Siting Solar Facilities On Landfills: The EPA Releases Encouraging Guidance

Thursday, March 21, 2013 - 10:18

The Editor interviews Lanny S. Kurzweil, Partner, and Marshall B. McLean, Special Counsel, McCarter & English, LLP.

Editor: Tell us about your professional backgrounds.

McLean: I am special counsel in McCarter & English’s Environmental & Energy and Corporate practice groups. I recently joined McCarter after spending six years at a large international firm. My practice is transaction based, with an emphasis in M&A, project development, project finance and general corporate law. I especially enjoy renewable energy development, which entails representing developers, lenders, and investors of solar, wind and other renewable energy projects, as well as those entering into long-term renewable power purchase agreements. These include energy suppliers, individuals or companies placing solar panels on their buildings. I am the co-chair and founder of the New Jersey State Bar Association’s Special Committee on Renewable Energy, Clean Technology and Climate Change. As a corporate lawyer, I was drawn to renewable energy because, despite the perception of a narrowly focused niche, the transactions involve issues related to real estate, public policy, administrative law, land use, environmental law, project finance and tax.

Kurzweil: I joined McCarter almost 35 years ago, in 1978, straight out of law school. My practice is litigation oriented, but with a very substantial measure of regulatory and transactional counseling on environmental issues, including projects which would place solar on landfills and brownfield sites. I am and have been actively involved in environmental cost recovery cases, contribution actions, the defense and resolution of natural resource damage claims, and the litigation and resolution of complex contract claims involving disputes over the liability for a contaminated site. I also maintain a general commercial litigation practice. When I was in law school, few of today’s environmental laws – let alone environmental law classes – existed, so my practice and experience has largely tracked the enactment and development of many environmental laws and regulations through the years. I was privileged to be the firm’s Environmental & Energy group practice leader for many years.

Editor: Why should business be taking notice of the economic and social benefits of on-site solar?

McLean:  Because there are both tangible economic benefits as well as intangible benefits to both the company and the greater good. Economically, companies may: (1) enjoy a 30 percent federal tax credit for any costs incurred in connection with a solar investment; (2) lower monthly electricity costs; (3) recover investments in certain solar property through depreciation deductions; (4) depending on the applicable state, receive valuable credits for each megawatt (MW) hour of renewable energy that their systems produce; and (5) again, depending on the state, receive the benefits of “net-metering,” whereby the company’s utility meter will be “trued up” at the end of the year based upon the unused, excess power generated by the solar facility.

In addition, for those companies not interested in dealing with the burdens of owning and financing solar on their own, the incentives allow developers to build, operate and maintain the project free of charge to the site host, and to provide long-term fixed-fee energy purchase agreements to property owners.

Kurzweil: I like to characterize alternative energy, especially solar, as “smart” or “next generation business,” with benefits to many different stakeholders. Marshall correctly notes the economic incentives, but we cannot overlook the benefits to the host community. For example, energy costs are traditionally a significant business expense, along with personnel, occupancy and the like. The savings created by reducing energy costs can be reinvested to expand an existing operation or facility and to increase local hiring. In turn, local spending increases; local taxes increase; and the community and state benefit. From the perspective of the boardroom, solar is certainly “smart” business, especially for publicly held businesses – shareholders are outspoken in their desire to invest in companies that take their environmental stewardship seriously.

McLean: To expand upon Lanny’s comments, most Fortune 500 companies have sustainability platforms written into their annual reports, and many are already using solar. For example, Walmart is the largest private purchaser of solar power in the United States.

Editor: What is the current status of solar in the U.S.?

McLean: It is an emerging, relatively new market, but the President has made it clear that he is very much in favor of renewable energy development. States such as New Jersey have been actively enacting legislation that outlines the economics of solar for developers and owners. Simultaneously, the price of photovoltaic (PV) panels has dropped dramatically, and PV and other technologies (including battery storage technology) have become more efficient – all of which means that solar is very much here to stay.

Kurzweil: President Obama’s State of the Union address and nomination of Gina McCarthy to lead the EPA certainly signals that the administration will be promoting solar and other alternative energies.

Editor: What actions is the EPA taking generally in order to encourage renewable energy development on contaminated land and landfills?

McLean: In 2008, the EPA launched the RE-Powering America’s Lands Initiative, which, promulgated in cooperation with the U.S. Department of Energy, facilitates the development of contaminated land for the purposes of renewable energy – especially for the siting of PV panels.

