Maryland's Offshore Wind Energy Act of 2013

On April 9, 2013, Maryland Governor Martin O'Malley signed the Maryland Offshore Wind Energy Act into law.  North American WindPower recently published an article highlighting the key components of the new legislation and featuring commentary by me!  Feel free to click through to the original article here, or just scroll down for a reprint of the article below.

Stakeholders Weigh In On Maryland Offshore Wind

by Joseph Bebon

The Maryland Offshore Wind Energy Act of 2013, recently signed into law by Gov. Martin O'Malley, aims to help boost the local economy and subsidize wind energy development off the state's coast. But what, exactly, does the legislation do? And how have wind industry stakeholders reacted to the new law? O'Malley introduced the Maryland Offshore Wind Energy Act of 2013 in January, his third attempt at establishing offshore wind legislation in three years. According to the governor’s office, offshore wind development would lead to about 850 manufacturing and construction jobs and 160 post-development jobs for activities such as operations and maintenance. At the core of the new legislation is a financial mechanism to subsidize an offshore wind project by altering Maryland’s renewable portfolio standard (RPS) and establishing a charge on utility ratepayers’ monthly bills. The law amends the state’s 20% by 2020 RPS, classifying offshore wind energy as a Tier 1 renewable resource, creating an offshore renewable energy credit (OREC) system and mandating a carve-out for the state’s utilities. If an offshore wind project is proposed, permitted and constructed, utilities will be required to begin procuring up to 2.5% of their portfolio from offshore wind energy as early as 2017. To help offset the increased costs to the state’s utilities, the legislation will allow ratepayers to be charged an additional $1.50 per month on their electricity bills only if and when an offshore wind farm is built. Brian Redmond, partner at Paragon Energy Holdings, says the law's $1.50/month cap sets the marker for what the public would be willing to accept for a price subsidy for offshore wind. The law uses a potential 200 MW offshore wind farm to gauge its cost-benefit analysis and rate cap, but Jim Lanard, executive director of the Offshore Wind Development Coalition, says interested developers may aim to build a larger project. “The real cap is what the impact is on the ratepayers. It’s not likely that you’re going to see developers bid for less than 200 MW, because the cost of mobilizing and preparing a wind farm doesn’t change if it’s for 50 MW or 500 MW - the planning is all the same,”  he explains. Lanard also believes the new law provides essential subsidies that could jump-start Maryland’s offshore wind industry. “Without the legislation, there would be no offshore wind development off Maryland,” he says. “In today’s economic environment, you can’t finance a project without showing the banks or investors a revenue stream that proves they are going to get paid back or see a return on investment. You could build the power plant, but there wouldn’t be anyone to buy the power.” Developers’ POV Following the legislation’s passage, Doug Copeland, regional development manager of EDF Renewable Energy, welcomed the news. "EDF Renewable Energy supports Governor O'Malley's offshore wind bill and commends the state in supporting this new industry,” Copeland said in a written statement to NAW. “Our parent company, EDF Energies Nouvelles, develops, builds, owns and operates multiple offshore wind projects in Europe, and we are excited to begin these efforts off the East Coast. “The governor and his staff have been very thoughtful in how they have structured this bill to advance offshore wind, especially in giving opportunities to Maryland businesses,” he continued. “EDF RE believes offshore wind is a regional effort and commends the state of Maryland for taking a lead. We believe cooperation with other states will also be important to create additional economic benefits. The efforts involved in putting together a team and submitting a viable application will be substantial, and we look forward to the opportunity." Even before this legislation passed, however, there were a number of offshore wind developers eyeing Maryland. In 2010, the Bureau of Ocean Energy Management issued a call for interest from developers that would want to build an offshore wind farm in the state’s designated wind energy area, located 10 to 30 nautical miles off Maryland’s coast. Six potential developers responded. One such developer, RES Group, also welcomes Maryland’s new law but notes that the legislation cannot solely create a strong offshore wind industry in the U.S. “[This legislation] provides an important and positive step toward realizing the significant potential that offshore wind can bring to the United States in terms of energy generation, investment and new jobs,” says Chris Morgan, CEO of RES Offshore. “However, support for a project of around 200 MW will not, on its own, be sufficient to stimulate the level of investment and commitment that will be required by developers, manufacturers and contractors to establish a viable and cost-effective sector.” “In addition to ORECs,” Morgan continues, “the sector will seek the strategic support that the tax credit legislation has provided to the renewables industry in the past. The current ITC/PTC legislation will benefit those projects that are ready to enter construction this year, but beyond that, the absence of a clear vision for legislation will place a constraint on further offshore development.” SpecificityAlthough a few other states have offshore wind legislation, such as New Jersey’s Offshore Wind Economic Development Act of 2010, Maryland’s law includes several unique provisions. According to Jennifer Simon Lento, associate at Nixon Peabody LLP, Maryland’s legislation outlines exactly what is expected of potential developers. “In contrast to the New Jersey legislation, which requires the New Jersey Board of Public Utilities to apply a somewhat undefined ‘economic benefits’ test, the Maryland legislation sets out a very specific list of criteria, including a clearly defined cost-benefit analysis, that an applicant must demonstrate before the Maryland Public Service Commission (PSC) will issue ORECs,” Simon Lento explains. “The specific criteria required under the legislation means both that the PSC will be able to issue implementing regulations quickly and that developer applicants can draft their applications with the confidence of knowing exactly what needs to be included in the submission,” she continues. “Further, the Maryland legislation is drafted to encourage competition among developers to present projects with the most environmental, labor and cost-savings benefits.” Paragon Energy Holdings' Redmond adds that the Maryland law could serve as a model for future offshore wind legislation. “Other states that have yet to quantify the level of price support that their constituents would be willing to bear - be it zero, $1.50 or $2.50 - would be well served to at least establish that marker,” he says. “That, in a sense, will give the industry certainty that they are not shooting at a moving target. "In Maryland, developers know that if they can get to the 1.50 per residential customer, then they have a deal. Other states, such as North Carolina, Virgina and New Jersey, which are embarking in wind development activities, would be well served to provide certainty to developers so as to know what is politically palatable to the ratepayers in order to attract offshore wind to their states.”

