Managing brownfields risks requires complex technical and legal analysis. Analyzing risks in renewable energy projects is equally complex. Both projects involve several contracts that must be integrated and made consistent with each other. Combining these types of projects creates a unique combination of risks, including, for sites where institutional/engineering controls are part of the remedy, risks that will not diminish over time. The best risk management tool is an insurance program that can integrate property and commercial general liability (CGL) coverage for renewable energy risks with manuscripted coverage under a site pollution liability (SPL) policy for brownfield risks.
The Obama administration’s effort to double renewable energy generation in the United States by 2010 has increased the renewable energy sector’s focus on risk management techniques.  Several federal initiatives are anticipated to spur the financing of renewable energy projects. On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the Stimulus Law).  The Stimulus Law extends production tax credits for eligible renewable energy projects and provides the opportunity to opt for an investment tax credit, instead of a production tax credit, for types of renewable energy equipment that were not previously eligible. The Stimulus Law also allows developers or owners of renewable energy projects to forego production and investment tax credits altogether, instead receiving a nontaxable cash grant in an amount equal to 30 percent of a project’s cost. Additionally, on June 26, 2009, the American Clean Energy and Security Act (Legislation (HR 2454)) passed the House of Representatives. 
∗ The Law Office of Christopher D. Hopkins, LLC is a boutique law firm located in Scotch Plains, New Jersey committed to providing the highest quality of legal services in the select areas of real estate, land use and environmental law. The firm is committed to working collaboratively with clients to achieve practical, cost effective results- whether it be in complex litigation, transactions, cleanups and/or development projects. The firm provides transactional and litigation counsel to a broad spectrum of clients including private and public corporations, trade associations, nonprofit institutions, banks, real estate investment trusts and individuals in New Jersey, New York and Pennsylvania. Mr. Hopkins counsels clients in a broad range of commercial real estate transactions and his experience includes redevelopment, green-building, transit-oriented development, and returning brownfields to beneficial use.
Susan Neuman is president of the Environmental Insurance Agency, Inc. (EIA) headquartered in Larchmont, New York. EIA is a boutique environmental insurance brokerage and risk management company that, since 1997, has specialized in providing environmental insurance and alternative risk transfer (ART) products to facilitate brownfields transactions. Address correspondence to Susan Neuman, Environmental Insurance Agency, Inc., 138 Chatsworth Ave., Larchmont, NY 10538. E-mail: SusanNeumanEsq@aol.com.
That act requires electric utilities to provide an increasing share of their electricity from renewable sources: 6 percent in 2012, 9.5 percent in 2014, 13 percent in 2016, 16.5 percent in 2018, and 20 percent in the years 2021–2039. 
The prospect of cash flow into the renewable energy sector has left developers searching for appropriate project locations. To meet the renewed real estate demand for project locations, the federal government is touting contaminated properties, or “brownfields,” as locations for renewable energy production facilities. Brownfields are often well suited for renewable energy projects. The sites are often large with one owner and are situated in areas where aesthetic opposition is minimized and where existing electric transmission lines, capacity, and other critical infrastructure exists. Further, environmental conditions on these properties often are not well suited for traditional redevelopment such as residential or commercial. However, the development of renewable energy facilities on contaminated properties presents a unique variety of risks that can be detrimental to the financing viability of such projects. Investor focus on the risk side of the risk-return equation for renewable energy projects has certainly increased in the current economic climate. Renewable energy projects already have a high risk profile, unclear risks in construction and operational phases, and often face financing gaps. While some insurance products address risks presented by renewable energy projects, very few policies are specifically tailored to address both renewable energy project risks and brownfield remediation risks. Without a tailored risk management program that includes a manuscripted site pollution liability (SPL) policy as well as property and commercial general liability (CGL) coverage specifically addressing project risks and relating to key project contracts, such projects may never reach successful implementation.
GENERAL PRINCIPLES OF RISK MANAGEMENT
Risk management is frequently defined as a five-step decision making process: (1) identifying an organization’s exposures to accidental loss; (2) examining feasible alternative risk management techniques (risk control and risk financing) for dealing with these exposures; (3) selecting the best risk management techniques; (4) implementing the chosen techniques; and (5) monitoring the results of the chosen techniques to ensure that the risk management program remains effective.
Step one of this process, identifying and analyzing loss exposures, is arguably the most important step in the risk management process. Every loss exposure has three dimensions:
1. the type of value exposed to the loss;
2. the peril causing the loss; and
3. the financial consequences of that loss.
