s guidance, a manufactured<br />
good that contains materials from another country must<br />
be “substantially transformed in the United States into a new<br />
and different manufactured good distinct from the materials<br />
from which it was transformed.” The interim guidance<br />
adopts directly the “substantial transformation” test used to<br />
determine a product’s country of origin for trade purposes.<br />
This is a test that the U.S. Customs & Border Protection<br />
(“Customs”) has used for years to determine the country of<br />
origin of an imported product. The problem with this test,<br />
however, is that there are no clear and precise rules.<br />
In response to this lack of clarity, the Environmental<br />
Protection Agency (EPA) has provided some guidance on<br />
what it considers to be a substantial transformation. To help<br />
local utilities determine whether a good has been “substantially<br />
transformed” enough to pass the test, the federal<br />
agency provided a series of questions:<br />
ÆÆ Were all of the components of the manufactured<br />
good manufactured in the U.S., and were all of the<br />
components assembled into the final product in<br />
the U.S.? (If the answer is “yes,” then this is clearly<br />
manufactured in the U.S.)<br />
ÆÆ Was there a change in character or use of the good<br />
or the components in America? (These questions are<br />
asked about the finished good as a whole, not about<br />
each individual component.)<br />
ÆÆ Were the processes performed in the U.S. (including<br />
but not limited to assembly) complex and meaningful?<br />
According to the EPA, an imported component that undergoes<br />
further processing in the United States would not<br />
satisfy the substantial transformation test by “having merely<br />
undergone ‘[a] simple combining or packaging operation.’ ”<br />
Moreover, “assembly operations that are minimal or simple,<br />
as opposed to complex or meaningful, will generally not<br />
result in a substantial transformation.”<br />
Although the EPA has issued guidance on how the substantial<br />
transformation test works, it is uncertain whether<br />
the EPA’s guidance will apply to renewable energy projects,<br />
where most funding comes from Department of <strong>Energy</strong><br />
grants.<br />
3. International Obligations<br />
Pursuant to the ARRA, the Buy American provisions must<br />
be applied in a manner consistent with the WTO Agreement<br />
on Government Procurement (GPA) and U.S. free trade<br />
agreements. Under these agreements, the Buy American<br />
requirement does not apply to iron, steel or manufactured<br />
goods produced in signatory countries and acquired for construction<br />
projects with a value of $7.4 million or more. Thus,<br />
procuring agencies must honor the federal government’s<br />
commitments to treat the foreign iron, steel or manufactured<br />
goods as the equivalent of domestic goods. In determining<br />
whether a product is a product of the GPA or free trade<br />
agreement country, the rules specify that the “substantial<br />
transformation” test is to be used to determine country of origin<br />
when a manufactured good that contains materials from<br />
another country is processed in the GPA or FTA country.<br />
23 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Note that this exception to the Buy American provision of<br />
the ARRA does not always apply. Although the exception<br />
applies to federal government procurements for construction<br />
projects, it only applies to states and municipalities who have<br />
signed on with respect to their agencies. Although 32 states<br />
have signed on to the GPA, the fact is that very few state<br />
or local agencies are covered. Because most of the ARRA<br />
funds are disbursed through grants to states and municipalities,<br />
there is a significant likelihood that the Buy American<br />
provisions will apply to any state or local projects that use<br />
ARRA funds.<br />
4. Violations of the Buy American Provisions<br />
Both the FAR and OMB interim rules include provisions for<br />
dealing with violations of the Buy American rules. A violation<br />
could result in contract termination for default, reduction in<br />
the contract price, suspension and debarment of the contractor<br />
and, potentially, even criminal liability. Moreover, because<br />
each contractor must submit a certificate of compliance with<br />
the Buy American rules, a violation of the Buy American<br />
provisions could result in False Claims Act liability.<br />
III. Specific Issues for <strong>Renewable</strong> <strong>Energy</strong> Project<br />
A. When Do The Buy American Rules Of The ARRA<br />
Apply?<br />
There are several contexts where it is uncertain whether the<br />
Buy American rules of the ARRA apply.<br />
1. Grants In Lieu Of Tax Credits<br />
Section 1603 of the ARRA allows taxpayers to claim, in lieu<br />
of claiming the investment tax credit or production tax credit,<br />
a grant when they place “specified energy property” in service.<br />
The grant reimburses the taxpayer for a portion of the<br />
expense of such property.<br />
The Buy American provision applies to projects receiving<br />
“funds appropriated or otherwise made available by this Act.”<br />
The law is divided into an introductory section, a Division A<br />
and a Division B. Section 4 of the introductory section states<br />
that references to “this Act” contained in any division of the<br />
legislation are to be treated as references only to the provisions<br />
of that division. The Buy American provisions appear in<br />
Division A, while the tax provisions, including grants in lieu of<br />
tax credits, are in Division B. Thus, the Buy American provisions<br />
should not apply to the tax provisions, including grants<br />
in lieu of tax credits.<br />
Unfortunately, however, no mention was made of this in<br />
