Energy and environmental project finance law and taxation new investment techniques

Developing Markets for Renewable Energy Certifi cates and Their Impact on Project Finance.. Multitiered Debt Financing Structures and Intercreditor Relationships in Renewable Energy Pro

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Energy and environmental project finance law and taxation : new investment techniques / edited by

Andrea S Kramer and Peter C Fusaro

p cm

Includes bibliographical references and index

ISBN 978-0-19-539049-0 (hardback : alk paper)

1 Energy industries—Finance—Law and legislation 2 Renewable

energy—Law and legislation 3 Carbon offsetting—Law and

legislation I Kramer, Andrea S II Fusaro, Peter C

be used, including checking primary sources where appropriate

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Contents ix About the Authors xxxv Contributors xxxvii List of Abbreviations lv Introduction by Andrea S Kramer and Peter C Fusaro lxiii

1 The Global Challenge for Energy and

Environmental Investment 1

Peter C Fusaro

2 Creating and Financing the Next-Generation

Carbon Offset Project: An Application to

Carbon Capture and Storage 15

Robin Cantor, Praveen Gunaseelan, James Vopelius,

and Alexander Bandza

3 Carbon Finance in America: A Brief Overview 39

Justin E Felt

4 Carbon Credits as a Currency for Project Finance 55

Olivia Fussell, Rena Gelb, and Christopher Kaminker

5 Developing Markets for Renewable Energy

Certifi cates and Their Impact on Project Finance 95

Gregory K Lawrence and Athena Y Velie

6 Overview of the Development and Financing of

Renewable Energy Projects 123

Karen B Wong and Allan T Marks

7 Investing in a Green World: Does Green

Mean Profi table? 159

Roger S Berry

SUMMARY CONTENTS

8 The “Unique” Challenges Faced by Project Sponsors

in Monetizing Offsets 167

Stanford A Renas and Noah P Melnick

9 An Overview of Transmission and Interconnection

Issues Affecting Renewable Energy Projects 211

Mark D Safty and Giji M John

10 Project Finance for Small-Scale Installations:

Financing Distributed Generation 237

Celia Y David

11 Energy Savings Performance Contracts:

Legal and Financial Considerations 253

Craig A Hart, Kenji Watanabe, William Hughes,

and Patrick Duggan

12 Contract Force Majeure Under New York Law 281

Jeremy D Weinstein

13 Failure Is an Option: Bankruptcy Risks and

Considerations in Project Finance Transactions 297

Nathan F Coco

14 Taking an Interest in Carbon: Secured Financing

and the Legal Nature of Carbon Credits 311

Samuel Kramer and Richard Saines

15 Secured Hedges in Energy and Environmental

Project Finance 337

Vanessa Tanaka and Daryl Rice

16 Multitiered Debt Financing Structures and Intercreditor

Relationships in Renewable Energy Project Financings 355

Joseph A Scherer

17 Use of Lien-Supported Financial Derivatives

in Project Finance 389

Phillip G Lookadoo and Marco A DeSousa

18 Energy and Environmental Hedging and Risk

Management: The Risks and How They Are Managed

and Taxed in the United States 413

Andrea S Kramer and William R Pomierski

19 Credit Tools Used in Structured Energy

Transactions 465

Craig Enochs and Paul Vrana

20 Contract Techniques for Renewable Resource

Power Purchase Agreement Offtakers 493

Jeremy D Weinstein

21 Structured Financing Techniques in Oil and Gas

Project Finance: Future-Flow Securitizations,

Prepaids, Volumetric Production Payments,

and Project Finance Collateralized Debt Obligations 521

Christopher L Culp and J Paul Forrester

22 Insurance Strategies to Protect Project Finance

Cash Flow for Domestic and International Trade 557

Nadine Moore and Corina Monaghan

23 The New Generation of Nuclear Power 573

Martha Groves Pugh and Patricia M Healy

24 Project Financing of Cross-Border Pipelines: A Study

in Comparative Law, Culture, and Political Risk 599

John P Cogan, Jr

25 Financing Renewable Energy Projects Through

U.S Tax Credits 639

Craig Wesley Foxgrover and Damon Kellar

26 Monetization Structures and Issues for U.S

Tax Code Sections 45 and 48 Projects 683

Philip D Tingle and Madeline M Chiampou

27 Tax Equity Financing for Wind Projects 703

Edwin F Feo and Simon Friedman

28 The Financing of Photovoltaic Projects 729

Stefan Schmitz

29 Innovation in Tax Credit Structuring for

Solar Energy Projects 761

Charles Purcell, Dirk Michels, Won-Han Cheng, and

Darcie Christopher

30 Geothermal Power: An Old Technology

Comes of Age 841

Christopher M Zochowski

31 Private Investment Fund Investment in Cleantech,

Alternative Energy, and Carbon Products: Legal

and Regulatory Considerations 859

Edward G Eisert, Lawrence B Patent, and Eric E Freedman

32 Conclusion 913

Andrea S Kramer and Peter C Fusaro

Index 917

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About the Authors xxxv

Contributors xxxvii

List of Abbreviations lv Introduction by Andrea S Kramer (McDermott Will & Emery LLP) and Peter C Fusaro (Global Change Associates, Inc.) lxiii Chapter 1 The Global Challenge for Energy and Environmental Investment 1

Peter C Fusaro (Global Change Associates Inc.)

I Conventional Energy Resources and Needs 2

II Renewable Energy and Clean Technology 7

III The New Green Business Model Emerges 9

IV The New Market Drivers 10

V Climate Change as the New Market Driver 12

VI Energy Market Changes and Creating the Low-Carbon Economy 13

Chapter 2 Creating and Financing the Next-Generation Carbon Offset Project: An Application to Carbon Capture and Storage 15

Robin Cantor (Exponent, Inc.), Praveen Gunaseelan (Vantage Point Energy Consulting), James Vopelius (Trident Risk Management, LLC) and Alexander Bandza (Exponent, Inc.)