Loss exposures are commonly analyzed based on the first dimension, the type of value exposed, which results in four basic types of loss exposures: (1) property exposures; (2) net income exposures; (3) liability exposures (the value being freedom from liability); and (4) personnel exposures. Next, as part of the analysis, the perils affecting a particular economic exposure must be identified. Examples of perils to property exposures include fire, windstorm, earthquake, and rot.With liability exposures, the perils to the value—freedom from liability—are often intangible, such as legal claims brought against an entity because of a legal wrong it is alleged to have committed. Common perils to net income exposures include business interruption; contingent business interruption; losses of anticipated profits on finished goods; reduced rental income; decreased collection of receivables; and increased operating expenses. However, it must be noted that the same perils may affect more than one type of exposure. For example, a hurricane may result in first-party property and third-party liability claims. Similarly, business interruption can affect property and liability exposures.
RISK MANAGEMENT OF BROWNFIELD SITES
Environmental Risk Analysis
If identifying and analyzing loss exposures is the most important step in risk management generally, it is all the more important—and more complicated—in managing the risks at a brownfields site. Environmental liability is a subcategory of liability exposure. The value being exposed to the loss is still freedom from liability, but the peril created is not just the result of a strict liability regulatory framework. It is also the result of an actual pollution condition on, at, or under a site arising out of historic, current, or future operations. Thus, environmental perils or risks must be analyzed on both a technical and legal basis. Environmental lawyers often utilize a matrix such as the one shown in Table 1 to identify specific environmental risks of concern, with intersection points between liabilities and preclosing known and unknown conditions and postclosing conditions. This matrix of pollution conditions and potential liabilities can only be filled in, and the specific risks of concern can only be identified, by examining site-specific conditions and remedies. The first step in such an exercise is to define known conditions so that known can be separated from unknown.
TABLE 1. Site Environmental Liability Matrix.
Liabilities Known Unknown New Conditions
Diminution in Value
Buyer Excavation Activities
Known conditions must be characterized and defined before any risk can be properly identified and then allocated.
Environmental Risk Transfer Mechanisms
It is important to note that a corporate risk manager typically does not get to choose options for brownfields risk financing or risk control because those remedial and risk transfer techniques are often already chosen by environmental lawyers and consultants. There is usually a deal on the table with two and sometimes three contracts being negotiated—a purchase and sale agreement
(PSA), a remediation agreement, and an SPL policy. The question is how well will these options be implemented. Each contract must be legally sufficient in itself but its terms and conditions must also complement and coincide with the terms and conditions of the other contracts.
Provided that environmental risks of concern have been isolated and identified—the matrix discussed above has been filled in—specific environmental risks of concern should be allocated within the environmental provisions of the PSA. Risks of concern differ from deal to deal. A typical scenario might be one where a seller is the responsible party for a remediation and is
therefore willing to take responsibility in the PSA for known remedial costs. The seller, however, wants an indemnification from the buyer (who will be performing excavation) for cleanup costs arising from unknown conditions. Environmental indemnities for these risks will be drafted that allocate liability in the PSA. The role of environmental insurance in the deal should be clarified through an environmental insurance provision that will spell out how such insurance can support or substitute for the specific indemnities in the PSA.
The SPL policy potentially covers almost all risks of concern contained in the environmental liability matrix. It must be stressed, however, that there are many versions of this nonstandardized policy with important coverage differences in the language of their standard forms. Any SPL policy for a brownfield site will necessarily involve “manuscripting” for the very reason that some coverage of specific known conditions is usually involved. Nevertheless, the coverage provided by the policy form and standard endorsements is basically the same and tracks with the environmental liability matrix. The policy covers new and preexisting known or unknown conditions that give rise to:
• Third-party bodily injury and property damage, on a claims made and reported basis;
• Cleanup costs on a claims made and reported or discovery and reported basis (for first party/on-site cleanup costs);
• Other liabilities, e.g., business interruption and transportation, often by endorsement for an extra premium.
One confusing feature of SPL policies for brownfields is that coverage of known conditions is hidden in an exclusion for conditions that were known and not disclosed during the application process. This exclusion is often modified in one of two ways: (1) by an endorsement excluding certain liabilities arising out of the known conditions, typically remediation costs; or (2) if the insurer decides to cover known and disclosed conditions, by a disclosed document endorsement that stipulates that the conditions described in the scheduled documents are known and have been properly disclosed.