either the interim guidance or rules. Nevertheless, a treasury<br />
official has stated that the grants in lieu of tax credits do<br />
not have to comply with the Buy American provisions of the<br />
ARRA. However, nothing official has been issued concerning<br />
whether the Buy American rules of the ARRA apply to grants<br />
in lieu of tax credits.<br />
2. Loan Guarantees<br />
[B]y definition the Buy American<br />
provisions of ARRA should not apply to<br />
loan guarantees for private projects.<br />
On July 29, <strong>2009</strong>, the Department of <strong>Energy</strong> issued $30 billion<br />
in lending authority to support loan guarantees for<br />
renewable energy and transmission projects. Unlike the tax<br />
provisions, loan guarantees are in Division A of the ARRA.<br />
As such, recipients of ARRA funds conceptually must comply<br />
with the Buy American provisions. Nevertheless, many of<br />
the projects receiving funds are private projects, typically<br />
through a Power Purchase Agreement (PPA). Under the<br />
terms of a PPA, the PPA provider (the electricity generator)<br />
typically assumes the risks and responsibilities of ownership<br />
when it purchases, operates and maintains the facility.<br />
Because the Buy American provisions only apply to ARRA<br />
funds given for construction, repair, alteration and so on<br />
of a public works or public building, by definition the Buy<br />
American provisions of ARRA should not apply to loan guarantees<br />
for private projects.<br />
Although the Buy American provisions should not apply to<br />
these types of private projects, the interim guidance has not<br />
addressed this issue squarely when it comes to renewable<br />
energy projects. Moreover, there are a host of issues that<br />
could make a difference when it comes to PPAs. Would it<br />
make a difference if the host site operator itself is a governmental<br />
entity? Does it make a difference if the host site<br />
operator is a governmental entity that has an option to buy<br />
the facility? These are just some of the issues that were not<br />
addressed in the interim guidance.<br />
24 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
3. Substantial Transformation Test<br />
As stated above, there are two amorphous standards that<br />
are espoused for determining when products that undergo<br />
further manufacturing can be considered a product of<br />
the United States (or a product of a free trade agreement<br />
country). Despite guidance by the EPA, the fact is that these<br />
standards are not predictable. Without predictability, it makes<br />
it extremely difficult for renewable energy companies to know<br />
whether their projects are compliant with the Buy American<br />
rules.<br />
Even Customs has proposed eliminating altogether the<br />
substantial transformation test due to its unpredictability.<br />
Customs has stated the following:<br />
Despite its heritage and apparent straightforwardness,<br />
administration of the substantial transformation<br />
standard has not been without problems. These<br />
problems derive in large part from the inherently<br />
subjective nature of judgments made in case-by-case<br />
adjudications as to what constitutes a new and different<br />
article and whether processing has resulted<br />
in a new name, character, and use. The substantial<br />
transformation standard has evolved over many<br />
years through numerous court decisions and CBP<br />
administrative rulings. Because the rule has been<br />
applied on a case-by-case basis to a wide range of<br />
scenarios and has frequently involved consideration<br />
of multiple criteria, the substantial transformation<br />
standard has been difficult for the courts and CBP to<br />
apply consistently and has often resulted in a lack of<br />
predictability and certainty for both CBP and the trade<br />
community.<br />
Instead, Customs has proposed a change in tariff classification<br />
system (tariff shifts) for determining whether a change<br />
in origin has occurred. Under this codified method, the substantial<br />
transformation that an imported good must undergo<br />
in order to be deemed a good of the country where the<br />
change occurred is usually expressed in terms of a specified<br />
tariff shift as a result of further processing. This system currently<br />
is in place for making origin determinations for goods<br />
imported from Canada and Mexico pursuant to the North<br />
American Free Trade Agreement.<br />
Due to its predictability, in any final guidance, the FAR<br />
Council and OMB should adopt the change in tariff<br />
classification system for determining origin for Buy American<br />
purposes.<br />
4. Guidance<br />
Another issue for the renewable energy industry is the lack<br />
of transparency with regard to procedures for having Buy<br />
American coverage issues resolved. Although OMB and<br />
the FAR Council issued the guidance on the Buy American<br />
provisions, given the overarching issues, there is no central<br />
authority to uniformly decide Buy American issues. Rather,<br />
typically it is the contracting officer that in the first place<br />
makes decisions concerning the Buy American provisions.<br />
The problem with this type of system is that many decisions<br />
are made without significant oversight and uniformity. There<br />
should be transparent and uniform rules concerning issues<br />
involving the Buy American rules that are issued by a lead<br />
agency like OMB. Unfortunately, however, no such hierarchy<br />
exists. This further stymies businesses because of the lack<br />
of predictability.<br />
IV. Conclusion<br />
Given the ambiguities in the guidance and rules, coupled<br />
with the significant potential penalties for non-compliance, it<br />
is critical that renewable energy companies be aware of how<br />
