The project finance market in the United States benefits from a well-developed legal framework and sophisticated financial markets. The US legal system is generally viewed as clearly codified, stable and efficient, as well as one that is enforced in a regular and open manner.2 Contractual agreements between parties are recognised by law with few exceptions related to public policy concerns. The project finance sector has strong access to both the public and the private financial markets and is in some limited areas even supported – directly or indirectly – by government policies.
This combination of a strong legal framework and financial markets has facilitated the development of a robust project finance sector in the United States. Project finance is premised on the ability of the parties to contractually allocate risks among themselves and to enforce those contractual obligations in a reliable manner. A successful project finance regime is also dependent on commercial laws that allow developers to protect themselves through special purpose entities that benefit from non-recourse financing and that, similarly, allow lenders and investors to obtain security in the project assets and to enforce their claims against the project. Likewise, a sophisticated private financial market has the flexibility to allow the developer and the financing providers to create complex financing structures and to tailor those structures to the specific needs of a particular project.
This chapter discusses various transactional structures available to projects and the legal documentation frequently used to implement them. It reviews the various risks associated with project finance transactions and how parties allocate these risks. It also examines how the US legal framework supports the ability of lenders and investors to protect their interests, including obtaining, perfecting and enforcing security interests in a manner that permits lenders to enforce their rights in the event that a project encounters financial problems. This chapter also considers how the legal framework is influenced and affected by social and environmental considerations. The role of a complex legal framework and sophisticated private financing providers and the public sector is also addressed, followed by a summary of the impact of taxes on investment, which may be of particular interest to foreign lenders and investors. The framework for how dispute resolution is processed in the United States is discussed in the final section.
II RECENT TRENDS
The nature and complexion of project finance in the United States has been shifting, mostly as a result of the expiry of certain government incentives, regulatory changes relating to power plant emissions, declining prices of distributed generation technologies and lower natural gas prices as a result of increased domestic production. More recently, the sector has been shaped by the enactment of a package of amendments to the tax code at the end of 20173 and by the imposition of tariffs on imported solar cells and modules in January 2018 as a result of a petition filed by Suniva, Inc and SolarWorld Americas with the US International Trade Commission. Despite fears that the approval of the US tax reform (particularly the reduction in the corporate tax rate from 35 per cent to 21 per cent and the implications of the base erosion anti-abuse tax to certain international financial institutions active in the market) would curtail the availability of tax equity financing in the market in 2018, tax equity investors have maintained a substantial presence as financing sources and renewable energy projects continue to remain a significant component of the market. In 2018, approximately 29 per cent of the total value of project finance transactions in the country was invested in the renewable energy sector.4 For example, 7,588MW of wind energy (an 8 per cent increase from the 2017 level)5 and 10.6GW (including approximately 6.2GW of utility-scale installations, which was approximately the same as in 2017) of solar energy were installed in 2018.6 Approximately 16,521MW of wind capacity was still under construction at the end of 20187 and approximately 12GW of solar capacity is expected to be completed in 2019.8 Additionally, hydroelectric capacity could grow from 101GW to approximately 150GW by 2050, not only through the construction of new power plants but also through the upgrade and optimisation of existing plants and by the increase of the pumped storage hydropower capacity.9
Throughout 2018, much of the project financing activity in the United States involved energy projects that were able to qualify for a production tax credit (PTC)10 or the 30 per cent investment tax credit (ITC)11 by meeting certain requirements. Additionally, developers of clean energy projects employing new or innovative technology that was not in general use were able in 2017 to request loan guarantees pursuant to Section 1703 of the Department of Energy's Loan Guarantee Program.12 In 2013 and 2014, the Department of Energy published an US$8.5 billion solicitation for advanced fossil energy projects that avoid, reduce or sequester greenhouse gases13 and a US$4.5 billion solicitation for renewable or efficient energy technologies;14 in January 2017 both solicitations were supplemented to clarify that the deployment of infrastructure for alternative fuel vehicles that use alternative fuels may be eligible under those programmes.15 In December 2016, the Department of Energy announced a conditional commitment to guarantee up to US$2 billion of loans to construct a methanol production facility employing carbon capture technology in Lake Charles, Louisiana, which would represent the first loan guarantee made under those solicitation programmes.16 In February 2018, Congress enacted the Bipartisan Budget Act of 2018,17 which substantially increased the value of the Section 45Q tax credit available for carbon capture, utilisation and storage projects, and significantly expanded the universe of companies that would be eligible for this federal subsidy, which was originally made available in 2008 by increasing the eligible uses, decreasing the carbon capture threshold and eliminating the prior programme's limitation to the first 75 million tons of carbon captures. The Section 45Q tax credit will be available for eligible projects placed in service after 2 February 2018 and before 1 January 2023 and can be claimed over a 12-year period.18 The development of carbon capture and sequestration projects will certainly increase once the IRS issues formal guidance to facilitate and implement the new Section 45Q rules.
