New BLM Final Rule Is Favorable to Renewable Energy

The U.S. Bureau of Land Management (BLM) recently released a prepublication copy of a final rule that will reduce annual rent and capacity fees for wind and solar energy rights-of-way (ROWs), allow noncompetitive leasing in Designated Leasing Areas (DLAs), modify BLM’s approach to prioritizing applications, and make other changes to the application process.

The Federal Land Policy and Management Act of 1976 directs BLM to collect fair market value for use of public lands. Under the current regulations, BLM does so by charging annual acreage rent and capacity fees for wind and solar ROWs based on rent and fee schedules that update every five years. Acreage rent is based on the physical size of a project, and capacity fees are based on nameplate capacity.

In January 2021, rent schedule updates caused annual charges to spike well beyond fair market value in many areas. In June 2022, BLM responded to renewable energy industry concerns by issuing interim rent guidance that significantly reduced acreage rent and slightly reduced capacity fees pending new regulations.

The final rule overhauls how BLM will calculate annual charges for wind and solar ROWs and replaces the 2022 rent reductions. One of the most significant changes in the new rule directs BLM to charge ROW grantees the greater of either acreage rent or capacity fees in a given year rather than both. This alone will help lower annual costs for projects on BLM-administered lands. The final rule also makes changes to how these charges are determined.

Acreage rent will be calculated based on the statewide average cash rent for pastureland in the five years preceding issuance of the ROW according to data published by the National Agricultural Statistics Service. These reference data represent fair market rental value far more accurately than the product of the convoluted formulas in BLM’s existing regulations.

The final rule also reduces the encumbrance factor for wind energy projects from 10 percent to 5 percent. Rates for wind and solar projects under the methodology are projected to be considerably lower than under the current framework in most areas. The acreage rent rate will be established at the time of ROW issuance and will only increase by 3 percent each year for the life of the ROW, lending much-needed certainty to financial forecasts.

Capacity fees will no longer be charged based on nameplate capacity. Instead, they will be calculated based on actual electricity production in a given year and either the actual price-per-MWh in the project’s power purchase agreement or the average wholesale price of electricity in the 11 western states at the time of ROW issuance. Capacity fees will be subject to a blanket 80 percent reduction for ROWs issued before 2036.

The final rule provides additional 20 percent reductions for projects with American-made components and projects with organized labor agreements that would be applied on top of the blanket reduction. For example, the initial capacity fee charge for a ROW issued before 2036 would be automatically reduced by 80 percent, then reduced again by up to 20 percent for domestic materials, and again by 20 percent for a labor agreement, for a maximum total reduction of 87.2 percent relative to the baseline rate.

Even with these reductions, we expect capacity fees to be greater than acreage rents for most operating projects and therefore be the basis of annual charges. Like acreage rent, the capacity fee rate will be established at the time of ROW issuance and last for the life of the ROW, with the only variables being the 3 percent annual adjustment factor and the actual electricity generated by the project in a given year based on certified annual statements from the owner.

The final rule’s rent and fee methodology will apply to all new wind and solar ROWs, and to existing ROWs if the grantee opts in within two years.

The final rule is a major step in the right direction for renewable energy developers on federal lands. However, in some instances the capacity fee rates still may result in charges that exceed the fair market value of the public lands underlying a project. Furthermore, the new rent and fee structure does not apply to standalone linear ROWs for ancillary renewable energy facilities such as gen-ties or battery energy storage systems, which will continue to be charged under the old system. Owners and operators of renewable energy projects on BLM lands therefore should consider obtaining site-specific appraisals to determine whether projected charges under BLM’s new rent rule are likely to reflect fair market value.

Competitive leasing

The existing regulations provide that BLM may only offer wind and solar leases within DLAs on a competitive basis. BLM has found that a lack of competitive interest has hindered renewable energy authorizations in these areas.

The final rule gives BLM the discretion to issue noncompetitive renewable energy leases within DLAs, offering more flexibility and theoretically opening more lands in those areas for development. BLM also continues to retain the discretion to offer grants competitively outside of DLAs unless it has already accepted a complete application, received a Plan of Development, and entered into a cost recovery agreement for a given site.

The successful bidder in a competitive process becomes either the preferred applicant or the presumptive lease holder. A preferred applicant has an exclusive right to submit an application without competition, but approval is not guaranteed. A presumptive lease holder skips the initial application review and is awarded a lease upon submittal of an approved Plan of Development. BLM may only select presumptive lease holders within DLAs.

Application prioritization

Under the existing regulations, BLM assigns renewable energy ROW applications a high, medium, or low priority processing designation based on a set of enumerated factors. A low priority application often serves as an effective denial of an application. We have seen BLM apply the regulatory criteria with broad latitude, and the results can sometimes be inconsistent across, or even within, local offices.

The final rule removes the high-, medium-, and low-priority distinction altogether and replaces the previous prioritization factors with six general considerations for BLM to evaluate “holistically” when determining which applications to process first. The rule also provides that state and local BLM offices may establish additional prioritization criteria through policy guidance. We expect these changes make BLM’s prioritization approach even more subjective and grant local offices greater discretion when organizing the application queue.

Other notable aspects of the final rule

The final rule makes some other changes to how BLM processes wind and solar energy applications. For example, the final rule will allow BLM to deny an application after 90 days if reasonable costs have been requested of the applicant but not received. If funding runs out for an application, BLM will stop processing it until funds become available or the applicant elects to pay full actual costs. Cost recovery account funds may be used to hire additional staff or contractors to aid in application processing.

The final rule also includes a new requirement that ROW grantees maintain at least 75% of energy generation capacity for the authorized development. Failure to meet this milestone for two consecutive years may result in ROW suspension or termination after a reasonable opportunity for the operator to justify or cure the default.

Finally, the final rule extends the maximum term of renewable energy ROWs from 30 years to 50 years, which better reflects advances in wind and solar technology. ROWs for storage and major transmission facilities will also have a maximum term of 50 years.

The final rule, while not perfect, is generally favorable to renewable energy ROW grantees because it could significantly lower annual costs of operating projects on BLM-managed federal lands. Developers should calculate acreage rents and capacity fees for existing and future projects under the new methodology to determine how it will impact the projects’ financials and whether to opt in. The final rule may also give rise to new opportunities for individual applications within DLAs. However, the application prioritization process could become even less transparent than under the current framework, and applicants will be subject to new diligence requirements.

Finally, it is important to consider the final rule in the context of other ongoing BLM initiatives, such as updates to the Western Solar Plan and the Public Lands Rule, both of which are expected this year and are likely to substantially restrict rather than expand renewable energy siting on federal public lands.

Reed McCalib is an attorney with Bell Kearns, which specializes in advising on the review and entitlement of large-scale renewable energy projects. Contact the firm at (415) 230-0599 or info@bell-kearns.com.

Original Source: https://solarindustrymag.com/new-blm-final-rule-is-favorable-to-renewable-energy