the Buy American provisions apply and seek legal counsel to<br />
address those areas that it believes are unclear.<br />
Addendum<br />
In early summer, both the FAR Council and the OMB<br />
accepted comments on their interim guidance and rules.<br />
Many comments were received. Both the FAR Council and<br />
OMB intend to issue final rules in early fall. As of the submission<br />
of this article, the final guidance rules have not yet been<br />
released.<br />
25 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Green Investment Funds: Threshold Considerations and Challenges<br />
With the Obama administration’s focus on renewable energy<br />
and the implementation of the American Recovery and<br />
Reinvestment Act of <strong>2009</strong> (“ARRA”), we are seeing increasing<br />
investment interest in the renewable energy sector.<br />
Existing private investment funds with a generalist mandate<br />
are increasingly looking to deploy capital in the renewable<br />
energy industry. In addition, investment bankers and energy<br />
industry experts are increasingly looking to raise private<br />
investment funds devoted to renewable energy investing.<br />
Whether raising a new fund, or investing from an existing<br />
fund, there are some basic, threshold considerations and<br />
challenges the investment team should take into account.<br />
Those considerations and challenges are introduced below.<br />
This article is not intended to deter investors from this class<br />
of investment, but merely to inform on the threshold issues<br />
investors should consider and plan around before diving in.<br />
When talking about renewable energy investment funds, we<br />
tend to think of funds in several discrete categories, based<br />
on the way the fund needs to be, or is typically, structured in<br />
relation to its investment thesis, including:<br />
Æ Æ Clean Tech Funds. Clean Tech Funds seek<br />
investments in “green” or other energy-related<br />
technologies. These funds tend to follow a structure<br />
and investment program similar to traditional,<br />
technology-focused, venture capital funds.<br />
Æ Æ <strong>Energy</strong> Services Funds. <strong>Energy</strong> Services Funds<br />
make investments in operating businesses that derive<br />
revenue from the energy industry — development<br />
firms, engineering firms, manufacturers and<br />
similar businesses. These funds typically employ a<br />
traditional, generalist private equity or buyout fund<br />
model.<br />
Æ Æ Project Funds. Project Funds seek investments in<br />
renewable energy projects and installations. These<br />
funds can focus on the early, development stage of<br />
the project or a later, mature stage of projects that<br />
generate cash flow. The projects typically sought<br />
include wind, solar, geothermal, biomass and other<br />
renewable resources, and, as a result, may be eligible<br />
for federal tax credits, accelerated depreciation,<br />
newly implemented federal grants and other federal<br />
and state incentives. Traditionally, these funds were<br />
often structured like tax credit funds and catered to<br />
tax-driven investors. Today, the structure and role of<br />
these funds is in flux in light of the implementation<br />
of ARRA and investment trends. These funds often<br />
involve more complicated, tax-driven structures and<br />
terms, and confront legal and tax issues not typically<br />
confronted by other types of funds. This article<br />
focuses mainly on these types of funds.<br />
Impending Regulatory Reform<br />
Existing fund managers, and especially those considering<br />
launching a new fund, should be aware of the pending<br />
regulatory reform that is likely to increase regulation and<br />
compliance burdens of private equity fund managers. While<br />
none of the reforms are final, many who follow these matters<br />
expect that some form of the current proposals discussed<br />
below will likely become reality.<br />
Existing fund managers, and especially<br />
those considering launching a new<br />
fund, should be aware of the pending<br />
regulatory reform that is likely to increase<br />
regulation and compliance burdens<br />
of private equity fund managers.<br />
The single biggest pending change is the requirement for<br />
almost all fund managers to register as investment advisers.<br />
A number of proposals have circulated in the past year that<br />
would require managers of private investment funds to register<br />
as investment advisers under the Investment Advisers<br />
Act of 1940 (the “Advisers Act”). The most recent proposal,<br />
the “Private Fund Investment Advisers Registration Act of<br />
<strong>2009</strong>,” proposed by the Obama administration on July 10,<br />
<strong>2009</strong>, would eliminate the private adviser exemption found<br />
in Section 203(b)(3) of the Advisers Act (also known as the<br />
“15 client” exemption). Many investment advisers to private<br />
funds rely on the private adviser exemption as well as the<br />
client counting rules found in Rule 203(b)(3)-1 to avoid registration<br />
under the Advisers Act. The elimination of the private<br />
adviser exemption would require all investment advisers with<br />
$30 million or more in assets under management to register<br />
with the SEC. Although general partners and managers to<br />
26 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
private funds are already subject to the antifraud rules of<br />
the Advisers Act, if they are required to register as investment<br />
advisers, they will become subject to all provisions of<br />
the Advisers Act, including its rules relating to client asset<br />
custody, recordkeeping, advisory contracts, limitations on<br />
performance fees, ethics and personal trading policies,<br />
investment and financial reporting, and advertising.<br />
In addition to the regulation of fund managers under the<br />
