New DOI Rule Fosters Developing the Continental Shelf for Renewable Energy

DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 1 of 6 Search NEWS & INSIGHTS Publications 7 MAY 2009 New DOI Rule Fosters Developing the Continental Shelf For Renewable Energy ENERGY ALERT Jeremy Adam Kruger In honor of Earth Day, the Department of the Interior released a final rule regarding the development of the outer continental shelf (OCS) for renewable energy projects. The OCS consists of the submerged lands, subsoil and seabed belonging to the United States and lying seaward and outside the states' jurisdiction. The Rule covers activities in addition to development of OCS for renewable energy projects, but this discussion will focus on its development for renewable energy projects. Under the Rule developers will of course have to deal with the substantial processes and bureaucracy of the federal government. However, they will also enjoy many advantages: developing projects with larger equipment and larger arrays, dealing with only one landowner (even though several federal agencies will be involved) and, many times, producing energy on peak demand relatively near significant loads. US Already World Leader in Onshore Wind Power; Rule Will Prompt Offshore Growth The Energy Policy Act of 2005 (the Energy Policy Act) amended the Outer Continental Shelf Lands Act (the OCSLA) to permit the secretary of the DOI to grant leases, easements and rights-of-way on the OCS if those grants: “(C) produce or support production, transportation, or transmission of energy from sources other than oil and gas; or (D) use … facilities currently or previously used for activities authorized under this subchapter …” (43 USC § 1337(p)(1)). This is the federal law that will permit the US to develop the majority of its offshore wind capacity. Working from that enabling legislation, the Minerals Management Service (MMS), the subdivision of DOI http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009 DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 2 of 6 that has historically dealt with offshore oil and gas leasing, has promulgated the Rule to govern the OCS’s development for renewable energy. The Rule may be found in 30 CFR Part 285. While the US leads the world in onshore wind power installation, it has failed so far to tap into its offshore wind potential at the same level. And while the US’s onshore capacity is significant, so too is its offshore capacity: the Department of Energy estimates that US offshore capacity could total up to 900 gigawatts. To put that number in perspective, it is nearly equal to the total of current US installed electrical capacity from all sources. Such European countries as Denmark, Scotland, Sweden, the Netherlands and Ireland now lead the way internationally in offshore wind power development. Europe has already developed 600 megawatts of offshore wind power capacity. As in the nascent stages of onshore wind power development, the United States finds itself following as opposed to leading as it enters the market. The Rule’s Adaptive Approach Acknowledging the fledgling nature of the US offshore renewable energy development sector, MMS claims to take a pragmatic, flexible approach to the Rule – its term is “adaptive.” MMS focused the Rule on near-term projects to be completed with existing technology, but hopes that the Rule will grow to meet the needs and demands (technological and otherwise) of the offshore renewable energy industry. To those ends, MMS will publish an “adaptive” guidance document that will mature (i.e., be updated) as MMS gains experience and has transactions under its belt and as the state of the art advances. Types of Interests to Be Granted The Rule contemplates three different types of interests. All are available for alternative energy developers seeking offshore development opportunities and all may either be awarded through a competitive or a non-competitive process, depending on the level of interest in a particular site. Leases. Two different kinds of leases will be offered by MMS on the OCS. The first, a so-called commercial lease, is a long-term grant (up to 30 years) that includes the full complement of rights a project developer needs to construct, install and operate a utility-scale alternative energy project, including: Rights, to apply for and receive authorizations for assessing, testing and producing utility-scale energy; Easements to connect the project to necessary infrastructure (such as transmission lines, pipelines or communication lines); and Appurtenances on the OCS to permit the developer the full use and enjoyment of its lease. The second, a so-called limited lease, is a short-term grant (up to 5 years) that permits access and operational activities that do not result in commercial energy production. A limited lease may only be used (a) for site assessment (for instance, installing a meteorological tower to test a site’s wind characteristics), (b) for testing prototype renewable energy technologies, and (c) with express permission, sales of a limited amount of energy (for instance, from a prototype being evaluating through the limited lease). A limited lease may be renewed, but it cannot