By Peter Trimarchi
Peter Trimarchi, counsel at Nixon Peabody LLP, advises on all aspects of environmental law, with a particular focus on regulatory, enforcement and transactional matters.
The significant potential of brownfields for commercial and utility-scale solar development in the U. S. has been recognized for some time now, and developers have spent many hours scouting former landfills and historic industrial sites for suitable project locations.
But developing such sites involves a number of challenges that must be addressed before a proposed project becomes a reality, not the least of which is obtaining financing.
This article discusses some of the key obstacles to successfully developing a utility-scale solar project on a brownfield site, outlines strategies to confront those obstacles and minimize their impacts, and, most important, identifies strategies for getting those projects financed.
Owing to their industrial nature, brownfields are frequently located in inner cities or first-ring suburbs. Although that can make them less desirable for today's residential or commercial real estate markets, it makes them ideal for solar development. By virtue of their location in well-developed areas, brownfields are frequently close to transmission lines and utility substations, making it easier to transport to the grid the power they generate (if the developer is selling the power into the wholesale market).
Most states have created programs to encourage the redevelopment of brownfields, which can be used by developers to make their projects more attractive to investors and lenders. Those programs typically consist of some combination of liability protection and financial incentives (in the form of tax credits). For instance, New York's program offers developers certain liability protections, a refundable tax credit worth up to 50 percent of certain remediation costs and a refundable tax credit for up to 22 percent of the project's capital costs. There is a certain cost/time/benefit calculation a developer must make before taking advantage of such programs, as they usually require developers to enter into agreements and submit progress/completion reports, which can add expense and cause delays. But in the right circumstances, such programs can provide financial and other benefits to developers that otherwise may not be available.
The main thrust of this initiative has been a significant effort by the EPA to prescreen 66,000 currently or formerly contaminated properties for various criteria important to renewable energy developers (like solar/wind resources, proximity to transmission, etc.).1 The EPA has also created various handbooks and guidance documents describing best practices for development on contaminated lands.2
The EPA is hoping this initiative will accelerate the redevelopment process and get developers more comfortable with the legal risks posed by these sites. New York is also taking a targeted approach to encouraging solar on brownfields. Proposed regulations would exempt solar installations of less than 25 megawatts on landfills from the need to comply with the State Environmental Quality Review Act (SEQRA), a requirement that often leads to lengthy environmental impact reviews and adds significant cost to a project.
In short, there is widespread agreement that redevelopment of brownfields is a good thing, and that redevelopment of brownfields with renewable energy projects is even better. Yet we still don't see solar projects on every abandoned corner gas station and closed landfill in the country. There are still several obstacles to the redevelopment of those sites in the context of a solar project. Those issues are not insurmountable, however, and a coordinated, well-planned approach can go a long way toward managing those issues.
To convince such a reluctant landowner, the developer has to demonstrate the positives associated with such a project. First, if the owner uses significant amounts of electricity, the developer can sell the owner power directly, often at a discount to the retail rates charged by a utility. If the owner is currently conducting remediation at the site, some of the power generated by the project can also be used to run remediation systems (“green remediation”). The developer can also sell the property owner the environmental attributes generated by the project, giving the landowner the bragging rights to the green aspects of the project. If the landowner is a corporation with significant tax liability, the developer can explore making the landowner a tax equity partner, giving the landowner the federal tax credits generated by the project (although manystars would have to align to make that one work).
Perhaps the best option for a developer, though, is to offer to purchase the property from the landowner, either in connection with the development or at a future date. Many brownfield owners would like nothing better than to rid themselves of the headaches (and carrying costs) such properties present. They can often be persuaded to give a purchaser a long-term indemnity for any liabilities that arise in the future, just to free themselves of the hassle of the day-to-day ownership and operation of the site. Some combination of these sweeteners may be enough to persuade a reluctant landowner to give its blessing to a project.
This broad liability scheme imposed by environmental laws has been cited as one of the reasons why we have so many brownfield sites in the U.S. in the first place. But lawmakers and regulators have recognized this problem for some time and have crafted solutions to address it. Congress passed legislation back in 2002 that provides a defense to federal superfund liability for “bona fide prospective purchasers” who conduct a Phase I Environmental Site Assessment at the site before acquiring it (and take reasonable steps with respect to contamination they know to exist at the site).3
The EPA recently issued new guidance indicating that it would exercise its enforcement discretion to extend this liability protection to tenants as well.4 Most states have enacted similar liability protections under applicable state laws, although the scope of those protections varies from state to state. Accordingly, a developer who performs a Phase I prior to acquisition is afforded significant protection from the type of liability that used to scare many developers away from otherwise valuable property.
