Photo by Amy Cantrell.
For proof that a California environmentalist can change the world, look no further than Ed Zaelke, top alternative energy partner and global head of the Energy Project Finance Practice at McDermott Will & Emery. He grew up in a suburb of Los Angeles, and remembers well the many smoggy days each year when you could not see the local mountains.
So, of course it would be a green lawyer with a ponytail and sandals who inspired Zaelke during his years at UCLA Law School to recognize that he could do well by doing good. Zaelke charted a path through the nascent environmental and energy regulations of the early 1980s that encouraged investment in wind and other alternative energy at a time when most people were spending their time trying to find more coal and other fossil fuels.
Today, Zaelke is one of the world’s most respected energy lawyers, having advised on many of the renewable energy industry’s most significant projects, including, recently, the largest solar facility in the world, the Sweihan Solar Facility, about 75 miles from Abu Dhabi. Over his 35 years of practice, Ed has helped improve the sustainable energy profile of countries from China to Brazil and has made a powerful mark on the shape of the power industry in the United States, by focusing on energy sources that are cheaper and better than he could ever have imagined on his hikes in the local mountains around Los Angeles during his youth.
How he accomplished this is a tale we’ll call “blowin’ in the wind.”
Lawdragon: Ed, I’ve read about your work on the Sweihan Solar Facility on behalf of the Abu Dhabi Water & Electricity Authority. Can you tell us about that highly acclaimed project and the skills it required of you and your team to bring it to successful completion?
Ed Zaelke: The Sweihan solar project was very exciting, not just because it is the largest solar project in the world, but also because it allowed us to transfer, to a project in another country, the legal skills we built while developing and financing solar and other renewable energy projects in the U.S. The first challenge was landing the work. The client had used another top law firm for several years in the development and finance of its conventional power plants throughout Abu Dhabi. We had a number of discussions with the client about whether they would be better off working with their existing counsel, with limited experience in solar, or working with my group, which had very extensive solar development experience. In the end, the client felt that our experience and market expertise would provide them the greatest benefit.
Another challenge was the fact that, while the client appreciated our solar experience, it felt more comfortable with the “tried and true” documents it had used for years in conventional power deals, and was adamant about the use of that structure. That meant we had to find a way to fold our extensive experience and knowledge about what solar developers and financiers expect into the client’s typical ownership and finance structure.
LD: How does developing and financing a renewable project in a foreign jurisdiction differ from developing and financing a renewable project in the U.S.?
EZ: Each foreign jurisdiction will be different – especially in the way that they wish to encourage renewable energy development. Some will mandate set prices for power, others, like Abu Dhabi, will make formal request for proposals, some require partial state ownership, some provide local content requirements, and still others may provide local tax or other incentives. These differences in programs can present their own challenges. On top of that, lawyers have to deal with cultural issues, language (both in the documents and during negotiation), selection of governing law, and a host of other issues. Strong local counsel can be critical in foreign-based projects.
That is not to say that developing and financing renewable energy projects in the U.S. is any easier. The U.S. has relied on federal tax incentives and varying programs in each state to encourage renewables – and this presents its own challenges. As its primary driver for renewable energy, the U.S. has employed tax incentives to allow new technologies, such and wind and solar power, to try and develop for a period of time to see whether they can become cost competitive with existing sources of producing power, such as by burning coal or natural gas. The U.S. tax incentive approach has the added benefit of incentivizing only the best technologies to move forward as the industry is developing. The overlay of monetizing the tax incentives in the U.S. makes financing wind and solar projects quite complicated – often much more complicated than similar projects in foreign countries.
The U.S. has the added difficulty of separate transmission grids and rules throughout the country and that different incentives and regulations can exist in all 50 states. Thus, projects or financial structures that work in one state or under one regional transmission organization may not work in another.
LD: What other major projects have you worked on recently?
EZ: My practice is one that is “industry focused” – rather than focusing on certain types of transactions, my team focuses on the renewable energy industry, which includes wind, solar, geothermal, storage, biomass, and fuel cells. Thus, in any given year, I am as likely to handle merger transactions in the space as I am to handle financings. For example, over the past couple of years, I was hired to represent clients in six separate major company acquisitions in the renewable space.