be converted to a commercial lease without proceeding http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009 DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 3 of 6 through the formal commercial lease process, discussed below. Rights-of-Way (ROW); Rights of Use and Easement (RUE). A ROW or RUE may be granted to enable or support a project that is operating through some other grant of authority. In other words, if a project is primarily located on a state-issued lease site but needs access to a submerged transmission line, a ROW or RUE can allow the developer to cross the OCS to connect to that transmission line. A ROW is a stand-alone easement, as opposed to a so-called project easement that is appurtenant to a commercial lease. Alternative Use Rights of Use and Easement (AURUE). An AURUE will be issued to repurpose an existing OCS facility for energy- or marine-related use. Note that “existing” can mean a facility that becomes operational at any time (that is, before or after the enactment of the Rule). The existing facility and the repurposed facility must both be authorized under the OCSLA.[1] Obtaining Rights The first step in obtaining rights under the Rule will be to identify an OCS site and determine if a competitive interest exists with respect to that site. MMS anticipates that most of the OCS sites will be initially identified through unsolicited applications, but MMS can also identify sites on its own initiative. If MMS determines that a competitive interest exists (i.e., if MMS receives indications of interest during its evaluation of an OCS site’s competitive potential), then MMS will hold a lease auction to determine who the rights will go to. If there is a determination of no competitive interest, then the rights will be transferred according to the OCSLA.[2] One important issue for the putative grantees to keep in mind is that the Rule does not preempt any other federal law – it only enables the development of OCS lands for development of renewable energy. All activities permitted through this granting process must comply with applicable federal law. Leasing Strategies. One of the most interesting issues presented by the competitive leasing requirement involves the developer who proves a site for a certain technology through a limited lease, but then loses control of that site in the competitive commercial leasing process – where the first person’s work (in large part) made the site valuable in the first place. The discussion of the Rule addresses several potential scenarios. First, the process of issuing a limited lease could include some determinative weight in the commercial leasing process (if a competitive lease is ultimately sought). This would have to be negotiated into the limited lease when it is executed and would also have to be incorporated into the various notices required during the limited lease offering process. The second strategy involves pursuing a limited lease and a commercial lease simultaneously. MMS approximates the lead time for granting the limited lease at six months and the lead time for granting a commercial lease at one to two years (it is unclear if those time periods account for delays resulting from a competitive versus a non-competitive process). Again, the limited lease lessee could receive significant comfort from some kind of assurance that in the competitive process for the commercial lease its investment would be considered. A third alternative involves entering into a commercial lease for a given site and then relinquishing the site if it proves unfruitful for the intended development, or if the technology does not perform as http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009 DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 4 of 6 anticipated. The Rule permits the lessee to relinquish the lease on application to MMS; once the relinquishment is effective, then the lessee is no longer responsible for payments under the lease. Both of the first two alternatives (both likely good fits for developmental technologies) have the benefit of getting the lessee out to the project site sooner on a limited lease, rather than later under a commercial lease. The third alternative (likely a good fit for proven technologies) potentially involves additional lead time, but it also assures the lessee of its right to remain on the site for an extended period of time with all of the necessary appurtenances. Development Process Plan Submittals. In connection with the granting of a lease, ROW or RUE, the grantee must submit various plans to MMS, which will serve as the project’s road map.