- Recent developments in federal incentives, including tax credits, grants and loan guarantees - State law programs, including GHG legislation, transmission and RPS, and power purchase terms Karen B Wong, Partner, Milbank, Tweed, Hadley & McCloy LLP, US

1. BE I J I N G FR A N K F U R T H O N G KO N G LO N D O N LO S ANGELES MUNICH N EW YO R K SI N G A P O R E T OKYO W A S H I N G T O N, D C
Legal and Regulatory Issues Affecting Renewable
Energy Projects
Karen Wong, Partner
Milbank, Tweed, Hadley & McCloy LLP
Concentrating Solar Thermal Power 2009
June 4, 2009

2. Overview
§ Regulatory directives have promoted renewable
energy
• Demand creation through RPS and other programs
• GHG Regulation
§ Financial markets are troubled
§ American Recovery and Reinvestment Act to the
rescue
2

3. Regulation to Increase Demand
§ Renewable Portfolio Standards
§ Greenhouse Gas Regulations
3

4. Renewable Portfolio Standards
WA: 15% by 2020* VT: (1) RE meets any increase ME: 30% by 2000
New RE: 10% by 2017
MN: 25% by 2025 in retail sales by 2012;
MT: 15% by 2015 (Xcel: 30% by 2020) (2) 20% RE & CHP by 2017 ¤ NH: 23.8% by 2025
OR: 25% by 2025 (large utilities)
ND: 10% by 2015 MI: 10% + 1,100 MW ¤ MA: 15% by 2020
5% - 10% by 2025 (smaller utilities) by 2015* + 1% annual increase
(Class I Renewables)
SD: 10% by 2015 WI: Varies by utility; ¤ NY: 24% by 2013
10% by 2015 goal RI: 16% by 2020
¤ NV: 20% by 2015* CT: 23% by 2020
IA: 105 MW ¤ OH: 25% by 2025†
UT: 20% by 2025*
¤ PA: 18% by 2020†
IL: 25% by 2025
¤ CO: 20% by 2020 (IOUs) ¤ NJ: 22.5% by 2021
CA: 20% by 2010 10% by 2020 (co-ops & large munis )*
VA: 12% by 2022*
¤ MO: 15% by 2021 ¤ MD: 20% by 2022
¤ AZ: 15% by 2025 ¤ DE: 20% by 2019*
¤ NC: 12.5% by 2021 (IOUs)
10% by 2018 (co-ops & munis) ¤ DC: 20% by 2020
¤ NM: 20% by 2020 (IOUs)
10% by 2020 (co-ops)
TX: 5,880 MW by 2015
HI: 20% by 2020
28 states
have an RPS
5 states have goals
State renewable portfolio standard
¤ Minimum solar or customer-sited requirement
State renewable portfolio goal Extra credit for solar or customer-sited renewables
Solar water heating eligible *
† Includes separate tier of non-renewable alternative resources
Source: www.dsireusa.org, March 2009

5. California RPS
§ IOUs to achieve 20% by 2010 or financial penalty
§ Major municipals have instituted programs
§ Proposed 33% by 2020; currently 12% average
§ RFO process
§ Results in long-term power purchase agreements
• Terms up to 25 years
• Fixed price (with TOU variation)
• MPR
5

6. California RPS
§ IOUs permitted to acquire out of state
§ REC trading being considered
§ CPUC proposes standard contracts for RPS-
eligible projects under 20 MW, with feed-in
tariff for projects up to 10 MW
§ RPS contracts account for most of new projected
capacity in California
6

7. GHG Legislation
§ On May 21, the House Energy and Commerce
Committee (the Committee) approved H.R. 2454,
The American Clean Energy and Security Act by a
vote of 33 to 25
§ The Bill approved by Committee combines the
Renewable Electricity Standard (RES) and Energy
Efficiency Resource Standard (EERS) of the
discussion draft.
7

8. GHG Legislation
§ Federal RES
• Applies to all “retail electric suppliers” defined as all electric utilitie
that sell 4,000,000 megawatt hours of electric energy to electric
consumers for purposes other than resale.
• Not as ambitious as originally proposed in March draft bill
• The combined standard requires covered utilities to obtain 20 percent of
electricity from renewable resources by 2020, but up to 5 percent of that
amount may be met through energy savings. A governor may petition to
reduce the renewable component of a utility’s obligation to as low as 12
percent and increase the efficiency component to as much as 8 percent.
8

