Category: Uncategorized

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The Energizer – Volume 49
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The Energizer – Volume 47
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Webinar: Energy Storage project development: An Overview of key policy, finance & development issues with K&L Gates
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FERC Grants Waivers to Exempt Solar Aggregator from Certain QF Requirements
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JOIN K&L GATES AT #ESACON19 AND PICK UP THE ENERGY STORAGE HANDBOOK
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Making Room for Electric Storage: RTOs/ISOs Propose Changes to Their Market Rules to Comply with FERC Order 841
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FERC’s New ROE Math
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The Blockchain Technology Revolution: Implications for the Energy Sector
9
Is Guidance on ITC-Qualified Storage Coming?
10
Join K&L Gates at DNV GL Energy’s Energy Storage Lenders Day

The Energizer – Volume 49

A biweekly update on blockchain technology applications, distributed energy resources, and other innovative technologies in the energy sector.

By Buck B. Endemann, Benjamin L. Tejblum, Daniel S. Cohen, Toks A. Arowojolu, Olivia B. Mora, and Abraham F. Johns

There is a lot of buzz around blockchain technology, distributed energy resources (“DERs”), microgrids, and other technological innovations in the energy industry. As these innovations develop, energy markets will undergo substantial changes to which consumer and industry participants alike will need to adapt and leverage. Every other week, K&L Gates’ The Energizer will highlight emerging issues or stories relating to the use of blockchain technology, DERs, and other innovations driving the energy industry forward. To subscribe to the Energizer, please click here.

IN THIS ISSUE:

  • GE and BlackRock Launch Distributed Solar and Storage Business.
  • 400-MW Montana Pumped Storage Hydro Project Funded.
  • Major Chinese Energy Service Provider to Develop Blockchain Platform for LNG.
  • Indonesian NEWX Energy to Implement Blockchain Smart City Ecosystem.

To view more information on these topics in Volume 49 of The Energizer, click here.

The Energizer – Volume 47

A biweekly update on blockchain technology applications, distributed energy resources, and other innovative technologies in the energy sector.

By: Buck B. Endemann, Benjamin L. Tejblum, Daniel S. Cohen, Toks A. Arowojolu, Olivia B. Mora, Abraham F. Johns

There is a lot of buzz around blockchain technology, distributed energy resources (“DERs”), microgrids, and other technological innovations in the energy industry. As these innovations develop, energy markets will undergo substantial changes to which consumer and industry participants alike will need to adapt and leverage. Every other week, K&L Gates’ The Energizer will highlight emerging issues or stories relating to the use of blockchain technology, DERs, and other innovations driving the energy industry forward. To subscribe to the Energizer, please click here.

IN THIS ISSUE

  • Puerto Rico Introduces “MiniGrids” to Improve Grid Resilience.
  • New Jersey Becomes the Latest State to Commit to 100% Clean Energy.
  • KEPCO to Lead a Blockchain-based Renewable Energy Certificates Trading Platform Pilot Program.
  • U.S. Department of Energy Assigns Energy Security Grant to XAGE.
  • PPL Electric Earns Award for its DER Management System.

To view more information on these topics in Volume 47 of The Energizer, click here.

Webinar: Energy Storage project development: An Overview of key policy, finance & development issues with K&L Gates

Join Energy Toolbase and K&L Gates for a webinar on Wednesday, June 19, 2019 at 2:00pm EDT.

Webinar topics will include:

1) Key BTM energy storage policy issues (update on the current ITC legislation for energy storage, federal tax & depreciation, utility revenue streams/aggregation, FERC 841)

2) Development issues affecting BTM energy storage projects (EPC agreements, interconnection, insurance, common development hurdles)

3) Financing & monetizing energy storage projects (capacity service agreements, operating leases, PPA’s, shared savings, project financing risks)

4) How to configure & model different storage incentives in Energy Toolbase

5) How to configure & model different storage financing transactions in Energy Toolbase

K&L Gates attorneys Buck Endemann, Elizabeth Crouse, and Jim Wrathall will be participating in this webinar, along with with Energy Toolbase COO, Adam Gerza.

To register, please click here.