Guest Post: IRS Notice 2013-29 on “Begun Construction” for certain renewable energy facilities

My colleague Forrest Milder, an attorney in the Renewable Energy Tax Credits and Finance practice here at Nixon Peabody, authored the following client alert describing the IRS' April 15, 2013 Notice on what it means to have "Begun Construction" for the purpose of establishing eligibility for tax credits.  

The IRS' April 15 Notice sheds much needed light on this critical threshold that renewable energy developers must meet in order to incorporate tax credit financing as part of their financing structures.  Developers of offshore wind projects that are essentially ready-to-build once financing is established (i.e., all state and federal permitting hurdles have been cleared), including Cape Wind, Deepwater Wind's Block Island project, and Fishermen's Energy's Atlantic City project, will be looking to meet the December 31, 2013 deadline to take advantage of the tax incentives. In other words, the goal of meeting the "Begun Construction" test is one more reason to believe that we may see steel in the water before the end of 2013.

Although IRS Notice 2013-29 offers some guidance with respect to the eligibility criteria, other questions still remain.  For example, under the "Physical Work" test described below, the work must be a “continuous program of construction,” subject to a list of  permitted disruptions such as“severe weather conditions”, “natural disasters”, “labor stoppages” and “financing delays of less than six months."  Since offshore wind construction is subject to seasonal restrictions, it is not clear whether a work stoppage for winter would qualify as a permitted disruption.  

 The original version of this article reprinted below is available here.  For the benefit of the Ocean and Offshore Renewables blog readers, I have hyperlinked a few of the key documents discussed in Forrest's article.

This client alert addresses an IRS notice issued on April 15, 2013, with great significance to projects that generate electricity from wind, geothermal, biomass, landfill gas, municipal solid waste, hydroelectric production, and marine and hydrokinetic energy.