I Background on Carbon Credit and Offset Markets 15

CONTENTS

II Due Diligence and Transactional Issues 17

A The Carbon Offset Value Proposition 17

B The Carbon Capture and Storage Value Proposition 20

III Second-Generation Carbon Capture and Storage Projects 21

A CO 2 Capture Technologies 22

B CO2 Transportation 27

C CO 2 Storage or Disposal 27

D Emerging CCS Technologies 30

E Risks 32

IV Conclusions 37

Chapter 3 Carbon Finance in America : A Brief Overview 39

Justin E Felt (Point Carbon Thomson Reuters North America)

I Introduction 39

II A Shanty Town Market 40

III Offset Quality and Policy Eligibility 42

IV The Value Chain 43

A Buyers 44

B At the Project Level 45

C Quality Assurance 46

D Liquidity Providers 48

V Financing Carbon Offset Projects 50

VI The Costs of Monetizing Offsets and RECs 52

VII The Future of the U.S Carbon Market 54

Chapter 4 Carbon Credits as a Currency for Project Finance 55

Olivia Fussell, Rena Gelb, and Christopher Kaminker (Carbon Credit Capital, LLC)

I Introduction 55

II Market Frameworks for Carbon Credits 56

A Regulatory and Voluntary Frameworks for Greenhouse Gas Reduction 56

B Buyers and Sellers of Carbon Credits 62

C Price Drivers of Compliance Carbon Credits 63

D Pricing Voluntary Carbon Credits 65

III Carbon Credit Projects 66

A The Carbon Credit Process 66

B Types of Carbon Credit Projects 68

C Forestry Projects 69

IV Carbon Finance as an Option for Project Finance 70

A Overview of Carbon Finance Techniques 70

B How Risk Is Factored into the Price of Carbon 77

C How Carbon Transaction Agreements Address Risk 80

V Case Studies: Energy Effi ciency, Renewable Energy, and Methane 81

A Renewable Energy Case Study 81

B Energy Effi ciency Case Study 82

C Methane Capture Case Study 83

VI Addressing Uncertainty and Managing Risk in Carbon Credit Markets 85

A The Future of the Kyoto Protocol 85

B Regulatory Uncertainty and How This Impacts Markets for Carbon Credits 86

C Linkages Between Carbon Market Frameworks 89

D The Role of Developing Countries in an International Climate Agreement 90

E Projections of the Future Price of Carbon 91

VII Conclusion 93

Chapter 5 Developing Markets for Renewable Energy Certifi cates and Their Impact on Project Finance 95

Gregory K Lawrence and Athena Y Velie (McDermott Will & Emery LLP)

I An Introduction to U.S Renewable Energy Credit Markets 95

II Mandatory U.S State Renewable Portfolio Standards 96

A Brief History 96

B Selected State Mandatory RPS Requirements 97

C Emerging State RPS Requirements 102

CONTENTS

III The Creation and Trading of Compliance RECs 102

A REC Qualifi cation, Tracking, Banking and ACPs 102

B Secondary Markets for Trading “Unbundled” RECs 104

C Transfer and Settlement 104

D Regulatory Risk and Forward Market REC Value 108

IV Voluntary REC Markets 109

A Green-e-Energy 110

B Relationship to RPS Requirements and Developing GHG Emissions Markets 112

V Federal and State Oversight 112

A Federal Trade Commission’s Green Guides 112

B Commodity Futures Trading Commission 114

VI Documenting Compliance REC and Voluntary REC Transactions 115

A Unique Documentation Risks 115

VII RECs and Renewable Financing 117

A Who Owns What? 117

B Insolvency Issues—What Is a REC? 120

VIII A Federal Renewable Energy Standard or RPS? 121

Chapter 6 Overview of the Development and Financing of Renewable Energy Projects 123

Karen B Wong and Allan T Marks (Milbank, Tweed, Hadley & McCloy LLP)

I Introduction 123

II Renewables and Alternative Energy Defi ned 125

III Incentives for Renewable Energy Investment 125

A Political and Consumer Interest 127

B Political Support 129

C Economic and Market Factors 130

D Improved Technologies 131

E Industry Consolidation 132

IV Tax Incentives and Direct Government Support for Renewable Energy Projects 133

A Tax Incentives 133

B Renewable Portfolio Standards 134

C Feed-In Tariffs 135

D Changes to the Form of Government Support 136

V Development of Renewable Energy Projects 137

A Risk Identifi cation—Due Diligence 137

B General Issues For All Projects 138

C Risk Allocation in Key Project Contracts 144

D Key Project Contracts 145

VI Financing of Renewable Energy Projects 154

A Debt Financing 154

B Equity Financing Structures 156

C Financings Post-2009 Recovery Act 158

Chapter 7 Investing in a Green World: Does Green Mean Profi table? 159

Roger S Berry

I Introduction 159

II Green Drivers 160

III Green Returns? 163

IV Conclusion 166

Chapter 8 The “Unique” Challenges Faced by Project Sponsors in Monetizing Offsets 167

Stanford A Renas and Noah P Melnick (Linklaters LLP)

I Introduction 167

II Offsets and “Additionality” 169

III Cap-and-Trade Systems and the Role of Offsets 172

A Anthropogenic Climate Change 173

B Cap-and-Trade Systems 174

C Role of Offsets 176

D Creating Offsets 179

IV Project Financings; Risks and Monetization 180

A Project Financings—What Are They? 180

CONTENTS

B Distinguishing Project Financings from Traditional

Corporate Bank Lending 181

C Critical Importance of Future Cash Flows—Monetization 183

D Why Offsets Matter in Project Financings 184

V Offset Risk Profi le in Project Financings 185

A Uncertainty Makes Risk Assessment and Allocation Diffi cult 185

B Offsets as a New Asset Class and Challenges of Monetization 186

VI Embracing Uncertainty and Looking Ahead 194

A Uncertainty 195

B Related Risks 205

C Managing Risks 207

VII Conclusion 208

A Challenges Faced by Project Sponsors in Monetizing Offsets Are Not Unique 208

B Signifi cance of Challenges Faced by Project Sponsors in Monetizing Offsets 209

Chapter 9 An Overview of Transmission and Interconnection Issues Affecting Renewable Energy Projects 211

Mark D Safty and Giji M John (Holland & Hart LLP)

