The rush to secure interconnection rights for renewable energy projects is well underway, spurred by significant, and often time sensitive, governmental incentives for renewable energy. With the incentives have come multitudes of renewable projects that request interconnection to transmission grids nationwide. Entering the interconnection queue typically requires demonstrating site control and/or paying increasing deposits to maintain queue position until site control is established.
The competition for government incentives and interconnection slots has created a land rush, tempting early stage projects to possibly cut corners on site control including securing and submitting possibly incomplete or inaccurate lease agreements for renewable energy generating sites. This land rush could create complaints to grid operators and regulators over projects in a highly competitive queue that may lack sufficient site control or economic viability if the transmission upgrades anticipated for other projects in queue do not come to fruition.
Robust Incentives
That the renewable energy gold rush has begun is undeniable. For example, 8,558 MW of new wind generation capacity added in 2008 was 43% of all new U.S. energy generation, and another 4,000 MW was added by mid-year 2009 – and that was before the incentives provided in the American Recovery and Reinvestment Act (ARRA) and the Administration’s 2010 budget had fully begun. From 2009 through 2012 a significant total of 40,400 MW of new wind generating capacity is anticipated, according to the U.S. Department of Energy.
Driving the process is not just the availability of incentives, but also their accelerated timeframes. The ARRA extended the placed-in-service date for the renewable energy production tax credit (PTC) through 2012 for wind projects and through 2013 for other renewable sources. It also allowed projects placed in service by 2012 (wind) or 2013 (other renewables) to receive an investment tax credit (ITC) immediately rather than over a 10-year period, and allowed renewable energy developers to elect a non-taxable cash grant equal to 30% of total facility cost (essentially replacing, for a time, the currently dormant tax credit monetization market), if construction on the facility commences in 2009-2010 and is completed by 2013 (wind), 2017 (solar) or 2014 (other technology).
Add to this the ARRA’s Conventional Renewable Energy Loan Guarantees, and the important financial incentives for accelerated renewable development are implicit.
Other accelerants are the mandatory Renewable Portfolio Standards (RPS) that in approximately 30 states and the District of Columbia set required minimal – but quickly increasing – levels of renewable energy use. The Waxman-Markey Bill passed by the U.S. House of Representatives in June 2009 sets national renewable energy generation targets that rise to 20% of all electricity by 2020.
The Senate and House are considering legislation to put a price on greenhouse gases, including fossil power generation emissions. And the Environmental Protection Agency is not waiting for Congress to act – it is requiring facilities that account for up to 85% of U.S. greenhouse gas emissions to submit annual emission reports beginning in 2011 and has proposed significant permitting rules for emitters including the use of best available technology. Putting a price on carbon emissions will tend to make renewable power more competitive, providing a further, compelling development incentive.
Robust Due Diligence
These forces highlight the need for robust due diligence to ensure a successful renewable project. In addition to standard diligence regarding offtake agreements, permits and project development documents, a typical project should be assessed by available transmission capacity and interconnection opportunities and their cost. Instead, under pressure to enter the queue before competing projects secure their place, documentation of site control might be assembled haphazardly.
Although straightforward, the typical requirements for demonstrating site control to make an interconnection request are open to some level of interpretation. To enter either the Preliminary or the Definitive Interconnection System Impact Study queue in the Southwest Power Pool, for example, the interconnection customer needs to provide some evidence of ownership in or rights to use or acquire the site of the proposed generating operation. There also needs to be demonstration that the amount of land under control is sufficient for the generating operation. However, if the developer can provide a reasonable layout involving less land, it may be accepted. In addition, the interconnection request can secure a place in the connection queue by payment of an initial deposit and additional deposits ranging from $40,000 to $150,000, depending on the type of study and the size (MW) of the project.
The Midwest Independent Transmission System Operator (MISO) requires additional documentation, including demonstration that there is land area equal to at least 50% of that required to support the size and type of proposed project. MISO requires that proof of site control include copies of relevant portions of land lease or purchase documents, as well as a signed statement that all of the listed agreements are recorded in their entirety, that all referenced land is within the proposed project boundaries and those agreements constitute 50% (or more) of ownership/control of the project’s total site area. If MISO determines that proof of site control has not been adequately met, or that the developer has made false representations, the interconnection application must be withdrawn with loss of queue position.
Such provisions are critical, but they do not address completely the possibility of errors in the title or the execution of option and lease agreements for the property. There also could be issues with recording the various lease agreements with the proper land registry. Finally, even if such land agreements are viable or have minor errors, the developer still may have property access issues that could negatively influence the project. All of these factors could make a project developer’s efforts to prove site control more difficult, which could lead to disputes between project owners and transmitting utilities, and between generation projects fighting for position in the queue.
The Federal Energy Regulatory Commission (FERC) has launched initiatives to have grid operators assess and improve the processing of their interconnection queues, including queue size, processing timeframes and backlog assessments. The underlying issue, however, is vigilant due diligence, and not only processing time. Given the important incentives to renewable energy development, regulators, grid operators and developers should beware that failure to document fully and accurately land rights could mean controversy and a failed project.
About the Author
Gregory K. Lawrence is a partner in the Energy and Derivatives Markets Group of global law firm McDermott Will & Emery, and leads the firm’s Global Renewable Energy, Emissions and New (GREEN) Products group. Mr. Lawrence focuses his practice on regulatory proceedings, negotiations, governmental affairs and agency litigation relating to the wholesale and retail electricity and natural gas industries.
