50 Shades of Green Legal Considerations in Renewable

“ 50 Shades of Green”— Legal Considerations in Renewable Energy Procurement PRESENTED BY TAMMIE PTACEK MIDWEST SOLAR EXPO, MINNEAPOLIS, MN MAY 1, 2019

Driving Factors Behind Renewable Energy Procurement Climate Change— CO 2 & Temp. Trends Source: climate. nasa. gov Drivers of Corporate Renewable Energy Procurement Source: PWC, Corporate Renewable Energy Procurement Survey Insights (June 2016) 2

Unsubsidized Levelized Cost of Energy (LCOE) This analysis shows a continued decline in cost of generating electricity from alternative energy technologies, especially utility-scale solar and wind. In some scenarios, alternative energy costshave decreased to the point that they are now at or below the marginal cost of conventional generation Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12. 0 (Nov. 2018) 3

Unsubsidized Levelized Cost of Energy—Wind & Solar PV (Historical) Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12. 0 (Nov. 2018) 4

Production Tax Credit (PTC) ~ Typ. Wind • Full Credit—Generally, $0. 023/k. Wh (inflation adjusted) • Term—First 10 years of operation • Application—Power sold to an unrelated person (i. e. , not self-supply) • Phase-Out • (Wind): Begin Construction % Full Credit Pre-2017 100% 2017 80% 2018 60% 2019 40% 2020 0% • Internal Revenue Code § 45, IRS Notice 2017 -04 et al. 5

Investment Tax Credit (ITC) ~ Typ. Solar • Credit—Generally, 30% of basis of property • Application—Qualifying energy property that is depreciable (thus making it business property) and used to produce electricity (i. e. , includes self-supply) • Phase-Out (Solar): Begin Construction* ITC Amount Pre-2020 30% 2020 26% 2021 22% 2022 and after 10% *Placed-in-Service date requirements also apply. • Internal Revenue Code § 48, IRS Notice 2018 -59 et al. • Capture of ITC & PTC → Tax equity financing for project 6

Levelized Cost of Energy—Effect of Federal Tax Subsidies Source: LAZARD’S LEVELIZED COST OF ENERGY ANALYSIS—VERSION 12. 0 (Nov. 2018) 7

Source: Rocky Mountain Institute 8

Renewable Energy Buyers Alliance • The largest trade group of corporate renewable energy buyers in the U. S. • Since 2014, the REBA community has grown to over 200 large energy buyers including Walmart, General Motors, Google and Facebook as well as 150 renewable power developers and service providers • Participants in the REBA community have been a part of 98% of all large-scale U. S. corporate renewable energy deals to date • Aims to expand the number of organizations buying renewable energy from dozens to tens of thousands and cause 60 gigawatts of new renewable energy by 2025 9

What is Renewable Energy? • Renewable Energy: • Electricity generated from natural resources that replenish themselves over short periods of time • Solar, wind, biomass, geothermal, [hydro] • Energy + Renewable Attributes (e. g. , RECs) • Renewable Energy Credits (RECs): • Legal instrument that conveys to its owner the right to claim the associated environmental attributes of its generating resource • 1 REC ~ 1 MWh of Renewable Electricity • Electronic tracking systems issue, track, and retire RECs 10

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“Renewable” Marketing Claims • BE CAREFUL HOW YOU REPRESENT YOUR “GREEN” OR “RENEWABLE” EFFORTS! • "[U]nfair or deceptive acts or practices in or affecting commerce. . . are. . . declared unlawful. " Section 5(a) of FTC Act, 15 U. S. C. Sec. 45(a). • FTC Green Guides, 16 CFR Pt 260 • Marketers should not make broad, unqualified general environmental benefit claims like ‘green’ or ‘eco-friendly. ’ • Broad claims are difficult to substantiate, if not impossible. • Utilities that sell RECs to third parties are recommended to clearly identify such sales and the effects of transferring the right to claim credit for those RECs and related environmental benefits in annual reports or other publications 12

FTC Green Guides Example • Facts: • A manufacturer places solar panels on the roof of its plant to generate power, and advertises that its plant is "100% solar-powered. " • The manufacturer, however, sells RECs based on the renewable attributes of all the power it generates. • Guidance: • Even if the manufacturer uses the electricity generated by the solar panels, it has, by selling the RECs, transferred the right to characterize that electricity as renewable. • The manufacturer’s claim is therefore deceptive. • It also would be deceptive for this manufacturer to advertise that it "hosts" a renewable power facility because reasonable consumers likely interpret this claim to mean that the manufacturer uses renewable energy. • It would not be deceptive, however, for the manufacturer to advertise, "We generate renewable energy, but sell all of it to others. " 13

