Shifting Risks in Renewable Energy

The renewable energy industry in the United States has entered a new era of (relative) policy predictability and unprecedented economic incentives. From a legal perspective, the only certainty in a renewable energy practice is change. An industry founded by entrepreneurs within narrow regulatory exceptions that enabled private developers to experiment with different technology, renewables have often been relegated to the margins of the broader traditional energy industry. That, too, is changing.

Before 2022, the renewables sector had already succeeded beyond expectations: Early utility-scale development and rapidly evolving technology at ever-decreasing costs allowed the industry to survive a volatile political environment and significant supply chain disruptions and constraints. Indeed, over the last 15 years we’ve seen an emerging industry grow into an economic juggernaut — and a corresponding evolution of negotiation structures, risk management practices and claims.

Then, in 2022, the passage of the Inflation Reduction Act provided a 10-year pathway of national tax incentives for renewable energy development, establishing consistent investment and production tax credits to allow developers to invest in facilities and infrastructure over a longer time. The IRA’s benefits have been lauded by the industry and have created new avenues for investment — but the details of incentive qualification remain uncertain due to the ongoing federal rulemaking process of implementing regulations.

Providing prudent advice to clients amid such uncertainty requires counsel knowledgeable in administrative procedure as well as practical industry realities. For example, eligibility for the IRA’s highest investment and production tax credits depends on compliance with requirements to pay prevailing wages to workers and to employ qualified apprentices on projects. While the policy goals behind these requirements are clear, implementing them in practice raises many questions open to interpretation (even following the Treasury Department’s issuance of its notice of proposed regulations).

Does commissioning of a battery energy storage system constitute “construction, alteration or repair” sufficient to require commissioning technicians to comply with these requirements? Does warranty work performed by a contractor during facility operation require payment of a different prevailing wage rate than the wage determination applicable upon execution of the agreement? If no registered apprenticeship program exists to provide apprentices to a certain project site, how does a contractor satisfy its apprenticeship requirements?

Another example: The IRA provides additional incentives to suppliers manufacturing eligible equipment within the U.S., and to buyers procuring domestic equipment for installation on their projects (known as the “domestic content bonus”). While Treasury has issued a notice of proposed regulations for the domestic manufacturing incentive, it has issued only preliminary guidance for domestic procurement. Developers seeking to procure domestic equipment have limited information upon which to negotiate, and counsel advising on how to structure these agreements must acknowledge that reasonable interpretations of the preliminary guidance may vastly differ.

Will the racking component of photovoltaic tracker systems be considered structural steel and iron, or an Applicable Project Component of a Manufactured Product? What about torque tubes supplied as part of a tracker system? Should Manufactured Products consist only of major equipment, or all equipment procured for a renewable energy facility? When Treasury issues its notice of proposed regulations for the domestic content bonus, contracting parties and their counsel will need to evaluate whether existing agreements should be amended and strategy shifted to accommodate new information.

The IRA domestic content bonus is only one motivation for U.S. developers of renewable energy facilities to seek procurement options closer to home. In addition to worldwide supply chain disruptions resulting from the COVID-19 pandemic, the renewable energy industry continues to navigate significant geopolitical risk because the majority of renewable energy equipment is manufactured in China.

Procurement counsel must draft, and advise clients through negotiation of, detailed risk-shifting provisions regarding existing and potential future import tariff and duty liabilities ranging from tariffs pursuant to Sections 201 and 301 of the Trade Act of 1974 to antidumping and countervailing duties determined by the Department of Commerce. Counsel must also understand the nuances of human rights laws and regulations, including the Uyghur Forced Labor Prevention Act, and the associated need for supply chain traceability of every component of equipment down to raw material sourcing. Parties engaged in international trade have long performed OFAC (Office of Foreign Assets Control) and sanctions screenings, but corporate compliance programs today must also focus on prevention of forced labor in their supply chains.

A global supply chain requires counsel to be conversant in world events and to advise clients regarding increased risks of related effects. Should force majeure provisions include shipping delays due to drought conditions in the Panama Canal? Should a supplier be entitled to compensation for increased costs of routing shipments around the Red Sea? In today’s renewable energy economy, these are very real concerns.

Even within the U.S., the industry’s rapid growth presents a variety of new challenges. Projects are being developed across a much more diverse geography and in locations previously considered uneconomical (including on brownfields). Environmental compliance concerns continue to receive significant attention and have resulted in a corresponding trend of litigation. Many jurisdictions are not familiar with clean energy technologies or are only just starting to consider regulations specific to certain technologies. State licensing and local permitting frameworks (adopted long before renewable energy development existed at scale) continue to evolve.

Growth begets attention: Politicians and regulators are encountering rising complaints and other issues relating to renewable energy development, from utility-scale to distributed-generation projects. The national debate regarding transmission and interconnection reform, and the appropriate mix of resources for a reliable and resilient grid, is becoming a more prominent political issue. The increasing penetration of renewable resources on the grid, and their remote operation, raises cybersecurity questions regarding national security specific to critical infrastructure.

Most of these trends are positive and welcomed by industry leaders. But they require sophisticated counsel to advise on the potential risks in proportion to the potential reward, and to partner with clients in real time as new legal and market developments continue to unfold — counsel that brings perspective, balance and agility to analysis of new transactions and ever-shifting risk.

Republished with permission. This article, "Shifting Risks in Renewable Energy," was published in Best Lawyers Business Edition, Spring 2024 on June 10, 2024.