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September 21, 2018

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Loose Lips Sink Ships: Public Statements And The Contractual Rights To Renewable Energy Credits In Solar Power Purchase Agreements

This post is one of a series of “practice tip” articles about renewable energy power purchase agreements.

There is a well-known Chinese proverb: “All problems derive from your big mouth.” These are words of wisdom for parties who are negotiating renewable energy PPAs.

In due diligence, we regularly come across on-site solar power purchase agreements (PPAs) that state that the seller is reserving all environmental attributes and selling only the project’s electricity to the buyer. This type of reservation is common in states like Maryland and Massachusetts, where environmental attributes may have a fairly high market value and may be monetized by the seller to make the project more marketable by effectively reducing the delivered price of electricity.  However, despite this environmental attribute reservation, these PPAs too often go on to say, quite expressly, that the buyer has the right to announce that it is using “solar energy” or “renewable energy” produced by the project.  This seemingly innocuous provision, intended to enable the buyer to brag about its renewable energy purchase, can create problems in PPAs where the seller also reserves environmental attributes.

The right to claim the use of renewable energy goes with the environmental attributes, and a simple misrepresentation or overstatement about a party’s purchase or use of renewable energy could have important consequences. Under §5 of the Federal Trade Commission Act (15 U.S.C. Sec. 45), the Federal Trade Commission (FTC) has the jurisdiction to police deceptive trade practices.  The FTC considers the false characterization of a project as “renewable” following the sale of the project’s environmental attributes as “deceptive,” notwithstanding the project’s underlying renewable generation source.  Parties to a solar energy PPA should therefore think carefully about who is allowed to make claims about using renewable energy from the project.

Renewable Energy Follows the RECs

Renewable energy projects produce market-based, commoditized, intangible environmental attributes often called renewable energy credits or renewable energy certificates (RECs). Since renewable energy (aka “green power”) enters the power grid simultaneously with non-renewable energy (aka “brown power”), RECs are the means by which the market distinguishes between renewable- and non-renewable energy.  To claim that it is using renewable energy, the party making that claim must own the RECs, which are where the renewable characteristics of the energy repose.

As a general rule, only one party may make a claim to the purchase and use of renewable energy, which must not include any embellishment of the environmental attributes and must be adequately candid so as to avoid any claim of deception. To ensure this compliance, enter the FTC. The commission publishes Guides for the Use of Environmental Marketing Claims (i.e., the “Green Guides”) (16 C.F.R. Part 260), to advise buyers and sellers of renewable energy.1  These Green Guides provide the roadmap by which market participants can avoid what the FTC may construe as deceptive environmental claims: “If a marketer generates renewable electricity but sells renewable energy certificates for all of that electricity, it would be deceptive for the marketer to represent, directly or by implication, that it uses renewable energy.”2 The FTC’s guidance is consistent with the requirements for Green-e Energy certification, which may treat such misrepresentations as confusing or possibly as a “double claim” that could infringe on the REC holder’s property rights and make the RECs ineligible for Green-e Energy certification.3  The Environmental Protection Agency’s (“EPA”) Green Power Partnership provides similar instruction on the appropriate characterization of renewable use claims.4 In addition, both the FTC and the EPA stress that a blanket statement on the reduction of carbon emissions must be properly quantified on an accounting basis to merit such a claim.  In other words, before making a carbon reduction claim, not only must the speaker retain the contractual rights to the RECs, but must make fact-based statements about the renewable power being generated and cannot highlight GHG or similar reductions absent their prior, substantive accounting.

Practice Tips for Corporate Buyers and Sellers

According to the Business Renewables Center, two-thirds of Fortune 100 companies and close to half of Fortune 500 companies have defined renewable energy targets.5 To achieve these ambitious renewable energy procurement targets, these corporate players will continue to purchase significant amounts of renewable energy.  Many of these corporations are entering into long-term PPAs with on-site or offsite solar facilities, and most of these buyers are anxious to share the story of their successful renewable energy procurement.  But if the RECs are reserved to the Seller, the buyer cannot claim to be using renewable energy and must offer a more nuanced explanation of the transaction that complies with FTC and Green-e rules.  Experience suggests a few practical steps for managing this issue.