I Overview of Electricity Transmission in the United States 212

II Regulatory Overview 214

A Federal Energy Regulatory Commission 214

B North American Energy Reliability Corporation and the Regional Reliability Councils 215

C Independent System Operators and Regional Transmission Organizations 216

III Pro Forma Open Access Transmission Tariff 217

A Eligible Customers 219

B Point-to-Point Transmission Service—Firm and Non-Firm 220

C Network Integration Transmission Service 221

D Assignment, Resale of Transmission, and the OASIS Marketing System 223

IV Large Generator Interconnection Procedures 224

A Interconnection Application 226

B Large Generator Interconnection Agreement 231

C Special Issues for Wind and Solar Power Plants 232

V Addressing Interconnection/Transmission Risk in the Power Purchase Agreement 233

A Interconnection Facility Construction Delay Risk 233

B Curtailment Risk 233

C Forecasting and Scheduling Risk 234

VI Interconnection and Transmission Issues in Project Financing 235

VII Continuing Interconnection Issues: Revisions to the OATT and Interconnection Queue Reform 235

A Revised Pro Forma OATT: Order 880 235

B Interconnection Queue Reform 236

Chapter 10 Project Finance for Small-Scale Installations: Financing Distributed Generation 237

Celia Y David (Navigant Consulting, Inc.)

I Overview 237

II Types of Distributed Generation; General Considerations 238

A Generator Selection Issues 238

B Sizing the Generator: How Much Load Should It Serve? 240

C Other Issues 241

III Ownership Alternatives to Support Financing Goals 241

IV Revenue (Savings) Streams from Distributed Generation 242

A Sales of Electricity or Thermal Energy; Shared Savings Arrangements 242

B Wholesale Markets and Transactions 242

C Retail Sales of Electricity 243

V Financing Distributed Generation 243

A Financing Alternatives and Tax Incentives 243

B Impact of Utility Renewable Portfolio Standards 244

C Utility Financing or Ownership of Distributed Generation Using Renewable Resources 245

VI Overview of Utility Regulatory Issues Affecting Distributed Generation 245

A State Regulatory Background 246

CONTENTS

B Federal Regulatory Background 248

C Net-Metering and Net Billing 250

VII Policy Goals Favoring Certain Types of Generation 250

VIII Conclusion 251

Chapter 11 Energy Savings Performance Contracts: Legal and Financial Considerations 253

Craig A Hart (Alston & Bird LLP), Kenji Watanabe (Energy + Environment Foundation), William Hughes (Alston & Bird LLP), and Patrick Duggan

I The Concept of Energy Savings Performance Contracting 254

II Growth of the Energy Performance Contracting Industry 255

A United States 255

B Canada 256

C Europe 256

D Japan 256

E China 257

F India 257

G Australia 257

H Brazil 258

III Negotiating Energy Savings Performance Contracts 258

A The Walk-Through Audit 259

B The Bidding Process 259

C The Investment Grade Audit 261

D Developing a Contract 264

E Performance of the ESPC Including Measurement and Verifi cation 272

IV ESPC Financing Options 274

V Disputes and Dispute Resolution Under ESCO Agreements 277

A Schedules and Exhibits 277

B Measurement and Verifi cation (M&V) 278

C Design and Construction Issues 278

D Client Performance 278

E Disputes Relating to the Energy-Savings Guarantee 279

F Dispute Resolution Provisions in ESPCs 279

VI Conclusion 280

Chapter 12 Contract Force Majeure Under New York Law 281

Jeremy D Weinstein (Law Offi ces of Jeremy D Weinstein, P.C )

I Introduction 281

II Performance is Expected 282

III Force Majeure Clauses Will Be Narrowly Construed 283

IV Increased Cost to Perform is Not Force Majeure 283

V The UCC Doctrine of Commercial Impracticability 284

VI When Does Increased Cost of Performance Become Commercial Impracticability? 286

VII Summary Statement of New York Law of Force Majeure in Contracts 286

Chapter 13 Failure Is an Option: Bankruptcy Risks and Considerations in Project Finance Transactions 297

Nathan F Coco (McDermott Will & Emery LLP)

I Introduction 297

II Commencement of Bankruptcy Case 298

III Creation of the Bankruptcy Estate 300

IV Automatic Stay 301

V Treatment of Executory Contracts and Unexpired Leases 302

VI Treatment of Subordination and Intercreditor Agreements 305

VII Asset Sales 307

VIII Conclusion 308

Chapter 14 Taking an Interest in Carbon: Secured Financing and the Legal Nature of Carbon Credits 311

Samuel Kramer and Richard Saines (Baker & McKenzie LLP)

I Introduction 311

II Development of the Carbon Regime 312

CONTENTS

A In General 312

B The Kyoto Protocol 312

III Kyoto Mechanisms and Carbon Financing 314

A Flexible Mechanisms 314

B Clean Development Mechanism 315

C Carbon Project Finance 316

IV The Legal Nature of Carbon Credits Under Compliance Regimes 318

V Market Approach to Emission Regulation 319

VI Security Interests in De Facto Property 322

A Liquor Licenses 322

B Broadcast Licenses 325

C Perfecting De Facto Property Security Interests 327

VII Securing Carbon Credits 327

VIII Conclusions and Recommendations: Taking and Perfecting Security Interests in Carbon Credits 330

A The Issue 330

B Judicial Response 331

C Legislative Options 332

D Necessity for Legislative Action 335

Chapter 15 Secured Hedges in Energy and Environmental Project Finance 337

Vanessa Tanaka and Daryl Rice (McDermott Will & Emery LLP)

I Overview of Secured Hedges 337

II Primary Components of a Secured Hedge 338

A Documentation 338

B Credit Terms 340

III An Example of a Secured Hedge 344

A The Sponsor and Projects 344

B Capital Structure 345

C The Collateral 346

D Hedge Provider Voting Power, Standstill, and Consents 347

E Hedge Terms 348

IV Allocation of Design, Construction, and Financing Risk 351

V Current Market Trends and Predictions for Secured Hedges in Wind Projects 353

Chapter 16 Multitiered Debt Financing Structures and Intercreditor Relationships in Renewable Energy Project Financings 355

