2013 may well be remembered as the year that ushered in a new era for the development of renewable energy projects on tribal lands.
In January, regulations that compel the Bureau of Indian affairs (BIA) to react to a submitted lease for renewable energy development within 60 days (as well as other requirements) became final. Also in January, the BIA issued a National Policy Memorandum with guidelines for tribes to enact independent leasing regimes and regulations pursuant to the 2012 Helping Expedite and Advance Responsible Tribal Homeownership (HEARTH) Act.
These measures fundamentally change the relationship between tribes and the federal government and open the door to a new future in which tribes enjoy a greater degree of freedom and a truer expression of sovereignty, but also a larger measure of responsibility as tribes make decisions with diminished input from BIA. The impact of all this on renewable energy development on tribal lands could be significant.
The regulations actually revise 25 CFR 162 “Leases and Permits” and now impose a 60-day time limit on BIA to disapprove of any solar and wind leases from the time an application is deemed complete, and amendments and subleases can be automatically approved if not disapproved by BIA within the given time. The regulations provide guidelines for which documents and provisions are necessary for approval. It should be noted that the BIA will also have a lesser role policing and enforcing leases, even if the BIA approves them – tribes may have to establish or enlarge their legal infrastructures to perform these tasks.
The HEARTH Act and its resultant National Policy Memorandum (NPM) empower tribes to create self-governing leasing regulations, subject only to initial approval by BIA. The NPM will provide guidelines for the leasing protocols. However, tribes will have to develop not only the framework and conditions for leases, but also procedures and rules for dealing with defaults and the production of technology-specific lease forms.
These measures fundamentally change the relationship between tribes and the federal government and open the door to a new future in which tribes enjoy a greater degree of freedom and a truer expression of sovereignty, but also a larger measure of responsibility as tribes make decisions with diminished input from BIA. The impact of all this on renewable energy development on tribal lands could be significant.
The regulations actually revise 25 CFR 162 “Leases and Permits” and now impose a 60-day time limit on BIA to disapprove of any solar and wind leases from the time an application is deemed complete, and amendments and subleases can be automatically approved if not disapproved by BIA within the given time. The regulations provide guidelines for which documents and provisions are necessary for approval. It should be noted that the BIA will also have a lesser role policing and enforcing leases, even if the BIA approves them – tribes may have to establish or enlarge their legal infrastructures to perform these tasks.
The HEARTH Act and its resultant National Policy Memorandum (NPM) empower tribes to create self-governing leasing regulations, subject only to initial approval by BIA. The NPM will provide guidelines for the leasing protocols. However, tribes will have to develop not only the framework and conditions for leases, but also procedures and rules for dealing with defaults and the production of technology-specific lease forms.
Proceed with Caution
It is too early to tell how well these new protocols will work in practice. However, the new regulations appear to reflect a genuine policy decision to provide greater self-determination for tribes to shape their own renewable energy path. But, this is a path fraught with pitfalls for the uninitiated and where mistakes can be costly.
Let us not forget that solar and wind projects tend to be land intensive. A tribe can ill afford to turn over thousands of acres of its property only to find that the developer is unable to navigate the dizzyingly complex process of bringing a project to completion. Or even worse, tribes could face situations where a facility may not be able to perform as promised, leaving large areas encumbered by worthless fields of panels or turbines while the various parties (the lender, the utility, the developer, the tribe) pursue their legal remedies – an often complicated, expensive and protracted ordeal.
In many cases, the tribe is bringing a great deal to the table: the land, the resource, permitting assistance. When it comes to leasing for renewable energy development, developers can expect that tribes will be extraordinarily well informed and cautious.
Items to Consider
Which brings us to ten questions a tribe should (and probably will) ask before embarking on a renewable energy lease:
Resource: How desirable is the resource? The tribe should have some idea of the quality of the sunlight or the strength of the wind on its land and shouldn’t rely only on the developer’s assessment. The tribe should make its own determination of the value of its asset.
Team: What are the qualifications of the development team? How many projects have they completed and how have those facilities performed? Often, the utility buying the power or the lender financing the development will want a “Single Purpose Entity” to be formed with no assets other than the project itself. If this is the case, how will the tribe recover its losses in the event the developer defaults under the loan or under the Power Purchase Agreement with the utility?
Approval: What regulatory permits and approvals will the developer need to start and complete the venture? What are the developer’s plans for obtaining the permits and what are the chances of success?
Transmission: How will the power be transported to its intended market? Transmission hurdles can prove fatal to a project. Utilities will often shy away from a project that does not have a readily identifiable transmission pathway, or which will require substantial system upgrades, or have to traverse numerous balancing authorities. Further, addressing the transmission aspect is often a time consuming and expensive exercise. The issue of transmission is not something to be “figured out later” – the project sponsor should have a specific strategy for this vital facet of renewable energy development.
The Offtaker: Who will buy the energy? Which utility or utilities is the developer targeting? What are the needs of the potential purchasers? Are they under a legal mandate to procure renewables (e.g. California utilities have a duty to attain 33% by 2020)? How will this particular project fit within the portfolios of the intended buyers? Since the project will probably have to undergo a public, competitive bidding process, how will the product be priced and what are the sponsor’s plans to win approval?
The Financing: Where is the money coming from? How is the developer providing for its operations and how will the construction of the project be financed? Developers will often be dependent on private equity or venture capital funding to operate, and will seek project specific financing and/or tax equity investment to develop the project. It is essential that the tribe be fully aware of the sponsor’s plans regarding this crucial element. Accommodating a project lender’s requirements may also entail negotiations affecting the tribe’s sovereignty and range of remedies in the event of developer default. The tribe should foresee and be prepared for such discussions.