The manuscripted language of these endorsements involving known conditions must be carefully reviewed for legal sufficiency. The language of the exclusionary endorsement is particularly important. For example, such an endorsement will often state that when a no further action (NFA) letter is received, the exclusion will be removed or modified. Sometimes, however, the language states that this removal or modification is at the insurer’s “sole discretion,” which is clearly a problem. Another problem is that many remedies do not end with an NFA but with institutional/engineering controls (IC/ECs) over known conditions. This is known as the long-term stewardship problem. Most environmental underwriters typically add a failure to maintain
IC/ECs exclusion when they know that IC/ECs are part of a remedy. However, it is possible to obtain a manuscripted endorsement providing coverage for IC/EC liabilities, i.e., failure to monitor, maintain, and enforce them under SPL policies. The long-term aspect of the long-term stewardship problem can be addressed by an “automatic” renewal endorsement stating that if the company is in existence at the end of the policy period the policy can be renewed.
Implementation of such a manuscripted SPL policy covering known conditions is crucial and requires an expert broker and underwriter who can negotiate and tailor language that fits the specific risks of concern at any site. Language must be consistent with the environmental allocation provisions in the PSA. For example, if the PSA requires the seller to assume responsibility for known remediation costs and the buyer for everything else (i.e., cleanup costs arising out of unknown conditions and third-party bodily injury and property damage arising from known and unknown conditions) then the contamination exclusion endorsement should only exclude those cleanup costs arising out of known conditions. The language of both the PSA and insurance contract must carefully track each other.
RISK MANAGEMENT OF RENEWABLE ENERGY PROJECTS
Structure of Renewable Energy Projects
The financing structure, and accordingly the financial risks of a renewable energy deal, have traditionally been driven by the type of renewable energy project and thus available tax credits. The renewable energy market relies on tax credits to help generate competitive returns. The primary credits available are the production tax credit (PTC), which is principally used for wind, biomass, geothermal, and specified other renewable energy projects, and the investment tax credit (ITC),  which is principally used for solar projects.
A flip structure is the financing vehicle typically utilized for projects eligible for the PTC. A flip structure relies on partnership tax rules to allocate the tax benefits to tax equity investors. The developer and the equity investor form a pass-through entity, like a partnership or LLC, as a project company that owns the project. The members of the partnership are treated as the owners of the project. The partnership agreement allocates between the parties taxable income or loss and cash distributions. Once the project is placed in service and the tax equity funds its contribution, 99 percent of the tax benefits are allocated to the tax equity. The cash flow is typically allocated 99 percent to the investor once the developer has recovered a portion or all of its equity investment. Those allocations typically remain in place for ten years when all of the tax benefits have accrued. At that point, the allocations flip and the developer takes up to 95 percent of the cash and tax attributes.Thus, the flip structure delays a developer’s return on its investment, but reserves to the developer the potential upside potential in a deal.
Conversely, secured financing is typically utilized for projects seeking ITCs. This is so because the ITC is available to the owner of a facility, whether or not the owner actually produces electricity. Many solar projects utilize a sale/leaseback financing structure. Under that structure, a special purpose project entity is formed and the developer and operator of solar assets constructs and agrees to operate a solar facility and to sell the electricity produced to the owner of a property where the solar plant will be built under a power purchase agreement (PPA). If the site owner has no need to purchase electricity for on-site use, the project entity may enter into a PPA and corresponding interconnection agreement directly with the public utility. In either event, the PPA terms will require that the private/public power purchaser buy all of the power produced at a fixed price, thereby locking in a revenue stream over the term of the PPA. The developer typically sells the solar property to a bank or other tax equity investor that leases the property back to the developer under a long-term lease. The lease is integrated into the deal and very often the lease actually becomes part of the PPA. The lease terms provide that the developer will share in the ITC and depreciation tax benefits through a reduction in rent and grants as collateral an assignment of the PPA and other revenues (such as funds from the sale of renewable energy credits). Thus, this structure provides 100 percent financing. However, while a developer realizes a large up-front profit on the sale of the renewable energy project to the tax equity (and that sale steps up the basis of the project in the hands of the tax equity for ITC and depreciation purposes), it costs more for the developer to get the project back. After the lease terminates, the developer can only continue using the project by purchasing it from the investor. The structure also separates project ownership from operations, insulating the investor from operational risks.
With the passage of the Stimulus Law, investors and developers now have some flexibility in choosing financing structures. The Stimulus Law now allows PTCs to be converted into ITCs, and further allows the ITC to be converted into a cash grant. It remains to be seen whether the availability of up-front cash grants may prompt developers to forego capital from institutional tax equity investors altogether and instead finance projects through debt. Accurate financial modeling is required to choose an appropriate deal structure. However, no matter what financing structure is utilized, critical to each project is a corporate and legal structure that provides investors with limited liability, reduces taxes to the greatest extent possible, facilitates operating permissions and power purchase contracts, and accounts for the various risk mitigation provisions found in key contracts governing the construction and operation of a facility.