Furthermore, the Protecting Americans from Tax Hikes Act of 201519 extended the PTC programme for certain eligible facilities for which construction began before 1 January 2017 and for otherwise qualifying wind facilities for which construction began before 1 January 2020 (with a progressive phase-out reduction if construction begins after 31 December 2016) and the ITC programme for qualified solar facilities for which construction began before 1 January 2022.
Propelled by extended federal incentives, advances in green technology that decrease investment costs, state incentives and regulatory policies implementing renewable energy portfolio standards (RPS) on utilities, and the positioning of renewable energy as a key component for strategic energy independence for the nation, the development of renewable projects is expected to continue moving forward. As at October 2018, 29 states, the District of Columbia and three US territories have enacted RPS programmes, and eight additional states and one US territory now have voluntary goals for generation of renewable energy.20 For example, California's RPS programme, one of the most ambitious in the United States, requires that utilities derive 33 per cent of their energy from renewable sources by the end of 2020, 44 per cent by the end of 2024, 52 per cent by the end of 2027 and 60 per cent by the end of 2030 (with the ultimate goal of obtaining 100 per cent of the retail sales of electricity to end-use customers and the electricity to serve all state agencies from renewable energy resources and zero-carbon resources by the end of 2045).21 While all three of the largest California utilities have enough renewable energy capacity under contract to meet the 2020 threshold, the generation forecasts that those utilities prepared in 2018 (risk adjusted to account for a certain degree of project failure) show that, in the aggregate, there will be a deficit beginning in 2026.22 Additionally, the bankruptcy filing by one of those utilities, Pacific Gas & Electric Company (PG&E) in January 201923 could provide PG&E with the ability to reject certain of its power purchase agreements (especially those with above-market prices) with renewable energy generators and increase the generation deficit. Other states, such as New Mexico and Washington, have similar 100 per cent carbon-free goals in the next few decades and Hawaii has gone further by requiring 100 per cent renewable energy generation by 2045.24 As a result, there is a need for additional renewable energy generation in California and the rest of the United States. As the existing fleets of wind generation projects developed before 2000 approach the end of their useful lives, it is also expected that repowering investment will significantly increase during the next decade.