First, the corporate buyer should consider very early in the process what it wants to say about the transaction it is negotiating.  For example, a corporation may announce a goal of serving 100 percent of its load with renewable energy.  It may decide to buy the output of an on-site solar project and to issue a press release stating that this transaction counts toward its “renewable energy” procurement target.  But if the PPA allows the developer to retain and to market the facility’s RECs, or if the buyer immediately resells the RECs, that announcement may run afoul of the FTC and Green-e rules.  Occasionally, proposed renewable energy PPA deals go off the rails when a corporate buyer realizes that it cannot say what it wants to about the transaction.  It is thus important for both the buyer and the seller to consider and to resolve this question early in the transaction.

Second, the PPA should not include conflicting language that reserves the RECs to the seller yet expressly allows the buyer to publicize its use of renewable energy.  (During due diligence on solar project portfolios, we run into on-site solar PPAs with conflicting language like this more often than you might expect.)

Third, from the seller’s perspective, the PPA should clearly state that the buyer cannot make any public statements about its use of energy from the project that are inconsistent with the seller’s retention of the RECs.  The PPA may further provide that no party can issue a statement about the transaction without the other party’s approval, not to be unreasonably withheld.  Such a provision enables each party to understand what the other intends to say about the transaction and can help to avoid unpleasant surprises.  In some cases, the PPA may be fairly specific about what the buyer and the seller can and cannot say about the transaction.

Fourth, when performing due diligence on a portfolio of projects in which the seller’s reservation of RECs is key to portfolio economics, ask for and review the public statements that buyer and seller have made about the transaction to determine if any statements constitute a “double claim” on the RECs.  This step is particularly important where the PPA reserves the RECs to the seller but is silent about what the buyer can and cannot say about the transaction.

It is only appropriate then to conclude with additional sage advice from a Chinese proverb: “[S]he who treads softly goes far.”


Notes

[1] Federal Trade Commission, Guides for the Use of Environmental Marketing Claims (“Green Guides”): https://www.ftc.gov/policy/federal-register-notices/guides-use-environmental-marketing-claims-green-guides (October 11, 2012).

[2] Renewable Energy Claims, §260.15(d).

[3] Center for Resource Solutions, Green-e Energyhttps://www.green-e.org/programs/energy.

[4] Environmental Protection Agency – Green Power Partnership, Solar Power Use Claimshttps://www.epa.gov/greenpower/solar-power-use-claims.

[5] BRC: Business Renewables Center, https://rmi.org/our-work/electricity/brc-business-renewables-center/.

Copyright 2018 K & L Gates

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About this Author

William H. Holmes, KL Gates, Hydroelectric infrastructure projects lawyer, energy transactions attorney
Partner

William Holmes is a partner in the firm’s Portland office. He focuses his practice in the area of energy and infrastructure projects and transactions with an emphasis on wind energy, solar energy, hydroelectric power, geothermal, biomass, natural gas, carbon offsets, and energy storage. His experience extends into corporate transactions, water law, and real estate law. Bill also advises clients in negotiating major power purchase agreements, acquisition and sale of energy projects, EPC agreements, O&M agreements, fuel supply, and energy project development agreements...

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Kristen A. Berry Attorney KLGates
Associate

Kristen Berry is an associate in the firm’s Seattle office. She assists clients in the development and financing of wind, solar, hydroelectric, natural gas, energy storage, and other energy projects. Kristen’s practice emphasizes mergers and acquisitions, utility regulatory issues, power purchase agreements, project development and financing, and energy services.

Prior to joining K&L Gates, Ms. Berry was a summer associate at the Houston office of an international law firm and at ExxonMobil Corporation. Prior to law school, Ms. Berry studied Mandarin and worked as an energy consultant in Tianjin, China, as well as worked on Capitol Hill for former United States Senator Mary Landrieu (D - LA).

Education

  • J.D., Yale Law School, 2016, (Notes Editor, Yale Journal of Law and the Humanities)
  • M.B.A., Yale School of Management, 2016
  • B.A., Howard University, 2009, (Phi Beta Kappa; summa cum laude)
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