Renewable Procurement Options 1. 2. 3. 4. 5. 6. 7. 8. On-Site, Self Supply On-Site, Vendor Supply Community Solar Garden Wholesale Power Purchase (PPA) Virtual Power Purchase + RECs REC Purchase Retail/Utility-Sleeved PPA Utility/Retail Green Program 14

1. On-Site, Self Supply (“Behind the Meter”) Buyer Payment for 40 k. W 100 k. W 40 k. W 60 k. W Utility Meter Environmental Attributes Renewable Project 15

On-Site, Self Supply (continued) (Net Metering Example) Buyer Payment / Credit for 40 k. W 60 k. W 40 k. W 100 k. W Utility Meter Environmental Attributes Renewable Project 16

Net Metering—Regulatory Developments • Basic Concept: • Customer consumes 50 MWh, produces 50 MWh • Customer pays utility for 0 MWh • Cost-Shifting Issue—Customer depends on utility and grid infrastructure to ensure it has reliable 24 -hour power but is not paying for it • Alternatives (States with high levels of solar adoption—e. g. , AZ, HI, CA): • Net metering + fixed monthly fee on solar owners • Compensate excess output at lower than retail rate (e. g. , “Value of Solar”) • Compensate all output at lower than retail rate (two meters, “buy-all, sell-all”) • Technological “End-Around”: Energy Storage… 17

Source: DSIRE, N. C. Clean Energy Technology Center at N. C. State University, available at www. disreusa. org 18

On-Site, Self Supply (continued) (Storage Example) Buyer 60 k. W 40 k. W 100 k. W Environmental Attributes Utility Meter Battery 19

Outlook for Capitalized Cost of Storage by Technology Source: LAZARD’S LEVELIZED COST OF STORAGE ANALYSIS—VERSION 4. 0 (Nov. 2018) 20

On-Site, Self Supply (continued) Summary of Legal Considerations • Permitting • • a. Public Utility Commission Need/Site Permit (Large Projects) b. Zoning/Conditional Use Permit c. Building Permit d. Environmental (SWPP, wetlands, etc. ) Utility Tariff—Interconnection, Net Metering/Solar Rate Incentives—Federal Tax, State Agencies, Utility Programs Contracts a. Module Supply—Product & Output Warranty, Term, Exclusions b. O&M—Scope of Services, Pricing Structure, Term Insurance—Property and Commercial General Liability 21

2. On-Site, Vendor Supply (PPA) Buyer Payment for 40 k. W 100 k. W Env’tl Attributes 40 k. W 60 k. W Utility Meter Payment for 60 k. W Renewable Project 22

On-Site, Vendor Supply (continued) • Power Purchase Agreement (PPA) • Long Term, Fixed/Scheduled Price • Common and useful method for developers to finance projects • Advantages • Shift construction/installation burden • Shift O&M responsibility, focus on core business • Shift tort liability • Regulatory Issue – Avoid becoming a “public utility” or violating “exclusive service area” of a public utility… 23

Source: DSIRE, N. C. Clean Energy Technology Center at N. C. State University, available at www. dsireusa. org 24

3 rd-Party PPA Case #1 (Indiana) • U. S. Steel Corp. v. N. Ind. Pub. Serv. Co. , 951 N. E. 2 d 542 (Ind. Ct. App. 2011) • U. S. Steel sold a “Plate Mill” facility within its large “Gary Works” complex to Arcelor. Mittal. • U. S. Steel had been self-supplying electric power within the complex, including to the Mill, and continued to supply power to the Mill after sale. • Parties file for IURC declaration recognizing right to continue arrangement. • IURC found U. S. Steel was a “public utility” (and thus violating NIPSCO’s exclusive service area) • “Public Utility” means any company “that may own, operate, manage, or control any plant or equipment within the state for the. . . production, transmission, delivery, or furnishing of heat, light, water, or power. ” Ind. Code § 8 -1 -2 -1(a). 25