FERC Grants Waivers to Exempt Solar Aggregator from Certain QF Requirements

By William M. Keyser and Toks A. Arowojolu

On April 18, 2019, the Federal Energy Regulatory Commission (“FERC”) issued an order granting a petition for declaratory order filed by Sunrun, Inc. (“Sunrun”) that exempted Sunrun, the nation’s largest residential solar company, from certain qualifying facility (“QF”) filing requirements under the Federal Power Act (“FPA”) and the Public Utilities Holding Company Act (“PUHCA”). The requested waiver would allow Sunrun to avoid significant administrative and regulatory burdens by avoiding potentially hundreds of QF filings as it increases the number of photovoltaic (“PV”) systems it owns on behalf of its customers.

QFs have the right to sell energy or capacity to a utility at an avoided cost rate and receive relief from certain regulatory burdens. To qualify as a QF, eligible facilities (including solar facilities) with power production capacity of greater than 1 MW (1000 kW) must certify their status with the Commission by either submitting a Form 556 self-certification or filing an application. Facilities with net power production of 1 MW or less are exempt from this filing requirement. When determining the size of a QF, FERC applies a “one-mile rule.” Under the “one-mile” rule, QFs located within a mile of another facility that use the same energy source and have the same owner are considered one QF for purposes of determining whether the QF surpasses the 80MW requirement for QF eligibility. FERC also applies the one-mile rule to determine whether a QF is 1 MW or less and therefore exempt from the QF certification filing requirement.

The one-mile rule carries potential consequences for developers of small and distributed rooftop solar systems like Sunrun, particularly when they retain ownership over the individual systems. According to the petition, Sunrun’s customers can choose to have Sunrun finance the PV system with Sunrun initially retaining ownership and continuing to monitor, maintain, and insure the system. Under Sunrun’s system, the homeowner is granted an option to buy the PV system later.

Sunrun filed its petition in September 2018 requesting waivers of two QF certification requirements to support its business model of selling, owning, and maintaining residential solar PV systems. First, Sunrun requested a waiver of the QF certification filing requirement for separately interconnected, individual residential rooftop solar PV systems with a maximum net power production of 20 kw or less that Sunrun provides financing for but which the homeowner has an option to purchase. Because Sunrun could conceivably finance or own many such 20 kW systems within one-mile radius, it would be possible for all such 20 kW systems to aggregate to over 1 MW and trigger QF certification filing requirement. Second, Sunrun also requested that, in a self-certification submitted for a cluster of rooftop PV systems that exceed 20 kW, FERC waive the requirement to include information for the facilities covered by the first waiver request (i.e., 20 kW or less).

Sunrun explained to FERC that its concerns were two fold: (1) while 99.5% of the residential PV systems that Sunrun owns have a nameplate capacity below 20kW, PV systems within close proximity to one another can collectively be deemed to be one QF under the one-mile rule, and (2) without the waivers, Sunrun would have to “monitor the geographic concentration of its PV systems” and file and continuously update a highly burdensome number of filings. With Sunrun’s 202,000 PV systems spread across 22 states, numerous applications would be expected.

FERC granted the requested waivers, finding that Sunrun’s request aligned with the purpose of the 1MW exemption which is “to ease the administrative burden for both the Commission and small scale QFs.” FERC also directed Sunrun to maintain sufficient records of the residential PV portfolio that it owns through “third-party financing arrangements” to ensure that its aggregated solar resources are in compliance with other federal regulations. FERC’s ruling could provide an opportunity for Sunrun and other rooftop solar aggregators to sell solar power into the wholesale markets. However, despite the easing of the administrative and regulatory burden at FERC, solar aggregators are still subject to a host of interconnection and state regulatory requirements that would also need to be addressed. We will continue to monitor the developments of this proceeding and its impacts on the solar PV and wholesale markets.

JOIN K&L GATES AT #ESACON19 AND PICK UP THE ENERGY STORAGE HANDBOOK

K&L Gates is proud to sponsor the Energy Storage Association’s 29th Annual Conference and Expo

K&L Gates welcomes you to join us at #ESACon19. We are excited to be the News Desk Sponsor at this year’s conference. The conference will be held on April 16-18, 2019 at the Phoenix Convention Center in Phoenix, AZ.

