Page 11 - North American Clean Energy November/December 2018 Issue

more classic engineering, procurement, and construction (EPC) contract. Depending on contract terms, this can shift some construction risk to the utility, because it pays for the project upfront
in the acquisition price and through milestone payments under the EPC contract, rather than after the project has been completed. Some utilities, however, may prefer being an owner under a typical EPC arrangement, with the right to step in or terminate the contract
and hire a new contractor, should the original developer default.
Tax Equity Investments in Utility-Owned Projects
In the typical BTA, the utility becomes the owner of the solar project for
tax purposes, and claims ITC and accelerated depreciation. This may make economic sense, notwithstanding requirements to stretch out the tax benefits through normalization or other rate recovery principles. Some utilities, however, have recently structured transactions where the utility brings in
a tax equity investor as a partner in a special-purpose project company. The investor is allocated a disproportionate share of tax benefits, and some agreed portion of the cash flow, in return for
its upfront capital contribution. This contribution pays part of the cost of acquiring the project, reducing the cost to the utility and its customers. When the tax equity investor reaches an agreed target return, the utility has the option to buy out the investor, becoming the sole owner of the project.
The rules governing tax equity investments are complex, and frequently at odds with the utility’s other objectives, so care must be taken to assure compliance with both tax and other regulatory requirements. For example, certain structures may implicate federal or state rules governing transactions between regulated utilities and their affiliates. In addition, approval of the Federal Energy Regulatory Commission, with its concomitant market power review, may be required if a project is to be transferred after it starts delivering electricity to the grid.
Implications for Solar
Increased utility ownership of solar,
and other renewable energy projects, may have broad implications for the solar energy market in those parts of
the country where vertically integrated utilities continue to own generating fleets to serve their customers. Similar market and regulatory drivers are encouraging broader utility interest in owning wind and other renewable energy projects,
as well. While solar energy developers may face the paradox of more direct competition from regulated utilities, and fewer opportunities for PPAs, they
Frank C. Shaw is Counsel on Energy and Infrastructure Projects for Skadden, Arps, Slate, Meagher & Flom LLP. His practice
has focused for more than 25 years on the development and finance of international and U.S. power and infrastructure projects, and on the acquisition and sale of power projects and independent power companies.
Sean Shimamoto heads the Skadden, Arps, Slate, Meagher & Flom LLP West Coast Tax Group. He represents clients on a wide range of U.S. federal income tax matters, including mergers and acquisitions, partnership transactions, various types of public and private debt and equity financing transactions, initial public offerings and restructuring transactions.
Skadden, Arps, Slate, Meagher & Flom LLP | |www.skadden.com
benefit from a larger pool of potential credit-worthy buyers. The end result would be more solar energy deployed, but under different ownership structures, with different challenges, risks, and rewards for the players.
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