9. GHG Legislation
§ HR 2454 Cap and Trade Program
• The Bill places firm limits on emissions of carbon dioxide and other
designated heat-trapping pollutants
• 85% of U.S. emissions are covered through the cap-and-trade program
§ Phase In:
• 2012: Electricity and transportation.
• 2014: Industrial Processes and Combustors.
• 2016: Residential/commercial/small industrial natural gas
consumption at the Local Distribution Company (LDC)
9

10. GHG Legislation
§ Cap: 17% below 2005 levels by 2020; 83% below
by 2050.
§ Threshold: Entities greater than 25,000 tons of CO2
emissions; EPA may lower to 10,000 after 2020.
§ Offsets: 2 billion tons total.
10

11. GHG Legislation
• GHG cap and trade programs are on hold for 5
years (2012-2017); other state programs
unaffected.
• Holders of allowances issued by California,
• RGGI, or WCI before 12/31/11 may exchange
these allowances for federal allowances.
11

12. GHG Legislation
n Timing:
n Waxman Markey Bill:
n Full House vote (possibly summer 2009)
n Senate Committee action (possibly in 2009)
n Full Senate Vote (2009 or 2010)
n House-Senate Conference (2009 or 2010)
n President’s Signature (2009 or 2010)
12

13. Transmission
§ Transmission Has Emerged as a
§ Major Constraint
§ In the West much of the renewable resource is in
transmission constrained areas
§ Backlog of projects in transmission queue
§ New transmission is required not just for resource
access but also for reliability
13

14. Transmission
§ Major Backlogs (as of January 2009)
• California had over 13,000 MW of wind energy and
30,000 MW of solar energy waiting to connect to the grid
• 70,000 MW of wind energy waiting to interconnect in the
upper Midwest
• 40,000 MW of wind energy in the lower Midwest
• 40,000 MW of wind energy in the Great Lakes/Mid-
Atlantic
• 50,000 MW of wind energy in Texas
14

15. Transmission
Source: California Public Utilities Commission

16. American Recovery and
Reinvestment Act of 2009
§ ARRA passed in February
§ Principal benefits for renewable energy finance:
• Treasury grant
• Expansion of DoE loan guarantee program
• Expanded tax exempt financing
16

17. ARRA Tax Incentives
§ Treasury Grant in lieu of ITC (Sec. 1603)
• Covers 30% of the cost of qualified property
• Issued within 60 days of project being placed in service
or within 60 days of receipt of application
17

18. ARRA Tax Incentives
§ Treasury Grant in lieu of ITC (Sec. 1603)
(cont’d)
• Qualifying period: for projects placed into service in
2009 or 2010, or placed into service by 2017 if
construction begins in 2009 or 2010.
18

19. ARRA Tax Incentives
§ Extension of Bonus Depreciation (Sec. 1201)
• Can immediately deduct 50% of cost of project
• Project must be completed during 2009, and some
equipment installed in 2010 also eligible
19

20. ITC and Treasury Grant – Issues
§ Application requirements to be determined in
guidance to be issued by or in July
• Application form not yet published by Treasury and under
negotiations with DoE
• No longer expected to be a one pager; worksheet with terms and
conditions
20

21. ITC and Treasury Grant – Issues
§ Definition of “in construction:” Contractual
commitments, expenditures or more?
• Grant applicants will be required to agree to return
the unvested portion of the grant if the project is
disposed of within five years
21

22. ITC and Treasury Grant – Issues
§ Eligibility with respect to tax exempt partners
• Partnership is not eligible if a 501(c), tax exempt co-op or a
government agency or instrumentality (note does not appear
to include private pension plans) is a partner
• Any such tax exempt participation in a partnership can cost
100% of the grant
22

23. ITC and Treasury Grant – Issues
§ Ability to claim grant by a public utility if cost
of service is reduced by reason of grant
§ Foreign and tax-exempt investors may become
taxable if they invest in US projects and may
impact eligibility for ITC and grants: use of
blockers if foreign or tax exempt investors?
23

24. ITC and Treasury Grant – Issues
§ Partnership accounting: treat the grant as
partnership tax exempt income or as if partners
received the grant in same manner as they would
receive ITC and contributed the grant to the
partnership?
24

25. ITC and Treasury Grant – Issues
§ Recapture Liability:
• A sale by a partner will not trigger recapture so long as the sale
is sufficiently small that the partnership will not terminate for
tax purposes.
• Generally, a partnership terminates for federal income tax
purposes if there is a sale or exchange of fifty percent or more of
the total interests in the partnership’s capital and profits within a
twelve month period (but rules are very technical).
25