3 rd-Party PPA Case #1 (continued) • Ind. Court of Appeals reversed: • “It is an essential requirement that a business or enterprise must in some way be impressed with a public interest before it may become a public utility. ” • “[P]ublic” means “[t]he community or peoples as a whole; the members of the community collectively” (quoting Oxford English Dictionary) • Distinguishing factors: • Providing electricity to “only one customer located within its industrial complex pursuant to a special agreement. ” • Never attempted to compete with or displace NIPSCO or simply “cherry-pick” profitable customers. • Arrangement was the result of a unique circumstance, out of convenience and as a continuance of its previous self-supply. • No legitimate concern regarding discrimination in services and rates. • Electric service was ancillary to primary business of steel production 26

3 rd-Party PPA Case #2 (Iowa) • SZ Enterprises, LLC d/b/a/ Eagle Point Solar v. IUB, 850 N. W. 2 d 441 (Iowa 2014) • Eagle Point Solar (EPS) sought IUB declaration that it could install solar panels on city building and sell power to city without being a “public utility” • IUB held such activity would make EPS a public utility. • Iowa district court reversed. • Iowa Supreme Court (4 -2 with one abstention) upheld district court, holding that EPS would not be a public utility. • The Supreme Court applied an eight-factor test and found that most factors favored finding that EPS was not a public utility and that a few were neutral. By contrast, the lower court had found that a few of the factors did support finding that EPS was a public utility but were ultimately outweighed by those factors supporting that EPS was not. 27

3 rd-Party PPA Case #2 (continued) • Iowa Supreme Court applied an eight-factor test: • (1) What the corporation actually does. • (2) A dedication to public use. • (3) Articles of incorporation, authorization, and purposes. • (4) Dealing with the service of a commodity in which the public has been generally held to have an interest. • (5) Monopolizing or intending to monopolize the territory with a public service commodity. • (6) Acceptance of substantially all requests for service. • (7) Service under contracts and reserving the right to discriminate is not always controlling. • (8) Actual or potential competition with other corporations whose business is clothed with the public interest. • Iowa Supreme Court found that (1) most factors → not public utility, (2) a few factors → neutral. • Lower court had found that (1) a few factors → is a public utility, but (2) other factors → not public utility, outweighed the others. 28

3 rd-Party PPA Statute? (Minnesota) Minn. Stat. § 216 B. 02 Subd. 4: "Public utility" means persons, corporations, or other legal entities. . . operating, maintaining, or controlling in this state equipment or facilities for furnishing at retail. . . electric service to or for the public or engaged in the production and retail sale thereof. . No person shall be deemed to be a public utility if it produces or furnishes service to less than 25 persons. ” 29

On-Site, Vendor Supply (continued) Contracting Considerations • PPA + Lease/Easement (with cross-termination) • Conditions Precedent/Early “Outs” • Price (fixed/escalating), Term/Renewal, Quantity (versus load) • Allocation of RECs • Allocation of Permitting/Utility Interconnection Obligations/Risk • Allocation of Insolation/Solar Obstruction Risk • Access/Non-Interference with Buyer Operations & Vendor Output • Protection of Property/Roof • Indemnity & Insurance • Limitation of Liability/Consequential Damages • Purchase or Removal Option/Obligation at End of Term (and associated tax issues) 30

3. Community Solar Garden (CSG) Buyer Bill Credits Utility (Proportional to Subscription) Environmental Attributes (Opt. ) Electrical Output Subscription Payment Renewable Project (Off-Site) 31

Community Solar Garden (cont. ) • Subscribe” for participation in a portion of a remote solar facility • Advantages: • Avoid ownership and operation liability • Pay subscription fee to sponsor/owner of the solar project • Avoid O&M and administrative responsibility • “Virtual net metering”— Receive bill credits from your retail utility based on output of the project • Avoid interference with business operations and/or diminution of property value • Optimal installation locations (insolation, interconnection, access, etc. ) • Possible economies of scale 32

States with CSG Programs (2018) Source: solstice. us/solstice-blog; see also seia. org/initiatives/community-solar 33

Example CSG Programs (MN v. NY) MN NY Max. Size 1 MW-ac 2 MW-ac Min. # Subscribers 5 10 Location Restriction (Customer & Project) Project must be in utility Subscriber & project must territory. Subscriber must be in same utility territory & be retail customer of utility NYISO load zone in same or contiguous county of project. Min. Subscription 200 W 1, 000 k. Wh/Yr Max. Subscription 120% of average annual consumption Average annual consumption Max. Proportionate Share Each subscriber must Subscribers > 25 k. W must take ≤ 40% of CSG output Authority Minn. Stat. § 216 B. 1641 NY PUC No. 15 -E-0082 34