In the largest of those deals, I served as co-counsel to Global Infrastructure Partners, in GIP’s acquisition of the renewable business of NRG, which closed this past August. The underlying asset value of that transaction was several billion dollars. Really knowing an industry and understanding the issues facing that industry allows lawyers on the deal to add significant value, especially in M&A transactions. This is particularly important as renewable energy transactions have gotten larger and involve new sources of financing. Today, a large percentage of clients I represent are private equity funds seeking to invest in renewable energy or with investments in renewable energy.
LD: What about the financing of renewable projects? How do lawyers like you add value there?
EZ: Going green has not all been about the technology – lawyers and bankers have played a key role in the cost reductions we have seen in renewables. Unlike coal and natural gas, the “fuel” for wind and solar projects – wind and sunshine – is free. That means the cost of power from wind and solar projects is generally a factor of the capital cost of the installed equipment and what interest rate or rate of return must be applied to the investment required for that equipment. The unlevered rate of return on wind and solar projects has steadily declined over the past 10 to 15 years, in large part because the lawyers and bankers have worked to reduce the risk of these investments through what I often call “legal and financial engineering.” Power from a project that requires a 12% rate of return over its 30- or 35-year useful life is nearly double that from a project that requires a 6% rate of return. Moreover, the finance part of our practice today is a very sophisticated Wall Street-type project finance practice, but focused on renewable energy. Most of the wind projects I am working on today that require financing involve a capital stack of $300 million to $500 million.. This is extremely sophisticated, complicated and interesting work, and it requires the very best lawyers and bankers to make these projects a reality. As a bonus, we also get to help save the planet.
LD: You were lucky to gain experience in the budding renewable energy industry early on, before it temporarily receded because of changes in legislation. Can you explain to readers who are not intimately familiar with the renewable energy field the importance that tax credits have played in renewable energy development?
EZ: The decision to support energy creation through renewable resources in the U.S grew from the environmental movement, which really gained strength in the 1960s. However, serious support for renewable energy did not begin until the Arab Oil Embargo of the early 1970s. During the Carter Administration of the late 1970s, with support from both environmentalists and leaders concerned with domestic “energy security,” Congress responded by passing legislation for tax incentives, loan guaranties and other programs to support alternative energy and synthetic fuels.
New technologies such as wind energy, also benefitted from a 1978 law known as PURPA (Public Utility Regulatory Powers Act), which requires the purchase of energy by public utilities from small power plants. With California’s liberal interpretation of PURPA and the support of a federal investment tax credit for renewable energy projects available in the early 1980s, several thousand megawatts of wind energy projects were built in the Palm Springs, Tehachapi and Altamont Pass areas of California from 1981 through 1985. However, with a change in the federal tax law effective January 1, 1986, and the expiration of the Department of Energy’s loan guaranty program, it appeared that my goal of being a renewable energy lawyer had come to an end. I spent the next few years focusing on real estate development and finance. Fortunately, renewable energy only took a short hiatus.
LD: What happened to bring you back into renewables?
EZ: Starting in about 1989, with improved technology developed mostly in Europe, wind projects returned to California and were able to take advantage of the power purchase requirements of PURPA, although the investment tax credit was gone. Also, although the equipment had greatly improved by the early 1990s, energy produced by wind turbines still had a long way to go to be cost competitive with electricity produced by conventional fuels such as coal and natural gas. To help continue development of the wind industry, in 1992 a new federal “production” tax credit was created for wind energy projects. By the late 1990s several states began to require that public utilities purchase a portion of their energy from renewables. The combination of improved equipment, the federal production tax credit and state mandates allowed the wind energy industry to find new life, not just in California, but in a number of other states as well. As one of only a handful of lawyers with significant industry experience at that time, my practice found new life as well, as the business of my clients began to expand and as a number of new investors and developers discovered the renewable energy industry.
LD: Your extensive career as a renewable energy lawyer has not been just M&A and finance transactions. What role has your policy work, including your past leadership in the American Wind Energy Association, played in your success? What are you most proud of from your work in that area?
EZ: In 2003, I joined the Board of Directors of AWEA and served on it for 12 years, including being elected and serving as AWEA’s President for 2006-2007. As a new AWEA Board member I was committed to making a difference in what was, at that time, a very small lobbying organization for this new industry.
First, I helped develop a broad-based seminar program for AWEA members and new entrants in the growing industry. This was very successful. Over time, AWEA held as many as 11 programs a year for its members, which provided a great way for members to both learn and share information. It also created an important revenue source for the organization.