Joseph A Scherer (Cooley LLP)

I Introduction 355

II Potential Financing Sources and Their Relationships with the Renewable Energy Projects 356

A Traditional Debt Sources 356

B Equipment Vendor Lenders and Technology Licensors 358

C Priority Feedstock Suppliers 360

D Offtake Purchasers 361

E Cleantech Venture Capital Funds 363

F Renewable Energy Investment Funds 364

G Commodity Hedge Counterparties 365

H Government Agencies 366

III Multitier Debt Financing Structures 369

A Traditional Project Financing Debt Structure 369

B Traditional Mezzanine 370

C Secured Mezzanine (and the Silent Second) 370

D True Second Lien Structures 371

E Reciprocal Collateral Layering 372

F First Lien, Last-Out Layering 373

G Unitranche 374

H Upside Down or Silent First 376

IV Restructuring and the Addition of Pari Passu or Priority Financing 377

A Additional Funding Needs 377

B New Investor Concerns 378

C Holdout “Thorn in the Side” Creditors 378

CONTENTS

D Preference Period Incentives for Hold-Out Vendors 379

E Additional Pari Passu Financing Indebtedness 379

V Key Intercreditor Terms of the Project Financing Agreements 380

A Pari Passu and Priority Rankings 380

B Enforcement Through Collateral Agent 381

C Enforcement of Remedies 381

D Modifi cations and Waivers 384

E Preference Avoidance 385

F Payment Blockage Provisions Between Tiers 385

G Remedies Standstill Provisions Between Tiers 386

H Waivers of a Secured Creditor’s Rights 386

I Enforceability of Intercreditor Agreements 387

J Junior Tier Purchase Options on Senior Tier Debt 388

VI Conclusion 388

Chapter 17 Use of Lien-Supported Financial Derivatives in Project Finance 389

Phillip G Lookadoo and Marco A DeSousa (Reed Smith LLP)

I Application of Financial Derivatives in Support of Project Financing 389

A Project Finance and Risk Management 390

B Credit Support for Financial Derivatives 393

II Lien-Supported Financial Derivatives 395

A Parties to a Lien-Supported Financial Derivative Project Financing 395

B Case Study Example of a Lien-Supported Financial Derivative in Project Financing 397

C Fixed-for-Floating Price Swap Transaction Description 400

D Credit Support for the Swap Transaction 402

III Swap Transaction Agreements 408

A ISDA Master Agreement Schedule 408

B Credit Support Documents 409

C Termination Payments 409

IV Conclusions 410

Chapter 18

Energy and Environmental Hedging and Risk Management:

The Risks and How They Are Managed and Taxed

in the United States 413

Andrea S Kramer and William R Pomierski

(McDermott Will & Emery LLP)

I Introduction 413

II Risks to be Managed in Energy Project Financings 414

A Credit Risk 414

B Counterparty Risk 415

C Interest Rate Risk 416

D Foreign Currency Risk 416

E Commodity Price Risk 416

G Offtake and Other Sales Contracts 424

H Power Purchase Agreements 426

I Financial Hedge Contracts 426

CONTENTS

F Section 475 Mark-to-Market Election 442

G Commodities Derivative Dealers 444

A Hedging Transactions Defi ned 449

B Identifi cation Requirements 451

C Character Whipsaw 452

D Consolidated Group Hedging 453

E Hedge Timing Rules 453

F Hedging Exception to Straddle Rules 454

G Integration of Qualifying Debt Hedges 454

VI Special Rules for Foreign Currency Transactions 457

A Regulated Futures Contracts and Nonequity Options 457

B Forward Contracts that Are Section 1256 Contracts 458

C Futures and Options that Are Not Section 1256 Contracts 458

D Forward Contracts that Are Not Section 1256 Contracts 459

E Spot Contracts 459

F Swap Contracts 460

G Foreign Currency Hedging 460

VII Applying the Financial Products Tax Rules to Popular

Project Finance Risk 463

Chapter 19

Credit Tools Used in Structured Energy Transactions 465

Craig Enochs and Paul Vrana (Jackson Walker LLP)

I Overview 466

II Analysis of Specifi c Credit Tools Used in

Structured Energy Transactions 466

A Prepayment 466

B First Lien Structures 472

C Credit Default Swaps 480

D Guaranties 483

E Letters of Credit 486

F Surety Bond Insurance 488

G Margining 489

Chapter 20

Contract Techniques for Renewable Resource

Power Purchase Agreement Offtakers 493

Jeremy D Weinstein (Law Offi ces of Jeremy D Weinstein, P.C.)

I Introduction 493

II Negotiation Disclaimer Language 494 III Renewable Energy Credit Issues: Defi nitions 497

IV Renewable Energy Credit Issues: Double Claiming 499

V Renewable Energy Credit Issues: Qualifying Facility

Regulatory REC Allocations 502

VI Wind Leases 504

VII Due Diligence Exculpation 505 VIII Functional Separation for Transmitting Utilities 506

IX Production Tax Credit Exculpation Clause 510

X Subordinated Security Interest 511

XI Step-In Rights 513

XII Further Qualifying Facility Considerations 515 XIII Lender Consents 518 XIV Marketing 519

XV Confi dentiality Clause 519 XVI Conclusion 520

Chapter 21

Structured Financing Techniques in Oil and Gas Project

Finance: Future-Flow Securitizations, Prepaids, Volumetric

Production Payments, and Project Finance Collateralized

Debt Obligations 521

Christopher L Culp (Compass Lexecon) and

J Paul Forrester (Mayer Brown LLP)