Community Solar Garden (continued) Subscription Agreement—Contracting Considerations • Primary Commercial Terms • Price—Fixed, Escalating, Retail Minus Discount, … • Allocation of RECs (affects price) • Conditions Precedent/Early “Outs” • Quantity—Restrictions based on customer’s retail load? Guaranteed output? • Term—Long-term commitment (e. g. , Minnesota typically 25 years) • Exit/Transferability if Customer Moves/Abandons Location • Termination or transferability rights? • State/utility location restrictions? • Liquidated damages for lost income? • Mitigation obligations? 35

4. Wholesale Power Purchase (PPA) Buyer PPA Retail Price Payment Fixed Price Payment Environmental Attributes Utility Energy at Load Energy at Project Node Renewable Project Energy at Project Node Floating (Nodal Price Market) Payment RTO/ISO Market 36

Wholesale Power Purchase (continued) • Power Purchase Agreement (“PPA”) • FERC Regulatory Requirements: • “Sale of electric energy at wholesale in interstate commerce” is subject to FERC jurisdiction under FPA, 16 U. S. C. § 824(b)(1) • Generally applicable to all wholesales unless limited to AK, HI, or TX-ERCOT markets • “Wholesale” = sale for resale • Must obtain Market-Based Rate (MBR) authority, 18 C. F. R. Pt. 35 • Initial application based on formulaic “market power” screens • 60 -day review period • Update for “change in status” (e. g. , add’l 100 MW within geo. market) • Must file Electric Quarterly Reports (EQRs), 18 C. F. R. § 35. 10 b • Other compliance obligations—Anti-manipulation, etc. • RTO/ISO Participation • Must become “Market Participant” in applicable RTO/ISO • Must satisfy credit requirements (guaranty or other performance assurance) 37

Wholesale Power Purchase (continued) Contracting Issues • Conditions Precedent (permitting, land, financing, board approval) • Commercial Terms • Price (fixed/escalating)—Imperfect hedge of retail load costs • Term/Renewal • Quantity (typ. full output; flexibility for development risk? ) • • Credit Support (guaranty, letter of credit, bond, cash; pre/post-COD) Accommodation of Financing Parties (collateral assignment and consent issues) RTO Products—Energy, Capacity, Ancillary Services Production Guarantees Allocation of RECs Allocation of Change-In-Law/RTO Rules Risk (e. g. , PTC/ITC) Allocation of Curtailment Risk (RTO/reliability, regulatory, market pricing) and Payment for “Deemed Energy” (including lost PTC) • Purchase Option or Right of First Offer (ROFO) 38

5. Virtual Power Purchase + RECs Swap + RECs Buyer Retail Price Payment Fixed Price Payment Floating Price Payment Utility Environmental Attributes Renewable Project Floating Price Payment Energy at Load Energy at Project Node RTO/ISO Market 39

Virtual Power Purchase + RECs (continued) • Financially-Settled Transaction Between Parties • • • No physical transfer of power between the parties Buyer receives standard retail power from utility Imperfect hedge Fixed price payment to Seller “Offsetting” market price payment to Seller/retail price payment to utility • Accommodates restricted retail access • Buyer avoids need for FERC MBR status, RTO participation • Geographic flexibility—Advantage for Buyer with scattered footprint or limited access to good projects • “Additionality” claims—Finances development of project • Contracting—Non-phys. items of PPAs + regulatory issues • Disadvantages—More complicated “story, ” swap regulation… 40

Virtual PPAs—Swap Regulation Dodd–Frank Wall Street Reform and Consumer Protection Act (2010) → Swap Provisions of Commodity Exchange Act, 7 U. S. C. §§ 1 -27 f → Commodity Futures Trading Commission (CFTC) Swap Rules • Eligible Contract Participant (ECP) Requirement • Only ECPs can trade in off-exchange swaps, 7 U. S. C. § 2 • Generally, any company with assets > $10, 000, 7 U. S. C. § 1 a(18) • Swap Recordkeeping, 17 C. F. R. § 45. 2 • “[F]ull, complete, and systematic records, together with all pertinent data and memoranda, with respect to each swap” • Maintain during life of swap and 5 years following termination • Must be retrievable within 5 business days 41