The most common way of managing the legal risks associated with these sites is through a contractual indemnity from the responsible party at the site. This can be part of a purchase or lease agreement with the current owner or a standalone agreement with the party responsible for the cleanup. A well-drafted indemnity will clearly allocate to the owner or responsible party all liabilities associated with contamination at the site (including both cleanup costs and toxic tort liabilities), be transferable to future owners, and allow the developer/future owners to control any future cleanups (to minimize interference with the operation/development of the project). The developer needs to do some diligence on the party granting the indemnification to make sure it has the financial wherewithal to stand behind its commitment, but assuming that is the case, a well-crafted indemnity can provide real protection against future liability for existing conditions.
If all else fails, environmental insurance can play a role in getting developers and lenders comfortable with liability risk. Although such policies generally don't cover known conditions, they can cover unknown conditions that arise in the future (subject to deductibles and coverage caps). Again, this is not a cure-all for those risks--such policies usually contain significant exclusions and limitations that limit the coverage, and they are expensive. But lenders love them, and they can be an effective tool to help get a deal done in a pinch.
In sum, there are several ways for a developer to limit its legal liability for historic contamination at a site. If possible, it is best to layer several of these protections on top of each other to provide some redundancy. With those protections in place, developers and their lenders can often find comfort in knowing the risk of incurring cleanup liability is sufficiently remote to move forward with the deal.
For that reason, it is important for a developer interested in pursuing a brownfield project to choose the right property, and that usually means avoiding sites where cleanup is not yet complete. There are just too many risks associated with the possibility of future cleanup activities to make it worth the gamble in most cases. In addition to the costs involved, a developer can't risk putting solar panels on a site where active remediation may have to occur, as such activities could interrupt the project's operation due to required sampling or soil excavation. An exception to this rule might be for sites where all soil remediation has been completed but long-term groundwater treatment or monitoring is still occurring (although even that may be risky if additional “hot spots” are found later on). It is best to leave such sites alone (but keep them in mind for the future).
There are plenty of sites out there where remediation has been completed for developers to focus on first. Closed municipal landfills, sites with “no further action” letters issued by state agencies, and sites where a Phase I or other site investigation has revealed that contamination concerns are overblown can be found fairly easily. A developer is better off focusing on one of those sites and ignoring those still being cleaned up.
If the site is “capped” (i.e., has a surface barrier to prevent exposure to subsurface materials and rain infiltration), the characteristics of the cap must be well understood. The installation of solar panels and associated equipment may require the placement of base materials (like rock dust or soil), ballast (to make sure the panels remain in place in high winds) and even the construction of roads, all on the cap. The developer needs to be certain that the cap is stable and strong enough to support such activities.
If the site was a former solid waste landfill, some amount of settling may occur in the future, depending on the age of the landfill. As materials in the landfill decay, they change shape and size, which can lead to changes in the surface where the panels are installed. Developers often avoid landfills that have been closed for less than 10 years, to allow the majority of settling to occur before development takes place.
Solid waste landfill sites generate a significant amount of methane as a result of decomposition. That methane is then captured and burned to generate power for sale, or vented or flared to the atmosphere. Although the presence of a landfill gas generating station at the site may facilitate certain aspects of development (like access to an off-taker and/or transmission lines), it may also cause complications (such as making certain areas off-limits to development). If methane is flared or vented, the Occupational Safety and Health Administration requires certain minimum buffers around the flares/vents, limiting development space. The developer will have to take these conditions into account when designing a project.
Stormwater and erosion management is a major consideration for development on remediated sites. Caps are typically designed in a way that very carefully controls and manages stormwater coming off the site, and regulatory agencies will want to protect any stormwater and erosion control systems they designed with the responsible party over a period of years. To get approval to build on one of these sites, the developer will have to have a comprehensive plan addressing stormwater, including engineering analysis that shows how the project will address the addition of impervious surfaces (such as roads and even the panels themselves), how continuous drips from the bottom of the panels will be dealt with to avoid cap erosion, and the impact of additional layers of rock dust or soils as base materials.