K&L GATES HIGHLIGHTS

  • Stop by Booth 526 to meet the team and pick up a copy of the newly released Fourth Edition of our very popular K&L Gates Energy Storage Handbook.
  • Join us at the ESA News Desk where we will be conducting interviews with executives from several companies.
  • Portland Partner Bill Holmes will be a panelist during, “Advanced Contracting in Energy Storage (ACES) Workshop,” where he will present on energy storage project development. The workshop will be held Tuesday, April 16 from 9:00 a.m. – 11:00 a.m. in North 124.
  • Bill will also give a Master Level with Kris Zadlo, Senior Vice President of Invenergy, entitled “Ins and Outs of Energy Storage Agreements,” which will discuss features and pitfalls of long-term energy storage agreements. It will be held on Wednesday, April 17 from 11:30 a.m. – 12:30 p.m. in North 122.

We look forward to seeing you in Phoenix!

Making Room for Electric Storage: RTOs/ISOs Propose Changes to Their Market Rules to Comply with FERC Order 841

By Abraham F. Johns, William M. Keyser, and Toks A. Arowojolu

On December 3, 2018, the Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) filed proposed market rule changes to provide energy storage resources with greater opportunities to participate in the wholesale markets as required by Federal Energy Regulatory Commission (FERC) Order No. 841. These widely anticipated FERC filings will likely provide the framework for how energy storage resources will be developed and used in the coming years.

In February 2018, FERC released Order No. 841, which requires each regional grid operator to revise its tariff to establish a participation model that allows energy storage resources to participate in the organized wholesale markets and sell the relevant products offered by each market. K&L Gates covered the details of this Order in a blog post and in the Energy Storage Handbook.

FERC set a deadline for each RTO/ISO to submit a compliance filing including tariff revisions by December 3, 2018. We have provided links to the compliance filings for each RTO/ISO below. The deadline for public comments on the filings is December 24, 2018 by 5 p.m. Each RTO/ISO has until December 3, 2019 to implement the changes. Considering the holiday season, some commenters may request an extension on this comment deadline. We will continue to monitor the development of these proceedings.

FERC’s New ROE Math

By: Donald A. Kaplan, William M. Keyser, and Abe F. Johns

On October 16, 2018, the Federal Energy Regulatory Commission (“FERC” or “the Commission”) issued an order (“Order”) that dramatically reforms the way it determines the just and reasonable return on equity (“ROE”) in rate cases. The new methodology abandons FERC’s exclusive reliance on its discounted cash flow (“DCF”) model and will now give equal weight to the DCF, capital-asset pricing model analysis (“CAPM”), and an expected earnings analysis (“Expected Earnings”) to determine if a ROE is unjust and unreasonable. FERC will add a fourth method, a risk premium analysis (“Risk Premium”), to determine the new ROE when it finds a challenged ROE unjust and unreasonable.

While the new method only applies to transmission owners in New England, considering FERC’s enthusiasm for uniformity, the policy will likely be applied to more rate cases in the future and could impact both the electric and gas industries.

I. Background: FERC’s Previous ROE Calculus

The Order on remand, from the DC Circuit Court of Appeals in Emera Maine v. FERC, 854 F.3d 9 (D.C. Cir. 2017), comes as the latest iteration of cases based on several complaints against the collective ROE of the transmission owners in ISO New England, Inc.

The ROE represents the allowed return on utility equity included their cost-of-service rates. Under the famous Hope and Bluefield standards, FERC must set utility rates and returns on investment commensurate with other enterprises of comparable risk and sufficient to attract capital and “assure confidence in the financial integrity of the enterprise . . . .”  FERC ratemaking also “involves a balancing of the investor and the consumer interests.” FPC v. Hope Nat. Gas Co., 320 U.S. 591, 603 (1944).

In these cases, FERC was called upon to address a challenge to the New England transmission owners’ ROE under Section 206 of the Federal Power Act (“FPA”). Under Section 206, FERC first determines if the existing allowed ROE is “unjust and unreasonable.”  If that first finding is made, it then must establish a new just and reasonable ROE to replace the existing rate.

For nearly 40 years, FERC used the DCF method to assess whether a ROE is just and reasonable for a public utility. Under the DCF method, FERC evaluates the expected dividend growth and market-determined yields of a group of comparable utilities with bond ratings the same as or close to the utility or utilities subject to the ROE complaint to generate a range of ROEs with an upper and lower bound, which FERC termed the “zone of reasonableness.”  FERC then identifies a point in that range as the just and reasonable ROE. FERC had been using the midpoint (for multiple utility ROEs) or median (for a single utility) until recently. In early stages of this case, it began looking at various other considerations to adjust the ROE upward. FERC essentially used the new ROE to satisfy both findings it must make under Section 206 of the FPA.