In addition, as President, I took the very bold move of promoting a quite significant increase in corporate member dues. That dues increase had an immediate impact in allowing AWEA to grow its staff, conduct necessary research and be a much more effective champion of the burgeoning wind industry. Through AWEA‘s lobbying efforts, the production tax credit (the primary federal tax support for wind energy) was extended a number of times and the renewable energy cash grant program, which helped move us out of the Great Recession in 2009 and 2010, was implemented, allowing the industry to continue to grow.
LD: How important is energy policy at the federal and state level for this industry to be able to grow?
EZ: The U.S. is undergoing a fundamental change in how we make power. With the significant reduction over the past 10 years in the cost of power from wind and solar, and the steep drop in natural gas prices due to fracking, energy produced by burning coal – which constituted over 50% of our power just 10 to 12 years ago – is now on its way out. Today, power from coal makes up only 33% of our power mix and more and more coal plants are being retired each month. Coal is being phased out, not only because of environmental concerns, but for economic reasons as well, because in many cases it costs much more to run a coal plant than to produce electricity from natural gas or renewables. (Nuclear and hydropower are still in the mix, but that is a much longer discussion.) Renewables and natural gas power plants are replacing retiring coal plants and are expected to make up most of our power supply within the next 10 to 15 years.
Federal and state policies have been very important in helping to create a market for renewable energy as the industry worked to make renewables cost competitive with power produced by conventional sources such as coal, natural gas, hydropower and nuclear energy. The federal policies supporting renewables have, for the most part, been in the form of the tax credits we discussed earlier. These tax credits, when monetized, amount to a fixed subsidy for wind, solar and other technologies for a limited time, which allows developers to sell power from these projects at cost-competitive prices while the equipment manufacturers and developers work to reduce costs. For both wind and solar, this has been successful. The advances in renewable technology, risk reduction and cost reduction have brought the price of wind and solar power in some areas of the country below the cost of coal-fired power and very close to the cost of power produced by natural gas. Due to these cost reductions in wind and solar, the federal tax credits are now being eliminated or significantly reduced, which will require that wind and solar power will compete head to head with fossil fuels going forward. Wind energy will lose the benefits of the production tax credit for projects which complete construction starting in 2023 and solar will see its investment tax credit reduced to 10% for projects completed starting in 2025.
State support for renewables has also been important. Most state support has come in the form a a mandate or goal requiring that public utilities (and sometimes municipal utilities) within the particular state purchase a set amount of its wholesale power from renewables. Presently, 29 states plus the District of Columbia have some sort of requirements or goals for their public utilities to purchase energy from non-polluting sources. State support for renewables comes both from a desire to create local jobs and a desire to take action to protect the environment. California, for example, with 10% of the nation’s power supply, has taken a number of steps to address climate change concerns. It recently enacted SB 100, which requires that all power in California be produced 100% from renewables by 2045. Thus, California, which has no coal-fired power plants will be eliminating natural gas-fired plants as well. Even though natural gas is cleaner than coal, it still produces 50% as much CO2 as coal when burned, so renewables are still needed from an environmental perspective.
LD: Your involvement in AWEA and your ability to advocate for renewable energy policy stemmed from your position as a leading lawyer in the industry. How does a lawyer develop the expertise to be considered a legal expert for renewable energy? Is working on large, complicated renewable energy deals something you envisioned doing in law school?
EZ: I entered law school, probably like many law students, knowing I had an interest in a subject (in my case, environmental or land use law), but uncertain of what that would entail or where I would work. I guess I was also a bit of an idealist in that I had a love of the outdoors and hoped for a private-sector job that was not going to involve helping someone damage the environment.
As a first-year law student at UCLA, I attended a very small lunchtime environmental law presentation by a recent graduate, a young man who showed up wearing sandals and sporting a ponytail. He was very excited about relatively recent legislation and California’s rules relating to that legislation that were allowing private parties to install wind turbines in the California desert. The legislation also required that California utilities purchase power from those private parties at the “avoided cost” of having to build new power plants.