While still in its early stages, the US offshore wind energy sector recently experienced noteworthy developments. In 2018, Vineyard Wind LLC's 800MW offshore wind project was awarded six long-term power purchase agreements with Massachusetts utilities through a competitive process,25 which represents the largest single procurement of offshore wind in the United States.26 Besides the mere size of the award, the most significant feature of those power purchase agreements is perhaps the energy purchase price, which is substantially lower than the price in prior reported transactions and confirms the increased competitiveness of offshore wind energy. The first offshore project to be constructed and achieve commercial operations is the 30MW Block Island Wind Farm, which has a power purchase agreement with a starting price of US$244/MWh and the reported price in other subsequent offshore power purchase agreements ranged between US$132/MWh and US$160/MWh.27 In contrast, the starting price under the Vineyard Wind power purchase agreements is US$74/MWh for the first 400MW phase and US$65/MWh for the second phase.28 Fuelled in part by improvements in technology (lowering costs and reducing risk) and government support, particularly on the north-east coast of the United States,29 offshore wind is becoming widely seen as a notable opportunity;30 it was brought to the industry's attention with Ørsted's acquisition of Deepwater Wind (the owner of the Block Island Wind Farm) in November 2018.31
In recent years, the US Environmental Protection Agency (EPA) has attempted to implement regulations aimed at limiting greenhouse gas emissions from existing fossil fuel-fired electric generating units in part by setting state-specific goals for reducing emissions from the power sector. The final rules were released in August 2015 (the Clean Power Plan) but were confronted by immediate legal challenges from a large number of affected states and state agencies, utility companies and energy industry trade groups, and, after an emergency stay was granted by the US Supreme Court, the US Court of Appeals for the DC Circuit heard oral arguments on the merits of the case in September 2016. In March 2017, President Trump issued an executive order setting forth his administration's policy to promote energy independence and economic growth, and ordering the EPA to review the Clean Power Plan for consistency with the new policy. Subsequently, upon request by the EPA, the US Court of Appeals held the case in abeyance and last extended that status on 5 April 2019 for an additional 60 days.32 The EPA proposed on 16 October 2017 that the Clean Power Plan be repealed33 and published the proposed repeal rule on 31 August 2018.34 The EPA's final repeal rule is expected by mid 2019.
1 Carolina Walther-Meade, Karen Wong and Henry Scott are partners and Miguel Duran is a senior associate at Milbank LLP.
2 See WJP Rule of Law Index 2019, by the World Justice Project, available at https://worldjusticeproject.org/ sites/default/files/documents/WJP-ROLI-2019-Single%20Page%20View-Reduced_0.pdf.
3 Pub. L. No. 115-97 (2017).
4 These statistics do not include public-private partnership transactions and were researched and extrapolated from data available at the Infrastructure Journal website (https://ijglobal.com/league-tables).
5 See American Wind Energy Association, 'US Wind Industry Fourth Quarter 2018 Market Report – Public Version', available at https://www.awea.org/resources/publications-and-reports/market-reports/2018u-s-wind-industry-market-reports/4q2018_public.
6 See the Solar Energy Industries Association website (https://www.seia.org/research-resources/solar-market- insight-report-2018-year-review).
7 See footnote 5.
8 See footnote 6.
9 See 'Hydropower Vision, A New Chapter for America's 1st Renewable Electricity Source', prepared by the US Department of Energy, Wind and Water Power Technologies Office, available at https://www.energy. gov/sites/prod/files/2018/02/f49/ Technologies Office, available at https://www.energy. gov/sites/prod/files/2018/02/f49/Hydropower-Vision-021518.pdf.
10 Section 45 of the Internal Revenue Code of 1986, as amended.
11 Section 48 of the Internal Revenue Code of 1986, as amended.
12 Section 1703 of the Energy Policy Act of 2005.
13 See the Department of Energy website (https://www.energy.gov/lpo/services/solicitations/ advanced-fossil-energy-projects-solicitation).
14 See the Department of Energy website (https://www.energy.gov/lpo/services/solicitations/renewable-energy- efficient-energy-projects-solicitation).
15 See the Department of Energy website (https://energy.gov/sites/prod/files/2017/01/f34/FactSheet_Vehicle_ Announcements_01_9_17.pdf).
16 See the Department of Energy website (https://energy.gov/articles/energy-department-offers-conditional- commitment-first-advanced-fossil-energy-loan-guarantee).
17 Pub. L. No. 115-123 (2018).
18 See Section 45Q of the Internal Revenue Code of 1986, as amended.
19 Pub. L. No. 114-113, Div. Q, 129 Stat. 2242 (2015).
20 See the NC Clean Energy Technology Center website (http://ncsolarcen-prod.s3.amazonaws.com/ wp-content/uploads/2018/10/Renewable-Portfolio-Standards-2018.pdf).