Advisers Act, another recent proposal would subject private<br />
investment funds to additional regulation as “investment<br />
companies” under the Investment Company Act of 1940<br />
(the “Investment Company Act”). Also under this proposal,<br />
“large investment companies” (those with assets under<br />
management of $50 million or more) would be required to<br />
register with the SEC under the Investment Company Act<br />
and comply with other disclosure, reporting and examination<br />
requirements.<br />
Another proposal, the “Corporate and Financial Institution<br />
Compensation Fairness Act of <strong>2009</strong>” (H.R. 3269), which was<br />
passed by the House of Representatives on July 31, <strong>2009</strong>,<br />
includes a requirement that the SEC and other federal regulators<br />
adopt rules requiring investment advisers and other<br />
covered financial institutions with assets of at least $1 billion<br />
to disclose incentive-based compensation arrangements and<br />
prohibiting certain incentive-based payment arrangements.<br />
As of this writing, there is little information regarding the<br />
disclosure rules and types of incentive-based compensation<br />
practices that would be prohibited by investment advisers,<br />
such as fund sponsors. The Senate has not approved<br />
comparable legislation and the prospects for the bill being<br />
enacted into law are uncertain as of this writing.<br />
In addition, the SEC has proposed for comment rules placing<br />
restrictions on political contributions and the use of placement<br />
agents in connection with soliciting investments from<br />
governmental plans. These restrictions may make it harder<br />
for first-time fundraisers, but would only impact marketing<br />
to public pensions. For the reasons discussed below, these<br />
public pensions may be less likely candidates for investment<br />
in Project Funds.<br />
Changing Tax Rates<br />
Once again, Congress is attempting to increase taxes on<br />
the lucrative incentive compensation that private equity fund<br />
managers receive from the funds they manage. Currently,<br />
the character of income received from a partnership such as<br />
a private equity fund is determined at the partnership level,<br />
so that partners report ordinary income, capital gain and/or<br />
qualified dividend income depending on the character of the<br />
income received by the partnership. Thus, if the partnership<br />
recognizes long-term capital gains and qualified dividends,<br />
the individual partners would be subject to tax on that<br />
income at capital gains rates. Recently, the U.S. Treasury<br />
Department (“Treasury”) proposed to tax income and gain<br />
from a partnership profits interest received in exchange for<br />
services (known as “carried interest”) as ordinary income<br />
regardless of the character at the partnership level, unless<br />
the income or gain was attributable to the partner’s “invested<br />
capital.” The income from a carried interest would also be<br />
subject to self-employment taxes. The carried interest proposal<br />
would apply to all partnerships and would be effective<br />
for taxable years beginning after December 31, 2010. In<br />
addition, the proposal would eliminate the current 33 percent<br />
and 35 percent tax brackets and would add tax rate<br />
brackets of 36 percent and 39.6 percent for individuals with<br />
income over $250,000 (or $200,000 for single taxpayers).<br />
The proposal would increase the tax rate on capital gains<br />
and dividends to 20 percent for individuals with income over<br />
$250,000 (or $200,000 for single taxpayers), effective for<br />
taxable years beginning after December 31, 2010. Due to<br />
the number of recent proposals to modify the tax treatment<br />
of carried interest and the lack of any apparent significant<br />
political opposition to such a proposal, it seems likely that<br />
some form of the current proposals to tax carried interest at<br />
ordinary income rates will be approved in the near future.<br />
Potential Investors<br />
Sponsors considering investment of existing funds in renewable<br />
energy projects, and those raising new Project Funds,<br />
should focus on whether their current or anticipated investor<br />
base can benefit from relevant government programs, the<br />
incentives from which often make the difference between<br />
viable and nonviable projects. Project Funds and renewable<br />
project investments were traditionally sought mostly<br />
by tax equity investors. The Project Fund could allocate<br />
the federal tax credits and accelerated depreciation to the<br />
taxable investors seeking an after-tax return. However, in<br />
mid to late 2008, the traditional tax equity investors found<br />
themselves without a tax reduction appetite and equity<br />
investment in these projects stalled. The Obama administration<br />
and Congress offered some help in the form of the<br />
ARRA. The ARRA permits taxpayers to claim cash grants in<br />
lieu of production or investment tax credits for certain types<br />
of renewable energy facilities, such as wind, closed-loop<br />
biomass, open-loop biomass, geothermal, solar, landfill gas,<br />
27 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
waste-to-energy, hydropower or marine/hydrokinetic facilities,<br />
placed in service in certain specified time periods. The<br />
cash grant program seems to have become an attractive<br />
alternative to the federal tax benefits. In addition, there is<br />
no limit on the amount of grants available through the grant<br />
program, making it an attractive alternative for funds that<br />
have not yet developed or placed facilities in service but<br />
plan to place such facilities in service within the relevant time<br />
periods.<br />
Tax-Exempt Investors<br />
Notwithstanding this broadening of benefits for renewable<br />