Regulators are not monsters, though, and they recognize the benefits of installing solar at these facilities. As long as they're satisfied that the project will not have an adverse impact on the site, they will usually grant the required approval. This will typically require a sit-down meeting with the regulatory agency, and perhaps some follow-up meetings between the project's engineers and the agency's technical staff. Although the approval will likely come, it takes time. Getting agency approval should be very high up on the project schedule, to try to get it in hand before conversations with investors/lenders begin in earnest.
Developers should also choose their racking/mounting technology very carefully. There are many different technologies available for mounting and securing solar panels, some of which require little or no subsurface penetration. The process of obtaining regulatory sign-off will be much easier if the developer chooses a technology with as little subsurface penetration as possible.
Further complicating the financing picture in renewable energy transactions is the participation of tax equity partners. These are third parties who become true equity partners in a deal to take advantage of the tax credits generated by renewable energy projects. Most renewable energy projects these days require the participation of a tax equity partner to get off the ground, and those entities similarly need to get comfortable with the risks involved before they will agree to join the deal.
Nevertheless, with more and more successful renewable energy projects occurring on contaminated lands, many banks and tax equity partners are getting comfortable with the idea of lending to these projects. Both entities will still deploy an army of lawyers and engineers to complete an excruciatingly detailed due diligence process, but if their diligence checks out, they're willing to participate. Obtaining financing for a brownfield project is still difficult, however, and it is important for a developer to create a well-thought-out approach to these issues to demonstrate to financing parties that it has thoroughly considered the risks associated with the project, and addressed them all comprehensively.
These liability/risk management measures need to be in place before the developer first sits down with a potential lender or tax equity partner. If those measures are not in place early on, those parties will simply tell the developer to come back later when those issues have been addressed. The developer will get far better traction if it enters the first meeting with a very tight, buttoned-up presentation that anticipates and addresses all of the financing parties' questions about potential risks.
In addition to having the basic building blocks of a typical solar project in place (site design and performance specifications completed; a long-term, stable revenue source identified; and municipal/state approvals in place), the developer should have the following information fully developed at that first meeting:
• all due diligence and engineering analysis of the historic contamination, showing (a) exactly what contamination remains at the site, (b) how it's being dealt with through engineering/institutional controls (such as caps and deed restrictions), and (c) what the regulatory status of the cleanup is at the time;
• a development plan for the project, showing how sensitive areas of the site will be dealt with or avoided;
• regulatory approval for any impacts to an existing cap or other remedies in place at the site;
• a detailed legal analysis showing how available liability protections apply to the project;
• a contractual indemnity from a financially stable third party protecting the developer from future cleanup costs and personal injury claims; and
• if available (and meaningful), a covenant not to sue or other comfort letter from applicable regulatory agencies.
With those items in place, a developer can demonstrate that the risks associated with the property have been properly addressed.
Even with all those items at its fingertips, a developer still may encounter skepticism or reluctance from financing parties. It's at that point that the financials come into play. Not surprisingly, the better looking the pro forma, the more likely those parties will be to get comfortable with the environmental risks. Conversely, the thinner the margins on a project are, the more likely those parties will be to simply walk away. The developer should make an honest and accurate financial analysis of the project's projected returns as early as possible to determine the likelihood that a lender or tax equity partner will accept the risks inherent in the project. If the likelihood is low, it may not be the right project at the right time, and the developer can move on to other options.
Although they've improved some over the past few years, project finance markets continue to be tight. It may be that even a perfectly financeable project will struggle to find a lender willing to bite. In that case, it may make sense to seek alternative financing sources in private equity/hedge fund markets. There are a number of different funds that are interested in the kind of long-term, steady returns renewable energy projects generate and that understand development risks. Such funds often demand a significant premium for their investment, but it may be worth it in the right context to get a project off the ground. When going to market with a brownfield project, a developer should come prepared, keep all of its options open, and take the best deal it can get.
Given all that we've learned about brownfield development in the past 15 years, and the liability protections provided in state and federal statutes, there is no reason that a well-designed project shouldn't be able to get approval from applicable regulators and satisfy the concerns of willing financing parties. An intelligent, structured approach to such projects will put the developer in the best position to obtain required financing and make its project a reality.
1 See http://www.epa.gov/oswercpa/.
3 42 U.S.C. §9607(r)(1).
4Revised Enforcement Guidance Regarding the Treatment of Tenants Under the CERCLA Bona Fide Prospective Purchaser Provision, dated Dec. 5, 2012.
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