21 See the California Public Utilities Commission website (http://cpuc.ca.gov/rps/).
22 See California Renewables Portfolio Standard: Annual Report, November 2018, prepared by the California Public Utilities Commission, available at http://www.cpuc.ca.gov/uploadedFiles/CPUC_Public_Website/ Content/Utilities_and_Industries/Energy_-_Electricity_and_Natural_Gas/Renewables%20Portfolio%20 Standard%20Annual%20Report%202018.pdf.
23 See the US Bankruptcy Court for the Northern District of California website (www.canb.uscourts.gov/ case-info/pge-corporation-and-pacific-gas-and-electric-company).
24 See New Mexico SB 498 (https://www.nmlegis.gov/Sessions/19%20Regular/final/SB0489.pdf); Washington SB 5116 (http://lawfilesext.leg.wa.gov/biennium/2019-20/Pdf/Bills/Session%20Laws/ Senate/5116-S2.SL.pdf); Hawaii HB 623 (https://www.capitol.hawaii.gov/session2015/bills/HB623_ ); Hawaii HB 623 (https://www.capitol.hawaii.gov/session2015/bills/HB623_ CD1_.pdf).
25 The power purchase agreements were approved by the Massachusetts Department of Public Utilities on 12 April 2019 (see the order of the Massachusetts Department of Public Utilities, available at https://fileservice.eea.comacloud.net/FileService.Api/file/FileRoom/10617250).
26 See the Commonwealth of Massachusetts website (https://www.mass.gov/news/project-selected-to-bring- offshore-wind-energy-to-the-commonwealth).
27 See 'The Vineyard Wind Power Purchase Agreement: Insights for Estimating Costs of U.S. Offshore Wind Projects', Technical Report NREL/TP-5000-72981 by the National Renewable Energy Laboratory, February 2019, available at https://www.nrel.gov/docs/fy19osti/72981.pdf.
29 For example, the Governor of New Jersey signed an executive order aimed at achieving 3.5GW of offshore wind-generating capacity (see Executive Order No. 8, signed on 31 January 2018, available at https://nj.gov/infobank/eo/056murphy/pdf/EO-8.pdf) and the Public Service Commission of the State of New York issued an order adopting an offshore wind standard (see Order Establishing Offshore Wind Standard and Framework for Phase 1 Procurement, issued and effective 12 July 2018, available at http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7b37EE76DF-81B 1-47D4-B10A-73E21ABA1549%7d) authorising solicitations by the New York State Energy Research and Development Authority [NYSERDA], after which NYSERDA issued its first solicitation (see https://www.nyserda.ny.gov/All-Programs/Programs/Offshore-Wind/Offshore-Wind-Solicitations/ Generators-and-Developers/2018-Solicitation).
30 As at June 2018, there was approximately 1.9GW of offshore wind capacity under development in the United States and over 24GW of potential capacity in the development pipeline. See 2017 Offshore Wind Technologies Market Update by the Office of Energy Efficiency & Renewable Energy of the US Department of Energy, September 2018, available at https://www.energy.gov/sites/prod/files/2018/09/ f55/71709_V4.pdf.
31 Ørsted is the largest owner of offshore wind capacity in Europe and, at the end of 2018, owned 16 per cent of the cumulative offshore wind installed capacity in Europe. See Offshore Wind in Europe – Key trends and statistics 2018, by WindEurope, available at https://windeurope.org/wp-content/uploads/files/about-wind/ statistics/WindEurope-Annual-Offshore-Statistics-2018.pdf.
32 See the Environmental Defense Fund website (https://www.edf.org/sites/default/files/ content/2019.04.05%20Order%20Continuing%20Abeyance.pdf).
33 82 FR 48035 (16 October 2017).
34 83 FR 44746 (31 August 2018).
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