The Court of Appeals ruled that FERC must explicitly find that a ROE is unjust and unreasonable before it can establish a new rate. It was not sufficient for FERC to find that the new ROE it establishes under the DCF method differs from the existing ROE. Rather, the court held that a broad range of ROEs could be just and reasonable under the FPA (although this range was not the same as FERC develops under the DCF method) and that FERC must find that the existing ROE is not in this range before it establishes a new one.

II. FERC’s Decision: A New Calculus

FERC declared an end to its sole use of the DCF model to determine whether a ROE is just and reasonable. Instead, it will use the DCF with two other methodologies (CAPM and Expected Earnings) to determine whether a utility’s ROE falls within the zone of reasonableness. If it finds that it does not, it will then use these three methodologies plus a fourth, Risk Premium, to establish a new rate.

a. Three Additional Methodologies

FERC chose to incorporate the CAPM, Expected Earnings, and Risk Premium methodologies because, among other reasons, “investors use those models . . . to inform their investment decisions.” The basics of each methodology are worth understanding.

The CAPM evaluates risk and cost equity through a formula that adds a “risk-free rate” with a “market-risk premium,” multiplied by a “beta” of the security. The risk-free rate is a proxy number, often based on the yield of 30-year U.S. Treasury bonds. The beta is a measure of the stock’s risk compared to the market. The market risk premium is the difference between the risk-free rate and the expected return on that stock, which is found either by forward-looking estimates, backwards-looking estimates, or a review of investment academics’ and professionals’ estimates.

The Expected Earnings methodology determines the earnings an investor can expect to receive on the book value (the equity of a company’s capital minus the long-term debt) of a particular stock. The analysis either uses backwards-looking estimates, based on historical earnings on book value, or forward-looking estimates based on analysts’ forecasts of the company. The value of expected earnings helps investors gauge the opportunity cost of investing in a specific utility.

The Risk Premium methodology focuses on the investment in stocks, as they hold greater risk than investment in bonds. The methodology examines that “premium” value that a stock investment accrues over a bond investment. The Order noted that “investors’ required risk premiums expand with low interest rates and shrink at higher interest rates.” FERC will compare the interest rates and risk premiums and assess how “investors’ required rate of return have been impacted by the interest rate environment.”

To assess the first prong of the FPA’s Section 206 standard, three of the methodologies (DCF, CAPM, and Expected Earnings) will yield a composite zone of reasonableness from which a spread of presumptively just and reasonable ROEs for utilities with comparable risk profiles will be identified. FERC will establish an overall zone of reasonableness, then subdivide that zone into four “quartiles” centered on the overall midpoint, and upper and lower midpoints of the zone.

b. Comparing ROEs Based on a Utility’s Risk and Presuming ROE Lawfulness

FERC will use the overall midpoint and upper and lower midpoints to anchor three zones of reasonableness, one each for utilities of lower risk, average risk and higher risk utilities. If the subject utility falls with its appropriate zone, FERC will presume that it is just and reasonable. If not, FERC will move on to set a new just and reasonable rate.

For comparison to average risk utilities, the central tendency of DCF, CAPM, and Expected Earnings zones of reasonableness will determine the cost of equity. Those three midpoint/median figures will be averaged along with the Risk Premium number to calculate the ROE of average risk utilities. To assess ROEs for below or above average risk utilities, the midpoint/medians of the lower and upper halves of the zone of reasonableness will be used, respectively.

FERC will continue to determine a utility’s risk profile by two means. First, it compares the utility to a proxy group of companies with similar risk profiles, i.e., utilities within one “notch” of the subject utility’s credit rating. Second, FERC eliminates utilities from the proxy group based on specific circumstances may be unique, such as involvement in a merger or unusually high or low ROEs found under the four methodologies.

Additionally, FERC will use a “composite zone of reasonableness” based on the DCF, CAPM, and Expected Earnings to create a limit to a utility’s total ROE (base ROE plus incentives). Using this composite zone, FERC will dismiss complaints against ROEs that are within that zone, which are seen as presumptively just and reasonable ROEs, unless that presumption is adequately rebutted.

III. Industry Impact: New England and Beyond

The new calculation for ROEs is considered favorable for public utilities. Under the new calculation, there will be less need to account for anomalous market conditions because four distinct methodologies are used. The calculation is expected to identify a more accurate and healthy ROE for utility investors infrastructure investment.