26. ITC and Treasury Grant – Issues
§ Recapture Liability:
• Liability will rest with the partnership and not the individual partners.
• This will mean that structural subordination of the recapture claim by
having a partner claim the grant will not be successful.
• Senior lenders will be more concerned with controlling the circumstances
in which a recapture claim can arise (e.g. contractual provisions to prevent
transfers of interests at the partnership level and upper tier levels and
possibly indemnities from sponsors as to any claims arising from a
recapture claim).
26

27. ITC and Treasury Grant – Issues
§ Recapture Liability:
• Recapture liability will be treated as a non-tax claim.
• As a consequence, the government’s claim will be an unsecured creditor’s
claim and will not present the potential conflict on future revenues with a
senior secured claim as would a tax lien.
• As a condition to an applicant’s receipt of the grant, the government may
require a subordinated lien on a project, in which event the terms of
subordination will be subject to approval of the project’s senior lenders.
27

28. ARRA DOE Loan Guarantee
§ The Energy Policy Act of 2005 authorizes the DOE
to issue loan guarantees to projects that “avoid,
reduce, or sequester air pollutants or anthropogenic
emissions of greenhouse gases” and “employ new or
significantly improved technologies as compared to
technologies in service in the United States at the
time the guarantee is issued” (Section 1703)
28

29. Section 1703 Loan Guarantees
§ Requirements
• Must avoid, reduce, or sequester air pollutants or
anthropogenic emissions of greenhouse gases
• Must employ a new or significantly improved
technology
• Must not be a “commercial technology”
– Meaning not installed or used in three or more commercial
projects in operation for at least five years in the same
general application as the proposed project
29

30. Section 1703 Loan Guarantees
§ Requirements (cont’d)
• Limited to 80% of project costs; can be up to 100% of
debt if from Federal Financing Bank
• Project costs are more “hard costs”; less “soft costs”
• Requires “significant” equity commitment
• Sponsor funds credit subsidy cost– not a project cost
• Requires rating agency preliminary credit assessment
if project is over $25 million
30

31. Section 1703 Loan Guarantees
§ Expected benefit of FLG: longer tenor, lower rates
• 100% FLG debt would price at small spread over
Treasuries
§ Over $18.5 billion authorized for renewable
energy projects out of $51 billion in total
appropriations for the Section 1703 program
31

32. Section 1705 Loan Guarantees
§ ARRA established an additional, temporary
program for a broader range of renewable
energy projects (Section 1705)
32

33. Section 1705 Loan Guarantees
§ Requirements
• “Shovel ready:” Must commence construction
before Sept. 30, 2011
• NEPA, prevailing wage apply; Buy American
Act will apply to public projects
33

34. Section 1705 Loan Guarantees
§ ARRA appropriated $6 billion to pay for credit
subsidy costs
§ The program is expected to support $60 to $100
billion in additional loan guarantees (estimates vary
depending on credit subsidy cost)
34

35. Section 1705 Loan Guarantees
§ Early indications suggest a “bucketing approach”
to solicitations – 5 buckets with DOE to move
quickly on first two
• Commercial renewable projects
• Small transmission projects
• Major transmission projects
• Complex renewables
• Biofuels
35

36. Section 1705 Loan Guarantees
§ Delegated Lender Concept (at least for the first
two buckets)
• Lenders submit applications
• DOE relies on lender due diligence
• Lender needs to have significant “skin in the game”
- uncovered tranche with a minimum hold period
• Risk sharing is key
36

37. Loan Guarantee – Unresolved Issues
§ How much of the rules for 1703 will apply to
1705?
§ Will application process be made simplified? Fees
reduced or financed? Rolling application or
appraisal process?
§ What will be required for equity and sponsor
support?
37

38. Loan Guarantee – Unresolved Issues
§ How will the Treasury grant be treated? (Some
indication it isn’t equity, and March appropriations
bill dictates no double dip for guaranteed projects)
§ What will be the role of the “Green Bank”?
§ How easy will it really be?
38

39. Power Purchase Terms
§ Product being sold
• Energy only? What about environmental
attributes?
• Does purchaser have a resource adequacy or RPS
requirement?
• Is 100% output of the project committed to the
purchaser?
39

40. Power Purchase Terms
§ Price
• Can we renegotiate price? Or can we propose adders or
adjustments to account for changes in capacity factor,
interconnect cost, etc?
• What impact on PPA if elect to take an investment tax
credit (ITC) or grant? What will be the impact on the
PPA?
40

41. Power Purchase Terms
§ Milestones and Term of Agreement
• Can we negotiate an extension or at least buy time
with LDs? What are the termination events related to
schedule?
• What are the milestones before COD– such as
obtaining permits, committing on turbines, NTP, etc?
41

