On Dec. 19, 2016, the U.S. Department of the Interior’s (DOI) Bureau of Land Management (BLM) published a final version of a rule that overhauls the agency’s regulations governing the permitting of solar and wind facilities on 245 million acres of federal public lands, most of which are located in the 12 Western states. The development is significant, as the BLM has authorized almost 10 GW of utility-scale solar projects since 2009 and intends to approve more. The BLM published a draft of the rule in September 2014, and the recently published final rule takes effect on Jan. 18, 2017.
The rule replaces the BLM’s long-held practice of permitting solar and wind projects on a first-come, first-served basis with a framework for the creation of preferred “Designated Leasing Areas” (DLAs) and competitive leasing procedures, both inside and outside DLAs.
The rule also codifies bonding, rental, megawatt capacity fee and pre-application policies originally established by a series of instruction memoranda issued in February 2011, but now with each policy containing more favorable terms for lands located within a DLA.
While well intended, these wholesale changes complicate an already cumbersome BLM permitting process. This article discusses the implications of the rule after summarizing its key aspects.
Designated leasing areas
The rule builds on the Solar Energy Zone (SEZ) concept of the BLM’s 2012 Western Solar Plan by creating a new DLA land use plan designation for areas identified as preferred locations for solar or wind energy development. DLAs will be created through the BLM’s land use planning process and attendant National Environmental Policy Act (NEPA) review.
All wind and solar rights-of-way issued within a DLA will be termed “leases” rather than “grants.” The BLM will identify new DLAs based on expressions of interest, on its own initiative or both.
The BLM’s prior regulations allowed competitive leasing only in instances when the agency received two or more competing right-of-way applications over the same lands. The rule expands this mandate by allowing the BLM to include land in a competitive offer on its own initiative, even in the absence of competition, both inside and outside DLAs. Competitive leasing is mandatory within DLAs. It is left to the discretion of the BLM outside DLAs, although BLM staff have asserted a first-come, first-served approach likely will remain the default outside DLAs.
Competitive leasing within DLAs occurs under more favorable terms than outside DLAs. For example, a winning bidder outside a DLA merely wins the right to apply for a grant as the “preferred applicant,” while a winning bidder within a DLA is offered an actual lease.
Competitive offers within DLAs also provide for variable offsets totaling as much as 20% of the bid, based on a variety of factors, such as evidence of a power purchase agreement or large generator interconnection agreement; preferred wind or solar technologies; prior site testing; prior pending applications; submission of biological plans; and environmental or public benefits.
Non-competitive process outside DLAs
Developers can still file right-of-way applications outside DLAs without a competitive process if no competition exists and the BLM decides not to include the lands in a competitive offer.
Once a right-of-way application is submitted, the rule codifies 2011 BLM guidance (with a few minor changes) by requiring two preliminary meetings before the agency decides whether to process or deny the application. The first meeting focuses on potential siting and environmental issues or concerns; the second includes other federal, tribal, state and local agencies in a similar discussion.
The BLM’s 2011 high-, medium- and low-priority screening criteria are also codified and applied to either reject or prioritize and process an application.
Solar applicants must pay an application fee of $15 per acre ($2 per acre for wind projects). Unsuccessful bidders receive a refund.
Land rent and megawatt capacity fee
The rule codifies the BLM’s existing policy of charging payments on an acreage rent and capacity fee basis for both DLA and non-DLA rights-of-way.
The rule also addresses concerns over unpredictable rent increases by adjusting its rental formula and creating two alternative rental systems.
The standard rental method is subject to adjustment based on inflation and changes to National Agricultural Statistics Service (NASS) Census land values. NASS values are now adjusted on a state-specific basis to better reflect fair market value (e.g., NASS values are reduced by 51% in California). Additional regional adjustments can be made, as well.
The alternate rental approach is a scheduled rate adjustment method. It seeks to provide greater certainty by (i) applying an inflation index to adjust land rents annually outside DLAs and every 10 years inside DLAs, and (ii) in lieu of NASS adjustments, increasing rents and capacity fees by an additional 20% every five years outside DLAs and by 40% every 10 years inside DLAs.
Favorable rental terms apply to projects within DLAs. As previously mentioned, acreage rent is adjusted every 10 years within a DLA but annually outside a DLA. Under the standard rental method, project owners within a DLA pay 50% of the capacity fee for the first 10 years and 100% thereafter; outside a DLA, the capacity fee is phased in over three years at 25%, 50% and 100% (as opposed to five years at 20% each under prior policy). The phase-in is reduced to five years inside a DLA under the scheduled rate adjustment rental method, with no capacity fee phase-in outside a DLA.
The solar capacity fee schedule for 2016-2020 is approximately 45% less than the previous schedule established in 2010 due to the substantial reduction in wholesale power prices since then. The fee is adjusted on a market basis every five years unless an owner elects the scheduled rate adjustment method, as previously described. Further adjustments can be made based on a showing that a different net capacity factor is appropriate.