Virtual PPAs—Swap Regulation (continued) • Swap Reporting, 17 C. F. R. Pts. 43, 45 • Each swap must be reported to a swap data repository (SDR) • Only one party reports—either the “swap dealer” or by agreement • Each party must have a legal entity identifier (LEI) • Other (often not applicable)— 17 C. F. R. Pts. 1 -199 42

6. REC Purchase REC Payment Buyer Retail Price Payment Energy at Load Environmental Attributes Utility Renewable Project Energy Sale (? ) 43

REC Purchase (continued) • Separate Renewable + Energy Procurement • Purchase and retire RECs • Purchase standard retail energy service from utility/retail provider • Advantages: • Flexibility—purchase RECs from any project anywhere • Avoid FERC, CFTC, and state utility regulatory issues • Avoid long-term commitment to any renewable project(s) • Disadvantages: • Exposed to REC market risk unless long-term purchase • Diminished renewable “story” but can still make green claims • Provides no hedge/savings of power costs 44

7. Retail/Utility Sleeved PPA Buyer Retail PPA-Based Payment Fixed PPA Price Retail Provider or Utility Environmental Attributes Energy at Project Node Renewable Project Imbalance Energy Environmental Attributes Energy at Load Payments for Imbalance Energy RTO/ISO Market 45

Retail/Utility Sleeved PPA (continued) • PPA with Renewable Project, Intermediated by Utility • Provides a long-term price hedge in addition to RECs • Buyer avoids need for FERC MBR status, RTO participation • Nexus to specific renewable project(s) • Retail Choice (Deregulated States) • Wide flexibility to structure transaction • Regulated Utilities • “Green Tariff” • Price structure offered by local utility & approved by state PUC • Purchase energy & RECs from renewable project(s) at large scale, up to 100% of load • One-on-One Renewable Energy Deal • “Special contract” negotiated with utility under PUC rules/approval (not generally available) • Limited transparency • Structures Blend Into Standardized “Green Programs” 46

Sleeved PPA* Availability Source: World Resources Institute, U. S. Renewable Energy Map: A Guide for Corporate Buyers 47

Retail/Utility Sleeved PPA (continued) Contracting Issues • Legal authorization for arrangement (reps & warranties) • Commercial Terms • Price (fixed/escalating)—Full hedge of retail load costs • Retail Service Fees • Term/Renewal • Quantity • Full/partial output • Full/partial requirements (with targets, minimums, makeup) • Fixed quantity (MW) block • Layering of renewable over generic service • Right/prohibition of adding on-site generation 48

Retail/Utility Sleeved PPA (continued) Contracting Issues • Credit Support • Allocation of Change-In-Law or RTO Rule Risk • Allocation of RECs • See also § 4. Wholesale PPAs 49

8. Utility/Retail Green Program Buyer Green Retail Payment PPA Prices Environmental Attributes Energy at Project Node Utility or Retail Provider Environmental Attributes Energy at Load Third Party Renewable Project(s) Utility/Provider Renewable Project(s) 50

Utility/Retail Green Program (continued) Examples: • 100% renewable or renewable “blocks” (X MWh/month) • Source-specific (wind/solar) or generic (renewable) Advantages: • Ease (off-the-shelf) • Avoid project risk Disadvantages: • Limited offerings, depending on state • Limited savings/hedge opportunities? • Less “sexy” claims? (but still renewable) 51

Volume Firming Agreement • Developed by Microsoft and insurance and risk specialists as a way to mitigate risk for buyers in renewable energy PPAs • Weather-related risks of power production • Inherent intermittent nature of wind and solar • Moves these risks to insurers who charge a risk management price and an insurance premium, and in return, guarantee delivery of renewables-generated electricity for every hour of every day • To be used in conjunction with PPAs • Microsoft has signed 3 VFAs totaling almost 500 MW 52

Conclusion • Corporate procurements are expected to grow beyond 2019 due to factors such as increasingly favorable contract terms (pricing, structure and “understandability”), and sustainability goals • Three other positive trends to keep industry growing: • emerging policies supporting renewable growth • expanding investor interest in sector • advancing technologies that increase wind and solar energy’s value to grid, owners and customers 53

Thank You Tammie Ptacek 612. 335. 7246 tammie. ptacek@stinson. com DISCLAIMER: This presentation is designed to give general information only. It is not intended to be a comprehensive summary of the law or to treat exhaustively the subjects covered. This information does not constitute legal advice or opinion. Legal advice or opinions are provided by Stinson LLP only upon engagement with respect to specific factual situations. © 2019 STINSON LLP STINSON. COM