42. Power Purchase Terms
§ Proposed Delivery Point
• Transmission – from whom, on what terms, at what
cost and how long to complete?
• Who takes tosses and curtailment risk?
• An imbalance market have been established – But
what requirements for forecasting and mitigation of
imbalance charges for intermittent generators? And
who will pay imbalance charges if any?
42

43. Power Purchase Terms
§ Damages for Non-Performance
• Seller default– what LDs, and any limit on liability?
• Purchaser default– do LDs cover loss of tax benefits?
Any cap?
§ Seller Security
• How much during development phase, construction phase
and operations phase?
• LC? Cash? Second Lien?
43

44. Power Purchase Terms
§ Purchaser
• No experience in renewables? Is this good or bad?
• Any mandate to purchase? If not, what’s the motivation
to do the deal?
• What do the purchaser’s operations people think about
solar?
• What form of contract? EEI or a real renewable contract?
• How long to negotiate?
• Any interest by the purchaser in an equity interest?
Perhaps joint venture on development?
44

45. Power Purchase Terms
§ Purchaser
• Is the purchaser an investment grade entity?
– Load serving entity, so rating is lesser concern
– Favorable state policies?
– What happens if their credit declines?
Ø They refuse to give ratings triggers– no surprise there
Ø Can we ask for additional collateral in a downgrade scenario?
Ø Go to a prepay or short pay contract?
45

46. Power Purchase Terms
§ Can we mitigate the purchaser credit risk
through sales to other purchasers or even to the
market?
• Third parties will depend on transmission, PPA
limitations and available markets
– Committed 100% to this purchaser?
– Anything to sell that is NOT committed– e.g., RECs,
other environmental attributes? Is there even a market?
46

47. Conclusions
§ Federal and State Policies Can Promote
Development of Renewable Energy Projects
§ Policies Need to Address Demand, Cost, and
Access
§ Financing Market is Challenged But Not Dead
§ The Stimulus Bill Has Provided New Financing
Opportunities
47

48. About Milbank
§ Legal Advisor of the Year
– Ernst & Young and Euromoney
Global Renewable Energy Awards
2008
§ Top Clean Energy Project
Finance Legal Advisor to
Arrangers for 2008
– New Energy Finance
§ Best Law Firm for Renewable “Milbank’s talented and
experienced group of problem
Energy Finance for 2008 solvers is regarded as the market
– Environmental Finance and Carbon leader in the renewable energy
Finance magazines sectors.” - Chambers USA, 2008
§ USA Energy Law Firm of the
Year 2008
– ACQ Finance

49. About the Speaker
Karen Wong has been a partner in the Global Project Finance Group of Milbank, Tweed,
Hadley & McCloy LLP since 1996 and is resident in the Los Angeles office.
Her practice focuses on the representation of sponsors and financing parties in connection
with the development, acquisition, financing and/or restructuring of power, petrochemical and
other infrastructure facilities in Asia, Latin America, and North America. In her over twenty-two
years of practice, she has led numerous development, financing and acquisition transactions
involving generation assets (including large scale coal, gas and LNG fired cogeneration plants,
as well as wind, solar, geothermal, hydroelectric, biomass, waste energy and other renewable
energy facilities), transmission lines, and oil and gas pipelines.
Ms. Wong has extensive experience in complex commercial and financial transactions and has
participated in numerous project financings, restructurings, private placements, acquisitions
and dispositions, as well as leveraged and synthetic leases, municipal finance transactions,
aircraft financings, and monetization transactions. In addition to her specialty in the energy
sector, she has also worked on development and financing transactions involving satellites,
telecommunications, technology companies, and real estate (including office buildings, hotels,
stadiums, golf courses, amusement parks and other entertainment complexes).
Ms. Wong’s current transactions include various development and financing transactions in the
KAREN WONG renewables (wind, solar and biomass) sector, as well as several developments of coal
601 South Figueroa Street gasification projects throughout the United States.
Los Angeles, CA 90017
+1-213-892-4419 Ms. Wong received her Bachelor of Science in Business Administration from the University of
kwong@milbank.com Southern California magna cum laude in 1982 and received a Juris Doctor from the University
of Southern California in 1986. She served on the editorial boards of Major Tax Planning and
the Southern California Interdisciplinary Law Journal (former known as Computer/Law
Journal). Ms. Wong is listed in the 2007 and 2008 editions of Chambers USA for Projects in
California and was recommended in PLC Which Lawyer? for banking and finance. She is
admitted to practice in California.

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