The BLM continues to require bonding for solar and wind projects on the basis of its surface mining assurance regulations. However, DLA project bonding is capped at $10,000 per acre for solar and $20,000 per turbine for wind.
The same numbers apply to non-DLA projects, but as minimums instead of maximums, with the actual bonding amount determined by a project-specific reclamation cost estimate. The BLM will also consider other factors, such as salvage value, when determining the bond amount.
In addition to the direct transfer of interests, the rule requires an approved assignment for change in ownership or other related change in control transactions, unless the transaction is within the same corporate family. The rule also clarifies that pending applications are not assignable.
Right-of-way applications over lands that subsequently fall within a DLA are exempt from the DLA competitive leasing process if the application was filed before publication of a notice of intent to prepare a land use amendment creating the DLA.
Similarly, the BLM will not competitively offer lands for which the agency has accepted a right-of-way application and received a plan of development and cost recovery agreement.
One of the rule’s newest provisions is a catch-all that allows applicants to request terms or conditions that differ from those of the rule, including alternatives to applicable bonding requirements, although it does not specify any standards or procedures for granting or denying such requests.
The rule extensively revises the BLM’s solar and wind right-of-way regulations, but these changes are unlikely to streamline the permitting process.
The DLA concept could lengthen and complicate project siting. In 2014, the BLM did, in fact, prepare three environmental assessments (EAs) in under six months for three projects competitively bid within the Dry Lake SEZ in Nevada as a pilot test of the competitive leasing program. The EAs were preceded, however, by more than four years of NEPA review culminating in the 2012 Western Solar Plan, followed by another 18 months of regional planning. New DLAs will require lengthy preparation, as well, potentially putting solar projects on hold in the interim.
Competitive leasing will impose an additional upfront cost for solar energy sites on public land. The 2014 Dry Lake SEZ pilot competitive leasing process generated an additional upfront charge of approximately $1,892 per acre, for example.
Some question whether the competitive process is even appropriate in the solar context. Competitive bids are useful to establish a market value for a product that cannot otherwise be priced (such as oil and gas leasing) where the pre-lease market value of the resource is essentially unknown. Solar is different, however. There is nothing unknown about the value of the energy-generating resource at a given solar site.
The preliminary review process for applications outside DLAs runs the risk of making uninformed decisions by allowing the rejection of applications before NEPA review even begins, potentially exposing applications to rejection on political, rather than scientific, grounds. It also inadvertently creates a presumption that the BLM will approve any project that begins NEPA review, yet that is precisely the kind of behavior NEPA was designed to prevent.
Enforceable time limits should be imposed on the preliminary review process. And it should clearly confer site control from application acceptance until the application is withdrawn, is rejected or matures into a grant. This could be achieved through implementing guidance.
The BLM’s new rental framework is a step in the right direction, in that the standard rental approach now includes mechanisms to reduce discrepancies between NASS values and actual fair market value. The scheduled rent adjustment method is helpful, as well – at least in concept. However, many industry members have said an increase of 4% per year in addition to inflation index adjustments is too high a price for certainty.
Finally, although the BLM has the authority to charge land rent, it is less clear whether it has the authority to charge a megawatt capacity fee. Because the federal government lacks an ownership interest in sunlight (or wind), it cannot sell the right to use sunlight for profit (unlike the sale of federal minerals), charge a royalty against the sale proceeds (unlike federal oil and gas rights), or charge rent for the use of sunlight (unlike federal land surface occupancy rights).
Nor is the capacity fee a regulatory fee: It bears no relation to services rendered by the BLM and is paid to the U.S. Treasury instead of to a BLM cost recovery account. If anything, the capacity fee resembles a tax for contribution to a general fund spent for the benefit of the U.S. public. The DOI lacks the power to tax, however.
These implications also raise the question of revision under a Trump administration.
With thousands of jobs, the solar industry is large enough to seek and possibly obtain changes to the rule under President-elect Donald Trump’s “all of the above” energy strategy, in stride with more traditional resource extraction industries and irrespective of any debate over climate change.
For example, the top-down DLA zoning concept might strike a Trump administration as contrary to a market-based approach. The capacity fee may be perceived as an illicit tax outside the DOI’s statutory mandate. Whether the competitive leasing concept remains will likely depend on whether the Trump administration decides to alter the analogous competitive leasing regime that has applied to public land oil and gas leases for the past 30 years.
The BLM rule will take effect before the president-elect is sworn in. Modifying the rule would require a new rulemaking because it is not a “major” rule under the Congressional Review Act. Absent a concerted effort by the renewable energy industry, the formal rulemaking process could hinder efforts to modify a regulation that focuses almost exclusively on renewable energy facilities.
Andrew C. Bell is a partner at Marten Law PLLC, and he prepared the Solar Energy Industries Association’s comments on the draft BLM rule. Bell can be reached at email@example.com.