I Introduction 521

II Oil and Gas Projects and Project Finance 522

A “Direct” Project Participants 523

CONTENTS

B Risk Management Participants 525

C Providers of Project Financing 526

III Structured Finance In Project Finance 528

A Managing and Apportioning Credit Risk

Across Participants in a Project 528

B Preserving Bank Debt Capacity 529

C Preserving the Sponsor’s Debt Capacity 529

D Mitigating Sponsor “Underinvestment” Problems 529

E Reducing Agency Costs of Free Cash Flow 530

F Reducing the Agency Costs of Sponsor Equity 530

IV Future-Flow Securitizations 531

A Secured Export Notes 531

B Receivables Securitizations 533

V Prepays and Volumetric Production Payments 534

A Synthetic Project Financing Structures

and Sources of Funds 535

B Municipal Natural Gas Prepaids and

Gas Supply Revenue Bonds 537

C Volumetric Production Payments 542

D The Enron-Mahonia Prepaids 544

VI Project Finance CDOs 547

A Project Finance CDOs in General 548

B Project Finance CLOs 549

C Project Finance CBOs 552

D CDOs and the Credit Crisis 553

VII Implications of the Monoline Downgrades 553 VIII Conclusion 556

Chapter 22

Insurance Strategies to Protect Project Finance

Cash Flow for Domestic and International Trade 557

Nadine Moore and Corina Monaghan (Aon Trade Credit)

I Credit and Political Risk 557

A Managing Economic Risks—Domestic and Export Credit 558

B Trade Credit Insurance 560

C Political Risk Insurance 564

II Conclusion 570

Chapter 23

The New Generation of Nuclear Power 573

Martha Groves Pugh (McDermott Will

& Emery LLP) and Patricia M Healy (Consultant)

I New Nuclear Plants 573

A Need and Support for New Nuclear Plants 574

B The Old Generation of Nuclear Plants vs

the New Generation of Nuclear Plants 574

C Economics of New Plants 575

D Nuclear Decommissioning in General 577

II NRC 577

III FERC and State Public Utility Commissions 580

IV Federal Income Tax 581

A Production Tax Credit for New Nuclear Plants 582

B Qualifi ed Decommissioning Funds 583

C Income and Deduction of the Taxpayer 586

D Schedule of Ruling Amounts 586

E Qualifi cation Requirements 589

F Taxation of the Qualifi ed Fund 590

G Prohibitions Against Self-Dealing 591

H Disqualifi cation of Qualifi ed Fund 592

I Termination of Qualifi ed Fund upon

Substantial Completion of Decommissioning 594

J Sales of Nuclear Power Plants and Transfers

of Qualifi ed Funds 595

K Purchase Price Allocations Involving

Nuclear Power Plants 596

L Net Operating Loss Carryback Rules

Applicable to Decommissioning 597

V Conclusion 598

Chapter 24

Project Financing of Cross-Border Pipelines:

A Study in Comparative Law, Culture, and Political Risk 599

John P Cogan, Jr (Cogan & Partners LLP)

I Overview of Cross-Border Pipeline Issues 599

II Examples of Cross-Border Pipeline Projects 602

CONTENTS

III Structuring of the Project 602

A The Operational/Commercial Level 603

B The Governmental/Right-of-Way Level 603

C The Project Ownership/Shareholder Level 604

D The Financing Level 605

IV Comparative Law and Cultural Diversity Issues 607

A Special Home Country Problems 607

B Special Host Country Problems 608

C Other Potential Risks 610

VI The Equator Principles and Other Institutional

Initiatives Related to Social and Environmental Issues 610

A The Kiribati Principles 611

B Extractive Industries Transparency Initiative 612

C Voluntary Principles on Security and Human Rights 612

D ISO Involvement 613

VII Contractual and Other Devices to Minimize Political Risk 613

A Protection Against Arbitrary Action by Host Governments 613

B Stabilization 613

C Choice of Law 614

D International Arbitration 615

E Treaties and Other Devices 616

VIII Coming to Grips with the Tensions Among Commercial,

Financial, Political, and Social Parameters 617

Chapter 25

Financing Renewable Energy Projects

Through U.S Tax Credits 639

Craig Wesley Foxgrover and Damon Kellar

I Overview 639

A In General 639

B Current State of Renewable Energy 640

C Mechanisms for Increasing Use of Renewable Energy 640

D Federal Credit—Overview 642

II Defi ning the Federal Credit Mechanism 643

A I.R.C § 45—Electricity Produced from Certain

Renewable Sources 643

B IRC § 48—Energy Credit 657

C IRC § 54—Client Renewable Energy Bonds 668

D IRC § 54C—New Clean Renewable Energy Bonds 676

III Applying the Federal Credit Mechanism and

Financing Structures 680

A Financing Agreements and Structures 680

B The Economic Substance Doctrine 681

C Debt/Equity Issues 681

D Partnership Issues 682

Chapter 26

Monetization Structures and Issues for U.S Tax

Code Sections 45 and 48 Projects 683

Philip D Tingle and Madeline M Chiampou

(McDermott Will & Emery LLP)

I Introduction 683

II Effect of 2009 Recovery Act Credit Monetization,

Grants, and Bonus Depreciation 684

A Summary of Specifi c 2009 Recovery Act Tax

Incentives and Their Impact 684

B Use of a Lease Structure with 2009 Recovery

Act Tax Incentives 685

III Additional 2009 Recovery Act Energy Grants and

Taxation of Those Grants 687

A Introduction to Certain Additional 2009

Recovery Act Grants 687

B Taxation of Additional 2009 Recovery Act Energy Grants 689

IV Taxation of Sample State and Local Solar Incentives 692

A Sample Solar Incentives in California, Colorado, and Utah 693

B Solar Transaction Structures with State Incentives 694

C Exclusion from Income for State Cash Incentives

Sourced to Public Utilities under I.R.C § 136 694

D Other Service Authority Regarding Electricity

Rate Reductions 696

CONTENTS

E Tax Treatment of State-Refundable Tax Credits 697

V 2009 Recovery Act Buy American Provision 701

Chapter 27

Tax Equity Financing for Wind Projects 703

Edwin F Feo and Simon Friedman

(Milbank, Tweed, Hadley, & McCloy LLP)