The Order concludes that the new calculus will work to produce more precise ROEs from inception, allowing for less litigation and fewer complaints. During the Commission Meeting on October 18, 2018, Commissioner LaFleur commented positively about the new methodology, noting that it “could help mitigate pancake complaints (i.e., complaints filed while prior cases are still unresolved)” that have created uncertainty in the industry and “add clarity . . . [to] better inform potential litigants” about existing ROEs, as well as “mitigate some of the concerns . . . on the thinness of the survey that underlies the IBES (institutional brokers’ estimate system) growth rates . . . .”

Currently, the new method only applies to the litigation over the ROE for the New England transmission owners. However, given FERC’s desire for uniformity, the future policy could eventually be applied to all rate cases for electric utilities and gas pipelines subject to FERC’s jurisdiction.

The Blockchain Technology Revolution: Implications for the Energy Sector

Please Join K&L Gates and use our Speaker Discount Code!

Join K&L Gates’ Buck B. Endemann and Benjamin L. Tejblum, along with an expert panel in New Orleans, LA for a two-day conference that will discuss the business use cases of blockchain technology within the energy industry, cutting through the hype to focus on realistic applications of blockchain that many companies are already integrating.  Diverse content experts will present actual data, case studies and pilot projects involving blockchain to showcase what this technology can actually do for energy companies, while evaluating the longer-term implications for business and blockchain’s relationship to the evolving electric grid and other emerging technologies. This program will maintain an objective perspective of blockchain, addressing concerns about the technology, and evaluating if it is actually appropriate for every application it is being looked at for.

Click here to learn more about the event and to register.

K&L Gates is pleased to offer a registration discount to colleagues and friends of the firm. Simply enter discount code BLOCK18SPK when registering.

Is Guidance on ITC-Qualified Storage Coming?

By: Elizabeth C. Crouse

State level energy storage incentives have been proliferating in recent months, but it is still not clear exactly when the federal investment tax credit (“ITC”) is available in respect of storage assets. While certain aspects are well known, the industry has been waiting for several years for additional guidance from Treasury on this matter. On September 20, Senators Tim Scott (R-SC) and Michael Bennet (D-Co) sent a letter to Treasury Secretary Mnuchin nudging him to provide that guidance, particularly in regard to whether storage assets installed at operating ITC-eligible facilities qualify for the ITC.

Many readers will recall that earlier this year the Internal Revenue Service released a Private Letter Ruling concluding that the Code Section 25D credit–which bears striking similarities to the ITC–is available in respect of a battery installed after residential solar panels became operational. In our blog post and Energy Storage Handbook section describing that ruling, we noted that similar logic supports an argument that storage assets installed at an operating ITC-eligible facility should also qualify for the ITC. There are also arguments that the ITC should be available in respect of storage assets installed at a facility that produces power that qualifies for the production tax credit, at least if that facility would also qualify for the ITC.

Although storage has caught on or is taking off in many locations, a green light from Treasury regarding ITC qualification could help the industry and lawmakers accomplish many important and increasingly urgent goals, from flattening the duck curve(s) to increasing reliability in rural areas. We look forward to additional action by Treasury on this matter and hope to share it in the new version of our Energy Storage Handbook, which will be released soon.

Join K&L Gates at DNV GL Energy’s Energy Storage Lenders Day

Discover new approaches to energy storage investment decisions

DNV GL Energy’s
ENERGY STORAGE LENDERS DAY
October 17, 2018
10:00 am – 4:30 pm
Law Offices of K&L Gates
599 Lexington Avenue (at 53rd St.)
New York, NY 10022-6030

Attend DNV GL’s Energy Storage Lenders Day – and see where energy storage technologies, brands, and manufacturers stand on the spectrum of product discover qualification. At the event, graciously hosted by K&L Gates, you’ll explore an overall approach to due diligence for energy storage—and key in on the issues that affect your storage investment decisions.

At DNV GL’s Energy Storage Lenders Day, you’ll learn more about:

  • Insurance
  • Product qualification programs
  • Field monitoring
  • Performance guarantees, capacity guarantees, and how they vary by battery type

Plus, you’ll be the first to see results of the 2018 Battery Performance Scorecard, DNV GL Energy’s authoritative and in-depth report on energy storage products and their qualification results.

Register today! Space is limited.

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