A few of the top corporate law firms in Los Angeles at that time had just begun new renewable energy practices. I was fortunate to land a job as a summer associate at one of them, which, at the time, had been retained by the recently created U.S. Department of Energy to assist with its renewable energy loan guaranty program. Following graduation in 1983, I joined that firm in its renewable energy group and was elected to partner in 1988. Although I have changed firms since, I feel very fortunate to have had the opportunity to begin my career in renewable energy and to have spent my career helping a new and very important industry to grow into what it has become today.
LD: How did you develop your love of the outdoors?
EZ: I come from a large family. My early memories of summer vacations typically involved loading all five Zaelke children into the station wagon and spending a week in Big Bear or Lake Tahoe. When we grew a bit older we would travel (by station wagon, of course) to Colorado, where my uncle had a remote cabin in the mountains near Aspen. We also spent time hiking and camping in the mountains and deserts around Los Angeles, learning a lot about the outdoors and gaining an appreciation for nature. For me, protecting the environment for future generations is a moral obligation. My wife and I have raised our children with this same sense of “environmental morality”, and it gives me hope to see protection of the environment as an important issue for so many millennials.
LD: It says a lot about how far you and others have brought renewable energy as part of our infrastructure that with climate doubters in power in the U.S., most of the public remain fully committed to environmental preservation.
EZ: I firmly believe that climate change is the greatest challenge facing the next several generations of our children. Those generations will not only watch the disappearance of numerous species, but will have to suffer enormous cost from natural disasters, disease, fires, floods, droughts, famines and, as a result, also suffer increased political and global unrest.
While there are several causes of climate change, our production of electricity in the U.S. contributes about one-third of all carbon the U.S. is putting into the atmosphere. Although there are still some “client deniers,” I think most Americans, and most of the world, understand that the climate crisis is of our own doing and that we have to make changes to avoid, or at least slow, the climate-related impacts that the world is just beginning to face. Unfortunately, it may take more serious hurricanes, wildfires and more to convince certain policy-makers and others with an economic stake in denying science of the steps we need to take to address these issues. The fact that over half of the states in the U.S. have renewable energy purchase requirements or goals and that most polls show very strong support throughout the U.S. for renewable energy gives me hope.
LD: What’s the next big thing? Will you be helping arrange solar farms throughout the Middle East and Southeast Asia? What about the importance of battery technology to store excess wind or solar power? What can a lawyer do to advance important projects?
EZ: While renewable energy is critical to the future of this country and the planet, for the most part – with the exception of geothermal energy – it is not available all of the time (at least not yet). Wind power only exists when the wind is blowing and solar energy only exists when the sun is shining. Electricity produced by fossil fuels such as natural gas is referred to as “dispatchable” since it is available 24/7. To achieve a future which is 100% renewable non-polluting energy, we must develop a way to store and dispatch energy from wind, solar and other sources when the power is needed. Battery technology appears to be the leading candidate, although fuel cells, compressed-air storage, hydrogen creation, pump storage, and a number of other budding technologies show promise. Fuel cell companies such as Bloom Energy are also doing some very exciting new things. We are also seeing battery storage included on many solar, and some wind, projects. As storage technology develops and becomes cheaper, storage will become part of all renewable energy projects. That will make renewable energy “dispatchable” and truly competitive with fossil fuels.
In addition to solving the “dispatchability” dilemma, the other area for growth will be international development of renewables. Even the oil-rich countries of the Middle East see renewables as a very cost-effective way to produce power and desalinate water. The 1160 megawatt Sweihan project in Abu Dhabi that I worked on is a prime example of this new growth in developed, oil-rich countries. However, developing countries are very hungry for power at affordable rates, so we will see a great deal of development of renewables in those countries, as well. The challenge, as with all power plants in developing counties, is how to finance the much-needed energy projects in those countries. Hopefully, as the technology continues to come down in cost, it will become more available to the developing parts of the globe.
Domestically, I believe we will continue to see a healthy growth in both wind and solar, even after the federal tax credits expire or are significantly reduced over the next 4 to 5 years. We are starting to see growth in off-shore wind to be located in the waters off of the eastern seaboard, and it could be employed off the coast of northern California and Oregon as well. Off-shore wind has been installed extensively in Europe over the past 15 years and has the additional advantages of consistent, strong winds, the ability to use larger machines and the ability to run power cables underwater to large coastal cities. Other technologies including those which can solve other social problems, such as producing power from animal waste, continue to develop and improve. Looking ahead, I think the next 35 years in renewable power could be just as interesting and rewarding as my past 35.