Here’s the logic behind the EPA’s idea: To build a commercial grade solar plant (typically plants over five but more likely 10 to 25 MW) you need sufficient acreage, and in New Jersey, for example, that acreage can only be found on either (1) green lands or farmlands – which are in relatively short supply – or (2) contaminated sites such as landfills – which can present all kinds of unresolved liability issues for developers. Because of the risks, the trend has been to develop solar sites on open green spaces. But renewable energy is supposed to help clean the environment and make the world a greener place, and it frustrates the mission to build an alternative energy facility on pristine open space. The EPA’s actions have helped to ease these concerns, which make sense. Obviously, these contaminated sites would benefit from being put to productive re-use. Many already enjoy the onsite infrastructure (roads, transmission lines) and nearby business off takers (end users) required to build a solar facility.

Kurzweil: And let’s not overlook the influence of the federal government’s initiatives upon our individual states. When the EPA develops and announces a protocol to encourage alternative energy development on contaminated sites, states respond. Contaminated municipal landfills and brownfields are everywhere. Cleanups alone are only part of the equation – if a cleanup cannot be completed to safe, unrestricted standards, permitting unrestricted redevelopment, to what use can these sites be put?  Alternative energy development is one way to bring these sites back to a productive re-use, provided the developer is not exposed to liability needlessly for the underlying site conditions.

Editor: I understand that in December 2012, EPA published further guidance for tenants associated with such developments.

McLean: The 2012 guidance clarified a number of key issues, many of which center around the possibility of a developer being exposed to liability for certain cleanup obligations, especially under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), also known as Superfund.

CERCLA liability is broad, and potentially reaches a developer who has not taken the necessary measures to protect itself. However, CERCLA also offers liability protection and a carve-out for those that are bona fide prospective purchasers, or BFPPs, as defined by CERCLA. Keep in mind that most of these deals are structured such that there is a landowner host who leases its land to a tenant developer who ultimately will build the solar facility. The tenant could possibly be slapped with liability under the Superfund law, creating a tremendous risk and deterrent for developing on contaminated lands. The EPA’s 2009 guidance stopped short in providing liability comfort to those tenants whose landlords were not themselves designated as BFPPs. The new guidance does exactly that.

Kurzweil: I should point out that Superfund is not and was likely never intended to be fair. It created joint and several liability, without regard to fault, to ensure that our most contaminated sites around the country would be cleaned up. Liability is based on your relationship to a site containing hazardous substances – whether as an owner or an operator of the facility at the time of the discharge or release of the hazardous substance, or as a current owner or operator if the facility remains contaminated. Liability also attaches if you generated the waste, hauled it to the site or arranged for its transportation to the site.

The potential liability regime has a very wide net, and the risk that a developer may become saddled with the cost of cleanup could easily affect the financing of a project. Uncertainties or risks of this nature can easily kill a deal. The EPA’s goal was to create a vehicle that could provide some assurance to the developer that if specific steps are followed, the developer will avoid Superfund liability. Investors and developers commit tens of millions of dollars to these projects, and easily between $20 and $70 million. The more you can get issues nailed down with the EPA, reduce risk and obtain greater certainty, the more likely the transaction can or will proceed.

Editor: How many of these projects are currently underway?

McLean: About 60-odd projects, totaling over 185 MW. Meanwhile, the EPA has identified several hundred potentially viable sites that would be perfectly suited for solar. Further evidence of EPA’s support of the program is the mapping tool on their website, which not only identifies potential sites but also helps to assess their actual potential solar output and availability – meaning, how sunny they are.

Editor: What are some key considerations if I’m considering developing solar on a brownfield site?

McLean: From the EPA context, the most important is meeting the BFPP standard, for which there are eight different criteria, each of them critical. However, whether you’re considering developing or lending to a solar site, satisfying the "all appropriate inquiry" (AAI) test will go a long way in determining how risky the development is from a CERCLA standpoint. It is important to get your legal team and technical team involved in the process as early as possible to assess where the current landowner sits within the BFPP standard. This will dictate what actions need to be taken in the future in order to satisfy the various carve-outs the EPA has provided through its most recent guidance.

Kurzweil: You also should conduct a corporate/business analysis as well as a technical analysis. First, what type of entity will become the tenant-developer? Will there be a limited liability corporation or some other type of vehicle by which I can restrict or confine my liability to the site and not expose other assets of the company or a holding company? How do I limit my exposure as an innocent developer consistent with EPA or state guidance? In that regard, the EPA has at least outlined the steps that need to be taken at the federal level. Both Marshall and I would encourage developers to meet with their regional EPA officials to try to negotiate receipt of a “comfort/status” letter in order to protect their investment. It is somewhat disappointing that the 2012 guidance states that the EPA will only issue these letters in “limited instances,” so acquiring such a letter may prove challenging.

As for the technical analysis, on February 26 of this year, the EPA published “Best Practices for Siting Solar Photovoltaics on Municipal Solid Waste Landfills,” in which the EPA provides very detailed technical guidance on siting and building on a contaminated site in order to minimize risk.

Please email the interviewees at lkurzweil@mccarter.com or mmclean@mccarter.com with questions about this interview.