I Production Tax Credit 704

II Limitations on the Use of Production Tax Credits 707

A Limitations Based on Income 707

B Limitations Based on Nature of the Taxpayer 707

III Depreciation—Five-Year MACRS 708

A Computation 708

B Alternative Depreciation System; Service Contract or Lease 709

C Depreciable Basis 711

D Net Losses 712

IV Investment Tax Credit 712

A Eligibility and Limitations 712

B Placed in Service and Recapture 713

V Monetizing Tax Benefi ts—Partnership Flip Structure 714

A Basic Partnership Flip Structure 714

B Principal Tax Issues—Revenue Procedure 2007–65 715

C Allocations and Capital Accounts 717

D Miscellaneous Issues 720

VI Monetizing Tax Benefi ts—Lease Structure 723

A Basic Lease Structure 723

B Ownership; Revenue Procedure 2001–28 723

C Uneven Rents 724

D Typical Documentation 725

E Lease vs Partnership Structures 726

VII The Treasury Grant 726 VIII Conclusion 728

A Future of Financing 728

Chapter 28

The Financing of Photovoltaic Projects 729

Stefan Schmitz (McDermott Will & Emery LLP)

IV The Structure and Players in the Market 738

A Overview of the Market 738

B Module Manufacturers 738

C Engineering, Procurement, and Construction (EPC) Providers 739

D Financing Institutions and Investors 740

V The Financing of a PV Project 741

A The Structure of a PV Project Finance 741

B The Module Purchase Agreement 741

C Energy Yield Study 746

VI The EPC Agreement 746

CONTENTS

VIII The Operation and Maintenance (O&M) Agreement 751

IX The PPA 752

D Additional Financing Sources 755

XI Summary and Outlook 758

Chapter 29

Innovation in Tax Credit Structuring for Solar Energy Projects 761

Charles Purcell, Dirk Michels, Won-Han Cheng,

and Darcie Christopher (K&L Gates)

I The Solar Power Industry 761

A The Parties—Developers, Manufacturers,

Integrators, Equity Investors 762

B Types and Description of Facilities—PV,

Solar Thermal, and Cogeneration 762

C Types of Projects: Utility vs Distributed Energy Projects 763

II State Subsidies and Tax Credits 764

A Purpose of Incentives 764

B Types of Incentives 765

III Tax Credits and Federal Subsidies Associated with

Solar Energy Property 769

A Tax Credits Applicable to Solar Energy Property 769

B Grants in Lieu of Energy Credit or Production

Tax Credit 770

IV Energy Credit—Overview 771

A Solar Energy Property Defi ned 772

B Placed in Service—Generally 774

C Determination of Basis in Solar Energy Property 774

D Reduction in Basis of Solar Energy Property 776

E Accelerated Depreciation 780

V Placed in Service Issues 782

A Permits and Licenses 783

B Critical Testing 783

C Control/Acceptance by the Taxpayer 785

D Synchronization for Production of Income 787

E Regular and Daily Operation 788

F Focus on Entire System 793

VI Economic Substance and Tax Ownership of

Solar Energy Property 794

A Economic Benefi ts and Burdens of Ownership 794

B Overall Requirement Not to Engage in Transactions

that Are Purely Tax-Oriented—Economic Substance 799

C Recognition of Partnership for Federal Tax Purposes 806

D Substantial Economic Effect of Allocations of Tax Credits 810

E Partner Status of Investors 812

VII Other Issues 817

A Recapture or Redetermination of Credits 817

B Alternative Minimum Tax Effects 823

C Passive Activity Loss Limitation 824

D Ownership and Use by Tax-Exempt Organizations

and Governmental Entities 824

VIII Partnership Structures 826

Geothermal Power: An Old Technology Comes of Age 841

Christopher M Zochowski (McDermott Will & Emery LLP)

I History of Geothermal Power 841

II Geothermal Development in the United States 842 III Types of Geothermal Facilities 843

A Dry Steam Plants 844

CONTENTS

B Flash Steam Plants 845

C Binary Cycle Plants 845

D Hot/Dry Rock Steam Plants 846

IV Overview of a Geothermal Project 847

V Principal Issues Affecting the Financing of a

Geothermal Power Plant 848

A Development of the Geothermal Resource 849

B Other Issues 854

VI Conclusion 858

Chapter 31

Private Investment Fund Investment in Cleantech,

Alternative Energy, and Carbon Products: Legal

and Regulatory Considerations 859

Edward G Eisert, Lawrence B Patent, and

Eric E Freedman (K&L Gates)

I Introduction 859

II Structuring and Organization of Private Investment Funds 863

A Regulation of Private Investment Funds

Under U.S Securities Laws 863

B Regulatory Scheme under the Commodity Exchange Act 871

C Trading on Non-U.S Futures Exchanges 876

D Selected Tax Considerations 883

E ERISA Considerations 886

F U.S Banking Law Considerations 890

III Global Marketing of Private Investment Funds 892

A Regulation S 893

IV Ongoing Compliance Obligations of Private

Investment Funds 896

A General 896

B Liability for Failure to Supervise Under the Advisers

Act and the Exchange Act 897

C Policy of the SEC Regarding the Extra-Territorial

Application of the U.S Securities Laws 898

D Reporting and Filing Obligations Under the

Exchange Act and the Hart-Scott-Rodino

Antitrust Improvements Act of 1976 898

E Filing and Reporting Obligations under the Federal

Power Act and Public Utility Holding Company Act of 2005 905

V Private Investment Fund Management Compensation 909

A General 909

B Compensation of the General Partner or

Managing Member of a Private Investment Fund 910

C Compensation of Hedge Fund Personnel 911

D Compensation of Private Equity Fund Personnel 911

E “Key Manager” Retention Issues 912

Chapter 32

Conclusion 913

Andrea S Kramer and Peter C Fusaro

I The Market Today 913

II Green Project Finance Accelerates 914 III Need For New Metrics 915

IV Future of Green Finance 915

Index 917

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Andrea S Kramer Andrea S Kramer is a partner in the international law firm of