project investing, a major source of capital for private equity<br />
funds — tax-exempt investors, such as governmental plans,<br />
private pension plans, endowments, foundations and the<br />
like — are largely unable to participate. Although the grant<br />
program essentially converts tax credits to cash, many of<br />
the investor eligibility and fund structuring concerns for a tax<br />
credit fund will still apply. In particular, the Treasury guidance<br />
for the grant program provides that each direct and indirect<br />
investor in a partnership (such as a private investment fund)<br />
must be eligible to receive grant payments in order for the<br />
partnership to be eligible to receive grant payments. Many<br />
types of tax-exempt investors are not eligible to receive grant<br />
payments. Although the Treasury guidance further provides<br />
that the Treasury guidance expressly permits a partnership<br />
to establish a “blocker” or taxable C corporation through<br />
which these ineligible investors may invest, the tax impact<br />
associated with a blocker often decreases after-tax returns<br />
below a viable threshold.<br />
High-Net-Worth Individuals<br />
In addition, high-net-worth individuals also generally cannot<br />
participate in these federal renewable energy investment<br />
benefits. Noncorporate investors (and certain closely held,<br />
personal service and S corporations) are subject to the<br />
limitations on using losses and credits from passive business<br />
activities to offset certain types of income such as interest,<br />
dividends and capital gains from portfolio investments. There<br />
are also certain limitations on the amounts of partnership<br />
items that can be deducted by noncorporate taxpayers and<br />
closely held corporations. A private equity fund’s income or<br />
losses generally will be treated as passive activity income<br />
or losses. However, passive activity losses from renewable<br />
energy investments can be used to offset passive income<br />
from other sources, such as rental income, so high-net-worth<br />
individuals who have substantial qualifying passive income<br />
may still find such a fund attractive. Accordingly, individuals<br />
and closely held corporations or other entities subject to the<br />
passive activity rules should reasonably expect to have sufficient<br />
unsheltered passive income from other sources to use<br />
the tax losses and credits anticipated from an investment in<br />
the fund. Losses and credits that are currently disallowed<br />
under the passive limitations are suspended and may be<br />
carried forward to subsequent taxable years. If an investor<br />
subject to the passive activity rules does not have sufficient<br />
unsheltered passive income from other sources, the full<br />
extent of the tax benefit of the investment will not be realized<br />
by the investor. As a result, such investors may find such a<br />
fund to be a less attractive investment.<br />
Offshore Investors<br />
Offshore investors are also a source of significant capital<br />
for traditional private equity funds, but may not be good<br />
candidates for a Project Fund. As discussed above, the tax<br />
Because of these difficulties in providing<br />
maximum benefits (and therefore returns)<br />
to some of the traditional sources of<br />
private equity capital — tax exempts,<br />
high-net-worth individuals and offshore<br />
investors — sponsors of a new Project<br />
Fund should carefully consider its target<br />
investor base before launching the fund.<br />
credits, grants and related incentives often make viable a<br />
project that might not otherwise be viable. If the offshore<br />
investor is not a U.S. taxpayer, these benefits will not<br />
enhance its return. Moreover, a foreign person or entity may<br />
be eligible for a grant payment only if at least 50 percent of<br />
the income of the person or entity is subject to U.S. income<br />
tax, so the participation of ineligible offshore investors may<br />
disqualify the fund from participation in the grant program.<br />
Recapture Risk<br />
Each Treasury grant will vest ratably over a five-year period<br />
(similar to an investment tax credit) and must be repaid<br />
to the Treasury if certain events occur. These recapture<br />
events include: (1) the sale of any interest in the property,<br />
28 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
the owner or the partnership that is a direct or indirect<br />
owner to a disqualified person; (2) the property ceasing to<br />
qualify as specified energy property; and (3) other specified<br />
events applicable to particular types of renewable energy.<br />
A property may be sold to an entity other than a disqualified<br />
person without triggering recapture, so long as the<br />
property continues to be specified energy property, and the<br />
purchaser of the property agrees to be jointly liable for any<br />
recapture. Private investment fund sponsors should consider<br />
addressing potential recapture issues in fund partnership<br />
agreement provisions prohibiting transfers and assignments<br />
of fund interests to disqualified persons, investment<br />
guidelines prohibiting dispositions of projects to disqualified<br />
persons, distribution clawbacks requiring partners to return<br />
distributions associated with the recaptured amounts, and<br />
provisions establishing specific reserves.<br />
Because of these difficulties in providing maximum benefits<br />
(and therefore returns) to some of the traditional sources of<br />
private equity capital — tax exempts, high-net-worth individuals<br />
and offshore investors — sponsors of a new Project<br />
Fund should carefully consider its target investor base<br />
before launching the fund. Before embarking on a renewable<br />
energy project investment or strategy, an existing fund<br />