The Compensation: How will the tribe be paid? Compensation structures come in all shapes and sizes, ranging from straight rental payments, to royalty arrangements, to joint venture type deals. The tribe will have to balance various factors in arriving at the optimal structure, which could additionally include rights to receive power for the tribe’s use.
The Technology: In a competitive bidding process, the project proponent will necessarily want to submit the lowest possible price. However, the tribe will want to ensure that quality and durability are not sacrificed for the cheapest cost. It behooves the tribe to know what technology will be used, who will be the equipment supplier, who will be the contractor?
Employment and Training: A renewable energy lease transaction can afford fertile opportunities for employment and training of tribal members. Tribes should consider ways of fully realizing such prospects in negotiations with developers.
Outreach Plan: What is the program for communicating with the surrounding community and stakeholders to allay any concerns regarding the project and its impacts, environmental and otherwise? Even if the project is to be located in a remote area, interested parties will scrutinize its advantages and disadvantages. Prudent, seasoned developers will have a plan for engaging with stakeholders early to address and alleviate concerns.
The foregoing is not intended to be exhaustive, but should hopefully provide some assistance to tribes and developers contemplating a leasing relationship. By posing and answering the foregoing questions in advance, the parties will maximize the chances of success and lessen the possibility of error.
It is too early to tell how well these new protocols will work in practice. However, the new regulations appear to reflect a genuine policy decision to provide greater self-determination for tribes to shape their own renewable energy path. But, this is a path fraught with pitfalls for the uninitiated and where mistakes can be costly.
Let us not forget that solar and wind projects tend to be land intensive. A tribe can ill afford to turn over thousands of acres of its property only to find that the developer is unable to navigate the dizzyingly complex process of bringing a project to completion. Or even worse, tribes could face situations where a facility may not be able to perform as promised, leaving large areas encumbered by worthless fields of panels or turbines while the various parties (the lender, the utility, the developer, the tribe) pursue their legal remedies – an often complicated, expensive and protracted ordeal.
In many cases, the tribe is bringing a great deal to the table: the land, the resource, permitting assistance. When it comes to leasing for renewable energy development, developers can expect that tribes will be extraordinarily well informed and cautious.
Items to Consider
Which brings us to ten questions a tribe should (and probably will) ask before embarking on a renewable energy lease:
Resource: How desirable is the resource? The tribe should have some idea of the quality of the sunlight or the strength of the wind on its land and shouldn’t rely only on the developer’s assessment. The tribe should make its own determination of the value of its asset.
Team: What are the qualifications of the development team? How many projects have they completed and how have those facilities performed? Often, the utility buying the power or the lender financing the development will want a “Single Purpose Entity” to be formed with no assets other than the project itself. If this is the case, how will the tribe recover its losses in the event the developer defaults under the loan or under the Power Purchase Agreement with the utility?
Approval: What regulatory permits and approvals will the developer need to start and complete the venture? What are the developer’s plans for obtaining the permits and what are the chances of success?
Transmission: How will the power be transported to its intended market? Transmission hurdles can prove fatal to a project. Utilities will often shy away from a project that does not have a readily identifiable transmission pathway, or which will require substantial system upgrades, or have to traverse numerous balancing authorities. Further, addressing the transmission aspect is often a time consuming and expensive exercise. The issue of transmission is not something to be “figured out later” – the project sponsor should have a specific strategy for this vital facet of renewable energy development.
The Offtaker: Who will buy the energy? Which utility or utilities is the developer targeting? What are the needs of the potential purchasers? Are they under a legal mandate to procure renewables (e.g. California utilities have a duty to attain 33% by 2020)? How will this particular project fit within the portfolios of the intended buyers? Since the project will probably have to undergo a public, competitive bidding process, how will the product be priced and what are the sponsor’s plans to win approval?
The Financing: Where is the money coming from? How is the developer providing for its operations and how will the construction of the project be financed? Developers will often be dependent on private equity or venture capital funding to operate, and will seek project specific financing and/or tax equity investment to develop the project. It is essential that the tribe be fully aware of the sponsor’s plans regarding this crucial element. Accommodating a project lender’s requirements may also entail negotiations affecting the tribe’s sovereignty and range of remedies in the event of developer default. The tribe should foresee and be prepared for such discussions.
The Compensation: How will the tribe be paid? Compensation structures come in all shapes and sizes, ranging from straight rental payments, to royalty arrangements, to joint venture type deals. The tribe will have to balance various factors in arriving at the optimal structure, which could additionally include rights to receive power for the tribe’s use.
The Technology: In a competitive bidding process, the project proponent will necessarily want to submit the lowest possible price. However, the tribe will want to ensure that quality and durability are not sacrificed for the cheapest cost. It behooves the tribe to know what technology will be used, who will be the equipment supplier, who will be the contractor?
Employment and Training: A renewable energy lease transaction can afford fertile opportunities for employment and training of tribal members. Tribes should consider ways of fully realizing such prospects in negotiations with developers.
Outreach Plan: What is the program for communicating with the surrounding community and stakeholders to allay any concerns regarding the project and its impacts, environmental and otherwise? Even if the project is to be located in a remote area, interested parties will scrutinize its advantages and disadvantages. Prudent, seasoned developers will have a plan for engaging with stakeholders early to address and alleviate concerns.
The foregoing is not intended to be exhaustive, but should hopefully provide some assistance to tribes and developers contemplating a leasing relationship. By posing and answering the foregoing questions in advance, the parties will maximize the chances of success and lessen the possibility of error.
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