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.






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