should consider its investors and any provisions in its partnership<br />
agreement or other fund documents that allow it to<br />
consummate investments while excluding certain investors.<br />
Timing<br />
The Treasury began accepting applications for the grant<br />
program on July 31, <strong>2009</strong>, and awarded approximately<br />
$500 million of grants in the first round of awards in early<br />
<strong>September</strong> <strong>2009</strong>. For property placed in service in <strong>2009</strong> or<br />
2010, an application cannot be submitted for a project until<br />
after the project is placed in service, and must be submitted<br />
before October 1, 2011. For projects that are under<br />
construction in <strong>2009</strong> or 2010, but not placed in service until<br />
after 2010, applications must be submitted after construction<br />
has begun, and before October 1, 2011. As a result of these<br />
timing issues, fund managers may have a limited window in<br />
which to deploy capital under these beneficial programs, so<br />
will need a plan to raise and invest this capital on a diligent<br />
basis.<br />
Conclusion<br />
Existing and new private investment fund sponsors confront<br />
several threshold considerations in determining whether<br />
renewable energy investing is right for them. Fund managers<br />
generally are likely to come under increasing regulation<br />
and scrutiny, and it is likely that taxes on traditional forms of<br />
private equity compensation will increase. Federal and state<br />
governments have traditionally provided incentives to investors<br />
in renewable energy projects, and those incentives have<br />
recently been expanded. However, fund sponsors should<br />
consider whether these benefits can be adequately transferred<br />
to their anticipated investor base, as several traditional<br />
sources of private equity capital may have problems realizing<br />
these benefits or require special structuring in order to do so.<br />
There are strategies to deal with many of these issues, but<br />
they should all be confronted early in the planning process<br />
so all parties have realistic and achievable expectations.<br />
29 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Industry Happenings<br />
Sahara Sun to Power Europe?<br />
As solar projects continue to surge, the horizons for development<br />
have expanded to less likely places, such as Tunisia.<br />
A German consortium is now building support for one of the<br />
world’s most ambitious solar power projects to date. The<br />
$573 billion endeavor, known as Desertec, would harness<br />
solar energy from fields of mirrors in the Sahara and convey<br />
power to a carbon-free network linking Europe, the Middle<br />
East and North Africa.<br />
Munich Re, a German insurance company, is the driving<br />
force behind this major undertaking and has expressed<br />
interest in playing a role as an investor and insurer once the<br />
project gets off the ground. The technology envisioned would<br />
collect solar rays to produce steam for turbines that produce<br />
electricity, which would be transmitted through high-voltage<br />
direct current (HVDC) cables.<br />
Opponents of the initiative argue that the economic and<br />
political risks are too great. In addition to the instability of the<br />
region, the project would require 20 or more cables, each<br />
costing up to $1 billion, to transmit electricity north beneath<br />
the Mediterranean. Supporters counter that the project could<br />
one day provide 15 percent of the energy used by Europe.<br />
Desertec could also empower countries like Morocco to<br />
export energy instead of importing.<br />
The experts have yet to draft a business plan or determine<br />
financing of the project. The next step in Desertec will be to<br />
legally incorporate, which is planned for October 31.<br />
Hydropower Gains Momentum with Boost from DOE<br />
At the end of June, U.S. Department of <strong>Energy</strong> Secretary<br />
Steven Chu announced up to $32 million in Recovery Act<br />
funding specifically for modernizing the hydropower infrastructure,<br />
increasing efficiency and reducing environmental<br />
impact. In July, DOE announced its plans to provide up to<br />
$30 billion in loan guarantees to companies investing in<br />
new renewable energy projects, including hydropower. The<br />
additional incentive of investment tax credits or grants has<br />
further insured a swell of hydropower improvement and<br />
advancement.<br />
Hydropower is the nation’s biggest source of renewable<br />
energy and the DOE is committed to improving the technology.<br />
A major advantage to hydropower is the ability to store<br />
and release the energy on demand. On <strong>September</strong> 15, the<br />
DOE announced that 22 advanced waterpower projects<br />
will receive up to $14.6 million in funding, which includes<br />
conventional hydropower plants. Secretary Chu remarked<br />
that “these projects will provide critical support for the development<br />
of innovative renewable waterpower technologies<br />
and help ensure a vibrant hydropower industry for years to<br />
come.”<br />
Queens Tests Con Edison’s Smart Grid Program<br />
On August 4 Consolidated Edison Company of New York,<br />
Inc., announced that Queens will be home to a $6 million<br />
smart grid pilot program. The program features sophisticated<br />
technology designed to improve the delivery of electricity to<br />
the residents and the utility’s ability to respond to customer<br />
use and power interruptions. Approximately 1,500 customers<br />
will participate in the project, which will run for a period of<br />
30 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
18 months. Another 300 residents will have home meters<br />
that will gauge their consumption so they will have the option<br />
to manage their energy usage and thereby save money.<br />