[3] For commercial leases, the grantee must first submit a site assessment plan (SAP), which will comprehensively address the grantee’s activities in the initial or assessment phase of a commercial lease, presumably when the grantee is confirming the site’s utility for alternative energy development. For the operational portion of the commercial lease, the grantee will have to submit a construction and operations plan (COP) that will detail how the grantee plans to fully use the site for utility-scale alternative energy development. Limited lease grantees as well as grantees of ROWs and RUEs must submit a general activities plan (GAP) for their projects, which covers much of the same subject matter as a SAP. MMS envisions each of the plans as a “cradle-to-grave” road map-type plan for the activities that each addresses. Each plan must withstand a full NEPA analysis and must also comply with all other applicable federal laws. Federal Remuneration. The Rule sets various methods by which the federal government may be remunerated for leasing a specific OCS site, which can include bonuses, delay rentals, operating fees and royalties. The potential lessee’s choices among these options will be most important in making its bid stand out in a competitive lease scenario. A lessee will also be liable to pay a flat fee for the use of easements on the OCS that support its development. Revenue Sharing. The Energy Policy Act requires the federal government to share the revenues generated from this program with certain neighboring states. The Rule interprets the statutory language as follows: a project is “qualified” for revenue sharing if at least a portion of the project is located within three nautical miles seaward of any state’s submerged lands; the revenue will be shared among the states whose closest coastal point “is located within 15 miles of the geographic center of the project.”[4] MMS will determine where the project’s geographic center is at the time the lease or other grant is awarded. The revenue from a project, as well as adjustments to a project’s configuration (if necessary), will be determined on the last day of the applicable fiscal year and will be awarded based on the inverse distance of the applicable states’ coastlines to the project’s geographic center. Operations. In the operational portion of a lease, MMS will require the grantee to maintain levels of environmental management, safety, operational assessments and decommissioning as outlined in its plans as well as continue to address and maintain a range of additional operational issues. The portions of the Rule dealing with operations are intended to maximize safety and minimize the impact to the marine environment, and these regulations too take an “adaptive approach.” http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009 DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 5 of 6 Other Issues There are a number of additional issues that the Rule addresses, two of which are highlighted below. Demonstrated Capability. As part of issuing a lease or other grant, whether through a competitive or non-competitive process, each applicant must demonstrate its financial and technical capabilities to construct, operate, maintain and terminate and/or decommission the project for which it seeks the lease or other grant. The financial assurances can take the form of bonds, insurance and investment-grade securities – cash or cash-equivalent items that will tend to mitigate the federal government’s risk in leasing OCS sites. MMS/FERC MOU. The Federal Energy Regulator Commission (FERC) and MMS were locked in a jurisdictional dispute for some time regarding hydrokinetic[5] projects on the OCS. On April 9, 2009, MMS and FERC issued a joint MOU outlining the following jurisdictional limitations, which are acknowledged in the Rule: (a) MMS has exclusive jurisdiction on the OCS regarding the production, transmission and transportation of non-hydrokinetic alternative energy projects, (b) MMS has the exclusive jurisdiction to issues leases and other grants for hydrokinetic projects on the OCS, and (c) FERC has exclusive jurisdiction over issuing licenses and exemptions for hydrokinetic projects on the OCS. The MOU makes clear (and the rule echoes) that FERC is exclusively responsible for permitting hydrokinetic projects on the OCS and that MMS is the sole leasing and granting authority for all renewable energy projects on the OCS. The Outlook Offshore renewable energy development could be the next great energy frontier for the US. While leasing the OCS for renewable energy projects is new to MMS, its experience leasing the OCS for development of oil, gas and other materials hopefully means that MMS is well prepared for what may be an onslaught of interest and development. [1] Because under the Rule the AURUE is not a focus specifically for renewable energy development, the remainder of this discussion will not address it. [2] The form of the transaction is patterned on the process for issuing noncompetitive negotiated agreements for sand and gravel taken from the OCS. [3] Timelines for submitting the various plans depend on whether MMS grants the interest competitively or non-competitively. [4] Though probably not very common, a state could theoretically qualify a project by meeting the first criterion, but fail to receive any revenue because it can’t satisfy the second criterion. [5] Hydrokinetic technologies include devices that harness the energy in moving water such as waves, http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009 DLA Piper | Publications | New DOI Rule Fosters Developing the Continental Shelf For ... Page 6 of 6 oscillating water columns, and tides. http://www.dlapiper.com/new-doi-rule-fosters-developing-continental-shelf-for-renewable-e... 5/8/2009