You will remember that before the American Taxpayer Relief Act of 2012 (ATRA) each of these technologies was eligible for a production tax credit (PTC) or investment tax credit (ITC) only if the facility was placed in service by the end of 2013 (except wind, which had to be placed in service by the end of 2012, and geothermal, which can also qualify for a 10% credit beyond that date). ATRA changed the sunset provision to depend on when the facility begins construction, rather than when the facility is placed in service. Now, if one of the facilities described above begins construction by December 31, 2013, it will be eligible for the applicable PTC or the 30% investment tax credit.

On April 15, 2013, the IRS published Notice 2013-29, providing the tests that must be passed in order for these facilities to have “begun construction” by the end of 2013 and still qualify for tax credits. You will note that these tests are very similar to the Section 1603 Grant-in-lieu-of-tax-credit rules published by Treasury in connection with that program, which also has a begun construction requirement, albeit for projects placed in service after December 31, 2011.

Like the Section 1603 program, there are two tests under the notice—the “physical work” test, and the “five percent safe harbor.” Passing either of these tests will be treated as beginning construction under the PTC and ITC rules. A very quick summary—

The Physical Work Test. The work must be “physical,” such as setting anchor bolts or pouring concrete pads. The property must be “integral” to the activity, e.g., a transmission tower is not eligible. Note that “preliminary activities,” like designing the facility or securing financing do not qualify. Manufacturing components pursuant to a “binding written contract” is also includible, but not if the property is “in existing inventory or normally held in inventory by a vendor.” The work must also be a “continuous program of construction,” and the IRS has provided a list of  permitted disruptions that range from “severe weather conditions” and “natural disasters” to “labor stoppages” and “financing delays of less than six months.”

The Five Percent Safe Harbor. Like Section 1603, the amount must be paid or incurred in accordance with the Section 461 regulations. Here, too, costs can be incurred pursuant to a binding written contract. An important new requirement states that the taxpayer must also make “continuous efforts to advance toward completion of the facility.” This is a significant change from the Section 1603 rules, which potentially allowed grandfathered equipment that met the five percent test to be warehoused and used years later. This new continuous efforts test is not unlike the rules that apply to the physical work test, bearing in mind that under the five percent test, the efforts do not have to be “physical”; illustrations include “paying or incurring additional amounts,” and “obtaining necessary permits,” as well as “performing physical work of a significant nature.” The notice repeats the exact same list of permitted disruptions that will not affect passing the “continuous efforts” test as applied to the “physical work” test.

Four other things worth noting—first, there is no pre-approval process, like there was with the “preliminary applications” required under Section 1603. Second, there is no statement in the notice that a project must be specifically identified; it remains to be seen if that was an intentional omission. Third, the definition of “binding contract” is different from what it was under Section 1603; in the IRS notice, a contract is binding if it is “enforceable under local law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision).” Of course, under the Section 1603 rules, a provision limiting damages to five percent of the contract amount was specifically permitted. Finally, the notice gives two illustrations of the effect of cost overruns where the five percent safe harbor has been used—if the project consists of multiple facilities that could be operated independently (e.g., a wind farm), then the project may be scaled back (if necessary) to ensure that the smaller project passed the five percent test by the end of 2013. On the other hand, if the project is only one facility, e.g., a boiler and turbine generator, then it cannot be scaled back, and a cost overrun can be fatal. Other renewables that are still subject to the old rules. Thus, the tax credit rules for solar, fuel cells, small wind, microturbines, combined heat and power facilities, geothermal that generates heat, and geothermal that generates electricity, but that begins construction after 2013, continue to have the same placed-in-service tests as before ATRA. For example, solar facilities must still be placed in service by the end of 2016 to qualify for the thirty percent ITC. There is not a “begun construction” test for these facilities.

For more information about renewable energy tax credits and/or IRS Notice 2013-29, please contact Forrest Milder at 617-345-1055 or fmilder@nixonpeabody.com, or Jennifer Simon Lento via this blog, at 617-345-1352, or at jsimonlento@nixonpeabody.com.