The City University of New York will also participate in the<br />
pilot by testing the integration of solar energy into the city<br />
grid. The energy will be collected from a 100kW photovoltaic<br />
system on the roof of LaGuardia Community College.<br />
If the pilot proves a success, Con Ed hopes to bring the<br />
advances to the rest of the city. Since the announcement<br />
of the Queens project, Con Ed has applied for a total of<br />
$188 million in federal stimulus funds to support their overall<br />
$435 million smart grid program.<br />
Farmers Cut Costs and Emissions with Legislation<br />
Pending<br />
Climate change legislation has been the source of much<br />
debate in the agricultural community, but farmers have been<br />
making positive changes while lawmakers work out the<br />
details. Over the last few years, an increasing number of<br />
dairy farmers in Wisconsin have successfully lowered their<br />
operational costs with the use of biogas digester systems.<br />
The biogas engines generate enough power for on-site electricity<br />
needs and the excess power can often be sold back to<br />
the regional grid.<br />
In January a bipartisan group of U.S. senators introduced<br />
legislation to encourage the development of biogas, the<br />
Biogas Production Incentive Act of <strong>2009</strong>. If passed, the bill<br />
would encourage greater production of biogas for energy<br />
purposes by providing biogas producers with a tax credit<br />
of $4.27 for every million British thermal units of biogas<br />
produced. According to the U.S. Department of <strong>Energy</strong>, if the<br />
U.S. used half of its waste biomass, biogas could replace<br />
about 5 percent of the natural gas currently being used,<br />
reducing carbon dioxide emissions by another 45–70 million<br />
metric tons per year.<br />
U.S. Military and Investors Help Algae Research Grow<br />
On <strong>September</strong> 8 Solazyme Inc., a synthetic biology company<br />
specializing in algal biodiesel, announced that it had signed<br />
a contract with the Defense Department to develop 20,000<br />
gallons of algae-derived diesel fuel for testing. This contract<br />
is a symbolic leap forward for the advanced research and<br />
development of large-scale advanced biofuel production<br />
from algae. Earlier this year, the Defense Advanced<br />
Research Projects Agency (DARPA) awarded a $25 million<br />
contract to Science Applications International Corp. for the<br />
development of an algae-based jet fuel for the U.S. military.<br />
The military’s ultimate goal of energy independence continues<br />
to act as a catalyst for alternative energy pioneers like<br />
Solazyme.<br />
Algae are among the fastest-growing plants in the world.<br />
Approximately 50 percent of their weight is lipid oil, which<br />
can be used to make biodiesel for cars, trucks and airplanes.<br />
Many others are investing in the promise of algae. In July<br />
ExxonMobil and startup Synthetic Genomics announced<br />
more than $600 million for a five- to six-year algae biofuels<br />
development program, including more than $300 million to<br />
be invested into the startup. Bill Gates’ Cascade Investment<br />
has funded Sapphire <strong>Energy</strong>’s development of auto fuel from<br />
algae. In early <strong>September</strong>, Sapphire <strong>Energy</strong>’s green crude<br />
powered the world’s first algae-fueled vehicle — a modified<br />
Toyota Prius also know as Algaeus. Although it is premature<br />
to say we will conquer our dependence on foreign oil with<br />
algae, recent developments demonstrate it is a fuel with<br />
great potential.<br />
31 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Letter From the Editor<br />
Dear Readers,<br />
This <strong>September</strong> <strong>2009</strong> issue marks the first anniversary of the<br />
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong>. <strong>Hunton</strong> and <strong>Williams</strong> is proud<br />
to be one of the only law firms in the country that offers<br />
a quarterly publication devoted exclusively to renewable<br />
energy. Our authors strive to shed light on the leading legal<br />
issues affecting industry participants and contribute to the<br />
renewable industry dialogue as a whole. Our publications<br />
cover a wide range of subject matters, including current<br />
legislation, federal and state policy initiatives and issues<br />
affecting the investment community.<br />
When the first edition was published in <strong>September</strong> of 2008,<br />
our country, along with the rest of the world, had just entered<br />
one of its most difficult economic cycles and uncertain times<br />
for the global power market. In spite of this setback, key<br />
players in this sector have stayed the course and forged<br />
ahead, bolstered in part by the creative energy and innovative<br />
strategies of industry participants as well as support from<br />
federal and state policy makers and industry associations.<br />
As a firm, <strong>Hunton</strong> and <strong>Williams</strong> is dedicated to the growth<br />
and success of sustainable energy solutions. We are committed<br />
to the ambitions of our clients to improve the global<br />
environment and will continue to support them in their mission<br />
to mitigate the financial, physical and health burdens on<br />
future generations.<br />
Sincerely,<br />
Thomas B.Trimble<br />
<strong>Hunton</strong> In The News<br />
<strong>Hunton</strong> & <strong>Williams</strong> Hosts Series of Homeland Security<br />
Policy Breakfasts<br />
In June, <strong>Hunton</strong> & <strong>Williams</strong> kicked off a series of Homeland<br />
Security Policy Breakfasts featuring a variety of topics. The<br />
most recent event took place in our D.C. office and focused<br />
on “The Smart Grid: Meeting the Challenge of Modernizing<br />
