Legal Options for Renewable Energy

The start to any successful local energy project begins with joint ownership and understanding your legal options.

| February 2018

  • Knowing your legal options when it comes to renewable energy is key to understanding ownership.
    Photo by Getty Images
  • Power from the People by Greg Pahl book cover.
    Photo by Chelsea Green Publishing

Power from the People (Chelsea Green Publishing, 2012) explores how homeowners, co-ops, nonprofit institutions, governments, and businesses are putting power in the hands of local communities through distributed energy programs and energy-efficiency measures. Over 90 percent of US power generation comes from large, centralized, highly polluting, nonrenewable sources of energy. It is delivered through long, brittle transmission lines, and then is squandered through inefficiency and waste. But it doesn't have to be that way. Communities can indeed produce their own local, renewable energy. 

Because community-supported energy is a relatively new idea in the United States, the legal and other structures to support it are still, to some extent, works in progress. Nevertheless, there are a number of traditional (and a few not-so-traditional) ways of approaching ownership and development models for local energy projects. For most community renewable energy projects, some form of joint ownership makes sense.

Existing Local Public Entity

In some cases, depending on local circumstances, the simplest approach might be to go with an existing local public entity rather than take the time and expense to create a new one. Towns and school districts in most locations can develop renewable energy initiatives, and this is the ownership strategy many communities follow with their first project(s). For wind, solar PV, hydro, and other projects that generate electricity, any excess power may be sold to the grid through net metering. Financing for municipal projects might be accomplished with CREBs. Many entities eligible for CREBs might also qualify for REPI, although it’s not clear whether both programs could be used for the same project.

A relatively new legal option available in seven states, Community Choice Aggregation (CCA), provides an alternative and in some ways simpler route for utilizing public entities to exert more control over the power the community consumes—but without actually owning the plant and transmission infrastructure. Through CCA, a group of local governments can aggregate the demand of their respective communities (the residential and business ratepayers, as well as government institutions) and then select and purchase energy at superior terms on their behalf. “The reasons to pursue CCA vary by community,” says Shawn Marshall of the Marin Energy Authority, California’s first CCA program, “but chief among them are lower electricity costs, cleaner energy supply, greenhouse gas reduction benefits, and the development of local generation assets.”



Partnerships

A general or limited partnership is a relatively simple and flexible structure in which the profits and liabilities from a project are split among the partners. It’s easy to set up, and almost any requirements (within reason) can be included. It has the disadvantage of holding the partners personally liable for debts incurred by the partnership, although insurance can be bought to limit the actual liability. The large upfront costs for a project are generally borne by the partners, which limits participation to people with considerable financial resources.

LLCs

A limited liability company (LLC) is a corporate entity that can be the owner of a renewable energy project. An LLC offers many benefits: flexibility in ownership, management, and decision-making power; enhanced liability protection; and profit distributions. Individual investors normally buy shares in the LLC. Gains and losses are allocated to the shareholders for tax purposes. One of the main advantages of LLCs is that they offer legal protection to the owner/ investors in the event of financial problems or litigation. A financing entity (if used) can receive tax benefits from funding the project (in this case, for tax purposes the LLC would be described as a “pass through entity” that offers the tax advantages to the financing entity). There are no federal corporate taxes, but profit distribution passes through to the investors and is treated and taxed at the rate relevant to those investors. Federal production tax credits may be available. A key disadvantage is that the LLC by itself (without a financing entity) probably won’t have sufficient “tax appetite” to take advantage of PTCs.

Under certain circumstances a low-profit limited liability corporation (L3C) might be a useful organizational structure. The L3C differs from an LLC in that its main purpose is to achieve a social benefit rather than a profit—something that might well describe a community renewable energy project (L3Cs are allowed to make a profit, it’s just not the main stated goal). An L3C must “significantly further the accomplishment of one or more charitable or educational purposes,” and would not have been formed except to accomplish those purposes. L3Cs offer all the benefits of an LLC plus some potential advantages in possibly attracting financing from private foundations for program-related investments (investments that help the foundation achieve one or more of its main goals). This is a relatively new structure, not yet available in all states, but it might be worth looking at.

Co-ops

A cooperative is a business owned by its customers or workers or both. In this model, local investors pool their resources and use their capital to leverage debt financing. Cooperatives today follow the model provided by the Rochdale Principles first developed in Rochdale, England in 1844. These seven principles are voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training, and information; cooperation among cooperatives; and concern for community.

Co-ops offer a number of advantages. There are three core principles of co-ops that make them potentially useful for community energy initiatives: user benefit, user control, and user ownership. The details vary a bit depending on the type of business a co-op is engaged in, but an obvious user benefit for an energy co-op could be lower or more stable electricity prices or fuel costs. Control remains with the members, who elect a board of directors from the membership. User ownership in a co-op is usually accomplished by purchasing one share of voting stock and doing business with the co-op. In the case of a co-op formed for a renewable energy project, the members come together specifically to initiate the project and buy or use the energy or fuel produced by the project. The disadvantages are that cooperatives normally cannot take advantage of PTCs or CREBs due to lack of “tax appetite.” Raising large amounts of capital or securing member loans can be problematic with many co-ops since members may not be able to raise sufficient capital themselves for a large start-up venture.

In today’s highly competitive, corporate-dominated society, a small, local co-op is a lot of work and not an easy model to follow, but it involves the kind of collaborative thinking that will be required in the new, localized, more self-sufficient economy of the twenty-first century.

A multilateral licensing agreement is another new ownership model that might be useful for some community-owned renewable energy (CORE) group net-metering projects using solar PV.

A multilateral licensing agreement offers a lot of flexibility: It can define the relationships among the landowner, the members, and the facility’s management and operation. It can be structured to benefit single or multiple tax-advantaged investors who purchase the solar PV system and receive the investment credit with limited paperwork and headache from the IRS. A simple contract defines how members want their relationship to be governed, and covers who can become members, who administers the group, who the landowner for the project site will be, changes in membership, and so on.

A multilateral licensing agreement was suggested in a 2010 study, Vermont Group Net Metering Information & Guidelines, produced by the Vermont Group Net Metering Team for the Clean Energy Development Fund and Powersmith Farm (a 250-kilowatt solar photovoltaic model was used for the study). It’s easier to set up than a cooperative or LLC and involves a lot less paperwork. Because this model is so new for community energy projects, it is essentially untested; still, it’s worth consideration due to its simple structure and relative low cost.

Public Utility District (PUD)

Also known as a People’s Utility District, a PUD is a community-owned, locally regulated utility created by a vote of local citizens that provides utilities such as water, electricity, sewer service, and (more recently) telecommunications to people who live within the district. PUDs are created by cities, counties, or other local governmental entities. Most of these districts were formed in the 1930s or ’40s and are nonprofits. Many of the PUDs in the Pacific Northwest were created specifically to take over the territories then served by investor-owned utilities, and were part of a larger movement, supported by the Grange and others, that encouraged public ownership of electric utilities. There are twenty-eight PUDs in Washington State; twenty-three provide electricity, nineteen provide water and wastewater services, and thirteen offer wholesale broadband telecommunications. There are eight PUDs operating in Oregon, and dozens of municipal utility districts, electric cooperatives, and other public utilities in surrounding states.




To read more from "Power from the People" visit: 

Financial Strategies for Renewable Energy


This excerpt is adapted from Greg Pahl’s book Power from the People: How to Organize, Finance, and Launch Local Energy Projects (Chelsea Green, 2012) and is printed with permission from the publisher.






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