McDermott Will & Emery LLP, resident in its Chicago office She co-heads the firm’s Energy Services Group and heads its Financial Products, Trading, & Derivatives Group Ms Kramer has focused her thirty-two-year legal practice on tax and regulatory counseling and defense, legislative matters, documentation of customized over-the-counter derivatives products, trading policies and procedures, and bankruptcy and creditor’s rights issues She advises energy companies, public utilities, and hedge funds on the design, trading, and risk management applications

of financial products, devoting a substantial amount of time representing taxpayers

in contested tax matters with the IRS Ms Kramer is the author of Financial Products: Taxation, Regulation, and Design (3d ed 2000 & Supp 2008), a three-

volume, 3,800-page treatise that is kept current with annual supplements As the leading treatise on financial products law, her book has been cited more than sixty times by the courts and tax commentators She is also co-editor and contributing

author to Energy and Environmental Trading: U.S Law and Taxation (Cameron

May 2008) Ms Kramer has written nearly 120 articles and publications on topics ranging from operational and reputational risk in trading derivatives to insurance coverage to the use of derivatives to energy trading to corporate governance She was co-editor-in-chief of CCH’s quarterly Journal of Taxation of Financial Products for the first six years of its publication

Ms Kramer is an adjunct professor of law at Northwestern University School of Law, teaching “Taxation of Financial Derivatives” at the Northwestern Graduate Tax Program and the documentation of derivatives as part of “Derivatives: Design, Regulation, and Documentation” at Northwestern School of Law Ms Kramer was named as one of the 50 Most Influential Women Lawyers in America by the

National Law Journal (2007) Readers were asked to nominate women attorneys

with a national impact in their fields and elsewhere with “the demonstrated power

to change the legal landscape, shape public affairs, launch industries and do big

things.” She was also recognized as one of The Best Lawyers in America and one of

the “Top 500 Leading Dealmakers” and “500 Leading Lawyers in America” in

Lawdragon magazine She has received the highest rating of “AV” for legal ability

ABOUT THE AUTHORS

and ethics from the Martindale-Hubbell peer review rating system She was rated

as one of the Top 50 Female Lawyers and a Super Lawyer in tax in the Illinois Super Lawyers by Law & Politics ; a Leading Corporate Lawyer in the Leading Lawyers Network Corporate Lawyers ; and as one of the Top 100 Leading Women Lawyers in Illinois in the Leading Lawyers Network Magazine (2007)

Peter C Fusaro Peter C Fusaro is a New York Times best-selling author, chairman

of Global Change Associates and an energy industry leader noted for his keen insights in emerging energy and environmental issues He has co-founded both the Carbon Footprint Exchange and the Energy Hedge Fund Center With thirty-three years experience in the global energy industry, Mr Fusaro has been at the forefront

of energy industry and environmental change He coined the term “Green Trading” and created the annual Wall Street Green Trading Summit held in New York each

spring Mr Fusaro was selected for Who’s Who in America for 2007–2009 His

experience and insights have led him to the leading edge of energy consulting, including carbon and emissions trading, clean energy technology, renewable energy project finance and venture capital, LNG market developments, coal trading, and hedge funds He founded Global Change Associates in 1991 to focus on the inter-play and convergence of energy and environmental financial markets Mr Fusaro

has written more than 600 published articles appearing in Commodities Now , The Hedge Fund Review , NYMEX Energy in the News , IPE Pipeline , Power Finance & Risk , Oil & Gas Journal , Petroleum Economist , and many others He has also pub-

lished nine occasional papers for the University of Colorado’s International Center

for Energy & Economic Development, including his latest entitled The New Green Business Model for Investment (April 2008) Mr Fusaro has written fifteen books, including What Went Wrong at Enron: Everyone’s Guide to the Largest Bankruptcy

in U.S History (Wiley, 2002); The Professional Risk Managers Guide to Energy Markets (McGraw Hill, 2007); Weather, Energy and Environmental Hedging: An Introduction (Icfai Books, 2007); Energy and Environmental Hedge Funds — The New Investment Paradigm (Wiley, 2006); Green Trading Markets: Developing the Second Wave (Elsevier, 2005); Energy Hedging in Asia (Palgrave MacMillan,

2005); Energy & Emissions: Collision or Convergence (Wiley, 2006); Green Trading Commercial Opportunities for the Environment (Green Trading Inc., 2004); Energy Convergence: The Beginning of the Multi-Commodity Markets (Wiley, 2002); Energy Derivatives: Trading Emerging Markets (Energy Publishing

Enterprises, 2002); and Energy Risk Management: Hedging Strategies and Instruments for the International Energy Markets (McGraw-Hill, 1998), and con- tributed to Global Markets and National Interests (CSIS Press, 2002), Distributed Generation: The Power Paradigm for the New Millennium (CRC Press, 2001), and Professional Risk Management Guide to Financial Markets (McGraw Hill, 2007)

Alexander J Bandza Mr Alexander J Bandza is an associate at Exponent, Inc., where

he specializes in environmental and energy economics Prior to joining Exponent,

he was the MAP Sustainable Energy Fellow at the United Nations Foundation in Washington, D.C., contributing to their work on energy efficiency and the regula-tion of the electricity sector in Europe Mr Bandza also has interned Resources for the Future in Washington, D.C., where he started his own research project examin-ing the risk and regulatory connections between enhanced oil recovery and carbon capture and storage Mr Bandza will begin a J.D program at the University of California, Berkeley, School of Law in the Fall of 2010

Roger Berry Roger Berry is a Partner with LLC Change Investments, a fund manager

specializing in clean and renewable energy, resources and materials Roger is responsible for the development of the company’s investment funds, managing partnerships with investors and developing transactions Roger was formerly the Head of Group Funds and Investor Relations for Climate Change Capital, a fund manager that had over $1.6 billion of assets under management From 2000 to

2006, Roger was a Managing Partner and co-founder of Liberty Global Partners, an advisory and placement firm focused exclusively on emerging markets private equity Liberty Global Partners helped to raise significant commitments from insti-tutional investors and played a lead role in the creation of the Emerging Markets Private Equity Association For over eighteen years, Roger has been immersed in the opportunities and challenges of transitional markets He brings skills in nego-tiation, facilitation, and marketing, and has advised companies, investors, or gov-ernments in Africa, Asia, Eastern Europe, Latin America, and the Middle East Roger is a graduate of Harvard University (1990)