Electric Systems While Protecting Their Security.”<br />
Each event includes a panel of experts in the industry and<br />
concludes with a Q&A session. The next event is scheduled<br />
for <strong>September</strong> 24, <strong>2009</strong>, and will cover “Cloud Computing:<br />
Are the Security Risks Real or Exaggerated?”<br />
<strong>Hunton</strong> & <strong>Williams</strong> Pro Bono Leader George Hettrick<br />
Named American Lawyer Lifetime Achiever<br />
<strong>Hunton</strong> & <strong>Williams</strong> is pleased to announce The American<br />
Lawyer® named George H. Hettrick, firm partner and chair<br />
of the firm’s Community Service Committee, a <strong>2009</strong> Lifetime<br />
Achiever. The annual award recognizes lawyers who have<br />
made significant contributions to public service while also<br />
building an outstanding legal practice. Following a 25-year<br />
career as a corporate finance lawyer, Hettrick took on<br />
the challenge of leading the firm’s pro bono practice on a<br />
full-time basis. Nearly 100 percent of our U.S. lawyers participated<br />
in our pro bono program last year, donating nearly<br />
73,000 hours.<br />
H&W Shortlisted in Corporate Counsel’s Annual Who<br />
Represents Whom<br />
<strong>Hunton</strong> & <strong>Williams</strong> was listed among the top ten most-used<br />
outside counsel by Fortune 100® companies in Corporate<br />
Counsel’s <strong>2009</strong> “Who Represents Whom.” The magazine<br />
annually researches the nation’s largest companies to identify<br />
their “go-to” firms in each of the following practice areas:<br />
commercial law and contracts litigation; corporate transactions;<br />
employment and labor litigation; intellectual property<br />
litigation and patent prosecution; and torts and negligence.<br />
Robert Grey Nominated to Legal Services Corporation<br />
and Appointed Interim Director of Leadership Council on<br />
Legal Diversity<br />
<strong>Hunton</strong> & <strong>Williams</strong> partner Robert Grey was recently nominated<br />
to the Legal Services Corporation (LSC) by President<br />
Barack Obama. Once appointed to the LSC board, Grey will<br />
serve alongside 10 directors to set policy for the country’s<br />
single-largest provider of civil legal aid to the underprivileged.<br />
Grey was also recently appointed interim executive<br />
director of the Leadership Council on Legal Diversity. A<br />
newly formed organization of chief legal officers and law<br />
firm managing partners, the council is dedicated to creating<br />
a truly diverse legal profession. Grey’s responsibilities will<br />
include increasing the council’s membership, establishing<br />
partnerships to advance its mission, creating best practices<br />
for the promotion of diversity in the legal profession and<br />
helping identify a permanent executive director.<br />
32 <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong> www.hunton.com
<strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
<strong>Hunton</strong> & <strong>Williams</strong> <strong>Renewable</strong> <strong>Energy</strong> <strong>Quarterly</strong><br />
Issue 5, <strong>September</strong> <strong>2009</strong><br />
Editor<br />
Thomas B. Trimble<br />
Advisory Board<br />
Fernando C. Alonso<br />
P. Scott Burton<br />
John Deacon<br />
Laura E. Jones<br />
Ted J. Murphy<br />
Enid L. Veron<br />
Contributors<br />
William L. Wehrum and Scott J. Stone<br />
Federal Climate Legislation: The End Would Be Just The<br />
Beginning<br />
Edward B. Koehler, Chumbhot Plangtrakul and Peter Francis<br />
Schultz<br />
Progress To Date in Implementing China’s <strong>Renewable</strong><br />
<strong>Energy</strong> Law of 2006<br />
Edward B. Koehler, Weiqi Fei and Peter Francis Schultz<br />
<strong>Renewable</strong> <strong>Energy</strong> Development Prospects of Southeast<br />
Asia’s ‘Green Tigers’<br />
Laura E. Jones and Timothy L. Jacobs<br />
Recovery Act Guidance Update<br />
Douglas J. Heffner<br />
Ambiguities in ‘Buy American’ Rule Hamper <strong>Renewable</strong><br />
<strong>Energy</strong> Projects<br />
Cyane B. Crump and James S. Seevers, Jr.<br />
Green Investment Funds: Threshold Considerations and<br />
Challenges<br />
<strong>Hunton</strong> & <strong>Williams</strong> LLP<br />
200 Park Avenue<br />
New York, New York 10166<br />
(212) 309-1000<br />
700 Louisiana Street<br />
Houston, Texas 77002<br />
(713) 229-5700<br />
30 St. Mary Axe<br />
London EC3A 8EP<br />
+44 (0)20 7220 5700<br />
1900 K Street NW<br />
Washington, DC 20006<br />
(202) 955-1500<br />
951 East Byrd Street<br />
Richmond, Virginia 23219<br />
(804) 788-8200<br />
1 South Sathorn Road<br />
Thungmahamek, Sathorn<br />
Bangkok 10120 Thailand<br />
+66 2 645 88 00<br />
575 Market Street, Suite 3700<br />
San Francisco, California 94105<br />
(415) 975-3700<br />
1111 Brickell Avenue, Suite 2500<br />
Miami, Florida 33131<br />
(305) 810-2500<br />
550 South Hope Street<br />
Los Angeles, California 90071<br />
(213) 532-2000<br />
© <strong>2009</strong> <strong>Hunton</strong> & <strong>Williams</strong> LLP. Attorney advertising materials. These materials have been prepared for informational purposes<br />
only and are not legal advice. This information is not intended to create an attorney-client or similar relationship. Please do not send<br />
us confidential information. Past successes cannot be an assurance of future success. Whether you need legal services and which<br />
lawyer you select are important decisions that should not be based solely upon these materials. Contact for publication: Thomas B.<br />
Trimble, <strong>Hunton</strong> & <strong>Williams</strong> LLP, 1900 K Street NW, Washington, DC, 20006, (202) 955-1500.<br />
Atlanta • Austin • Bangkok • Beijing • Brussels • Charlotte • Dallas • Houston • London • Los Angeles • McLean • Miami • New York • Norfolk • Raleigh • Richmond • San Francisco • Singapore • Washington