Supporting the transition to clean energy

by Peter Kolodner ,

Senior Vice President, Environmental Practice

11/16/2023 · 7 minute read

Changes in the energy and power industry are here and rapidly evolving. A nation built and run on fossil fuels for centuries is now shifting away from these energy sources. In fact, renewables are expected to become the largest source of global electricity generation as soon as early 2025, replacing coal.

There is strong interest from investors and corporations to support the switch, with $358 billion invested globally in renewable energy assets in the first half of 2023. Clean energy investment has surged due to a variety of influences, such as volatile fossil fuel prices, drops in costs for renewable energy technology, and regulatory incentives, such as tax benefits. Organizations may also feel pressured to decrease their carbon footprint due to an increased focus from both society and investors on environmental, social, and governance (ESG) factors.

What are the opportunities?

There are myriad ways in which companies can support and capitalize on the clean energy transition. However, many opportunities present environmental risks, which can become an impediment to progress. Organizations that identify and mitigate environmental risks have a better likelihood of creating optimal returns on investment for renewable energy projects.

Repurposed coal assets

Social and political pressure to curb fossil fuel emissions has led to a shuttering of coal-fired power generation plants, with 23% of coal-fired capacity currently operating in the US scheduled to retire by the end of the decade. These locations pose potential opportunities for redevelopment, repurposing for clean energy production, and other beneficial uses, including light industrial, commercial, or community open space.

While repurposing shuttered coal generation facilities can have tremendous upsides for developers, including the opportunity to leverage existing connections to the power grid and infrastructure, safely and effectively responding to their inherent environmental exposures can be challenging. For instance, developers typically are responsible for coal ash disposal and remediation in accordance with local, state, and federal regulations. These processes are subject to much scrutiny, and the costs can vary considerably based on the closure remedy required by the regulatory agencies.

Brownfield redevelopment

The US Environmental Protection Agency (EPA) defines a brownfield as, “a property, the expansion, redevelopment, or reuse of which may be complicated by the presence or potential presence of a hazardous substance, pollutant, or contaminant,” and estimates there are over 450,000 brownfield sites in the US. These properties often offer attractive opportunities for redevelopment, as well as repurposing for clean energy production, such as solar, battery storage, wind, and hydrogen production because they are frequently strategically located in dense urban environments where they are needed most.

Brownfields are often eligible for contaminated land cleanup incentives through the EPA, state regulatory agencies, the IRS, and other government bodies. Further, renewable energy developers on brownfield sites may be eligible to receive incentives such as tax credits, rebates, grants, and loans through the Inflation Reduction Act of 2022 (IRA) and local programs.

Greenfield development

Greenfield properties — projects built on previously undeveloped land — are commonly misconstrued as low-risk development opportunities from an environmental perspective. Upon investigation, latent environmental exposures may materialize, including historical use of pesticides and herbicides. Illicit abandonment of hazardous wastes and materials by third parties can also contribute to unexpected project costs and delays.

Catastrophic weather events resulting in excessive stormwater runoff and sedimentation can have devastating financial impacts, as project sites are often in close proximity to sensitive environments, waterways, wetlands, or natural resources.

Carbon capture and sequestration

As governments, investors, and the public become increasingly committed to reducing greenhouse gasses, many organizations are looking for opportunities to offset or mitigate carbon dioxide emissions.

Organizations that undertake carbon capture and sequestration projects are able to take advantage of tax credits available under Section 45Q of the Internal Revenue Code, which were recently amplified and extended under the IRA. Although these tax credits can provide an organization with a stable and predictable cash flow, these sites can pose great risks as releases of highly concentrated carbon dioxide can result in catastrophic injury to humans and wildlife.

Capitalizing on existing real estate footprint or infrastructure

Supporting renewable energy does not always require significant investment, and organizations can opt to make smaller changes, such as installing photovoltaic solar panels on their roofs or expanding their real estate footprint to include charging stations. These actions can provide many advantages, ranging from energy independence, tax benefits, customer differentiation, and financial return. However, they also come with increased environmental risks during both the construction and operational phases, which may be outside of an organization’s traditional risk profile.

What are the risks?

Although there are numerous incentives for companies to make changes to support the clean energy transition, all of these opportunities come with inherent environmental risks.

Organizations should evaluate risks during the entire lifecycle of a project, including acquisition diligence, project planning, and site operations. These risks may include:

Unexpected remediation costs for historical contamination and new releases into the environment
Overrun of remediation costs from known contamination and closure costs associated with coal combustion residual
Potential for damages to third parties
Regulatory reopeners and changes in environmental law
Catastrophic weather events resulting in new spills or release/exacerbation of existing contaminants
Damage to natural resources and wildlife
Reputational risks and public relations expenses
Costly legal defense expenses

How can my organization mitigate environmental risk?

To help ensure a successful investment, organizations should consider the following actions to make better informed decisions regarding the assumption and management of environmental risks:

1. Conduct thorough due diligence:

a. Engage early with environmental and legal professionals to perform thorough environmental due diligence and secure suitable accommodations for potential environmental impacts, such as indemnifications, purchase price adjustments, escrows, or regulatory program incentives.

b. Capitalize on government grants and tax incentives available for your project based on project type and jurisdiction.

2. Review your existing risk and insurance programs:

a. Work with your risk advisor or broker to perform a careful evaluation of your risk and insurance program to assess the potential impact of coverage grants and exclusions for pollution conditions, including sublimits, time-element requirements, restrictions for onsite or first-party coverage, emerging contaminants, or waste materials.

b. Assess whether your existing insurance programs have exclusions or limitations for construction-related activities or material change in risk.

3. Consider incorporating specialty environmental risk solutions:

a. Develop a comprehensive environmental risk strategy for identified exposures that pose uncertainty in a project’s return on investment:

i. Existing historical contamination can lead to additional costs for the discovery and remediation of unknown environmental conditions, overruns of expected remediation costs, third party liabilities from unknown or known contamination, the failure of performance by an indemnitor, and costly legal defense expenses.

ii. Construction related pollution events, including new releases or the exacerbation of existing conditions by a contractor, can increase project costs — including remediation and project delays — and can also result in third party liabilities and legal expenses.

iii. The release of pollutants into the environment onsite or migrating from the operating facility, whether from the operation of the renewable asset or as a result of a catastrophic weather event, can result in environmental liabilities impacting the asset’s operating budget.

Environmental exposures such as these can be mitigated by strategic deployment of environmental risk transfer solutions, such as pollution legal liability, contractors pollution liability, excess of indemnity, remediation cost cap, and/or environmental liability buyout.

Supporting the transition to clean energy is not without its risks. However, with a thorough understanding of your environmental exposures and a robust risk management plan tailored to your organization, you can pursue these opportunities with greater confidence.

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