Robin Cantor Dr Robin Cantor is a principal at Exponent, Inc., where she specializes

in environmental and energy economics, applied economics, statistics, risk agement, and insurance claims analysis Dr Cantor has a faculty appointment in the Graduate Part-time Program in Engineering of the Johns Hopkins University She was the President of the Society for Risk Analysis in 2002, and from 2001–2003, she served as an appointed member of the Research Strategies Advisory Committee

man-of the U.S Environmental Protection Agency’s Science Advisory Board Dr Cantor

chaired the Second World Congress on Risk in Guadalajara, Mexico, in June 2008

Dr Cantor publishes frequently on economics and liability issues and is currently editing a book on product liability for the American Bar Association Dr Cantor has submitted analysis, testimony, and affidavits in federal arbitration, regulatory and Congressional proceedings, and state and federal courts Dr Cantor’s publica-tions include refereed journal articles, book chapters, expert reports, reports for federal sponsors, and a book on economic exchange under alternative institutional and resource conditions She holds leadership positions with the Women’s Council

on Energy and the Environment and the Society for Risk Analysis

Won-Han Cheng Ms Won-Han Cheng is a partner in the international law firm of

K&L Gates LLP, resident in its Seattle office, where she is a member of the Tax and Private Equity & Venture Capital groups Ms Cheng focuses her practice on federal and international tax issues involving domestic and foreign clients Ms Cheng fre-quently advises clients on partnership and corporate tax issues, restructurings and reorganizations, mergers and acquisitions and other tax planning issues and has con-siderable experience advising managers and investors in private investments funds

Ms Cheng has worked with both developers and investors in alternative energy projects She has been involved in structured energy transactions including negotiat-ing tax equity financing structures for the construction of solar energy assets

Madeline M Chiampou Madeline M Chiampou is an associate at the international

law firm of McDermott Will & Emery LLP, resident in its New York office She is

a member of the Tax Department Ms Chiampou focuses her practice on federal income tax matters relating to advising domestic and international clients on tax-able and tax-free mergers, acquisitions and divestitures, corporate restructurings, and finance transactions

Darcie L Christopher Ms Darcie L Christopher is an associate in the international law

firm of K&L Gates LLP, resident in its Seattle office Ms Christopher’s practice focuses on federal and international tax issues for both foreign and domestic clients She has represented developers and investors in alternative energy projects, including solar and wind energy facilities In addition, she has worked on a variety of tax issues related to mergers and acquisitions, public and private equity financings, choice of entity, and general employee benefit issues, including those related to executive com-pensation She has also advised clients in respect of partnership, limited liability com-pany, and general corporate tax issues Ms Christopher was recently recognized by the publication “Washington Law & Politics” as a rising star in the area of tax

Nathan F Coco Mr Nathan F Coco is a partner in the international law firm of

McDermott Will & Emery LLP, resident in its Chicago office He is a member of the Troubled Transactions and Bankruptcy Practice Group, where he concentrates his practice on distressed financings and asset dispositions, corporate bankruptcies and restructurings, and creditor rights representation Mr Coco represents and advises clients in the energy and derivative financial product sectors on matters related to creditor rights, legal, and transactional risk, collateral and credit support, rights and remedies upon default, and counterparty insolvency He is the author of

“Bankruptcy Code Confusion,” Energy Risk (October 2006); “Energy Trading

Transactions in Bankruptcy,” Chapter 15 in Energy and Environmental Trading:

US Law and Taxation (Cameron May 2008); and is a contributing author to Financial Products Taxation, Regulation, and Design (3d ed 2000 and Supp 2009)

John P Cogan, Jr Mr John P Cogan, Jr., is a partner in the law firm of Cogan &

Partners LLP, resident in its Houston office, where provides legal services for national infrastructure projects He has more than forty years of experience, con-centrating on the international exploration, extraction, processing, transportation, and sale of hydrocarbons, with projects in Latin America, Europe, Asia, and the Middle East Mr Cogan represents developers, lenders, and governments in devel-oping and financing major projects, including pipelines Some of his more signifi-cant pipeline projects include involvement with the Bolivia-to-Brazil Natural Gas Pipeline, the Centragas Colombia Gas Pipeline, the Chad/Cameroon Crude Oil Pipeline, and the Dar-es-Salaam-to-Uganda Petroleum Products Pipeline (not con-summated) Mr Cogan is a corresponding editor of International Legal Materials,

inter-a publicinter-ation of the Interninter-ationinter-al Linter-aw Society, inter-and inter-a member of the executive mittee of the Asia Society, Texas Center He is a frequent lecturer on international project development and finance Mr Cogan has been named as one of the world’s

com-leading energy and natural resource lawyers in Chambers Global: The World’s Leading Lawyers (2005 to 2007) and in the International Financial Law Review

1000 , and as one of the top five international lawyers in Texas by Texas Lawyer He

has been recognized by Super Lawyers , The Best Lawyers in America , and Lawdragon as a leading energy and/or corporate attorney

Christopher L Culp Dr Christopher L Culp is senior adviser with Compass Lexecon,

an Adjunct Professor of Finance at the University of Chicago Booth School of Business, an Honorarprofessor at Universität Bern in the Institut für Finanzmanagement, and Director of Risk Management Consulting Services, Inc

He teaches graduate degree courses on structured finance, insurance, and tives, and provides consulting services in these same areas both for advisory purposes and in the support of litigation Dr Culp is the author of four books—

Structured Finance & Insurance (2006), Risk Transfer: Derivatives in Theory & Practice (2004), The ART of Risk Management (2002), and The Risk Management Process (2001)—and the co-editor of two books— Corporate Aftershock: The Public Policy Consequences of the Failure of Enron and Other Major Corporations (co-edited with William Niskanen, 2003), and Corporate Hedging in Theory & Practice (co-edited with Merton Miller, 1999) He has published numerous arti- cles, and is on the editorial advisory boards of the Journal of Applied Corporate Finance , the Journal of Risk Finance , and Futures Industry magazine He received

his Ph.D from The University of Chicago Booth School of Business with a centration in finance

Celia David Ms Celia David is a director at Navigant Consulting, Inc., resident in its

Chicago office and a member of the Energy Practice’s Power Systems, Markets and Pricing Group Prior to joining Navigant Consulting in 2007, Ms David was an