Illinois Enacts Comprehensive Climate and Clean Energy Legislation

In September, Illinois Governor JB Pritzker signed the omnibus, 956-page climate and energy legislative package titled the Climate and Equitable Jobs Act (the “CEJA”). The CEJA has an immediate effective date. Following years of negotiations between clean energy and climate activists, labor leaders and the regulated utilities industry, the CEJA expands investments in clean energy and targets a transition to 40% of electricity being provided by renewable energy by 2030, 50% by 2040 and 100% from carbon-free sources by 2050.

This Legal Update covers the amendments the CEJA makes to Illinois law with respect to decarbonization of the electric generation facilities throughout the state and the corresponding increased financial support for wind and solar generation projects, the investment in electric vehicle infrastructure and incentives for consumers to purchase electric vehicles, and the new labor standards applicable to clean energy projects. It does not address the CEJA’s myriad other provisions.

Decarbonization and a Transition to Clean Energy

The headline feature of the CEJA is the mandate that generation facilities fired by coal, oil and natural gas must eliminate carbon emissions by 2045, with interim milestones applicable to certain facilities. For most facilities, this will likely require the implementation of new technology, possibly a phased shutdown of generation units and eventually a complete shutdown by the 2045 deadline. The CEJA also aims to make Illinois a net-carbon-neutral state by 2050. For reference, Illinois currently generates approximately 50% of its power from fossil fuels, 40% from nuclear and 10% from renewables. To replace the lost capacity once generated by fossil fuels, the CEJA establishes new goals of procuring 40% of the state’s generation through renewable energy credits (“RECs”) by 2030 and 50% by 2040.

In 2016, Illinois enacted the Future Energy Jobs Act, which made significant changes to the state’s renewable energy portfolio. The Future Energy Jobs Act tasked the Illinois Power Agency (the “IPA”) with administering the procurement of RECs and increasing the state’s utilization of renewable energy to 16% of the total load by the year 2019 (eventually increasing to 25% by 2025). The state fell short of its goal; IPA estimates that the state generates approximately 10% of its load from renewable sources.

The IPA generally procures renewable energy projects in two ways: (1) competitively and (2) through the Adjustable Block Program. For competitive procurements, renewable energy projects offer RECs through sealed, competitively bid prices. The Adjustable Block Program openly fixes REC prices and offers open enrollment. Projects eligible for participation in the Adjustable Block Program include new photovoltaic community renewable generation projects (commonly known as “community solar”) and photovoltaic distributed renewable energy generation systems (commonly known as “distributed generation”).

CEJA Amendments to the Adjustable Block Program and Competitive Procurements

To fund the increased renewable generation demand, the CEJA requires significant increases in the number of RECs to be procured from new renewable energy generation projects in both the short- and long-term horizons. Corresponding increases to existing renewable energy tariffs/surcharges assessed by utilities to ratepayers will be implemented.

Beginning immediately, the IPA is directed to increase (by nearly double) the number of existing RECs to 10,000,000 for the 2021 delivery year, and, beginning with the 2022 delivery year, the volume of new RECs must be progressively increased year-over-year to 45,000,000 by the end of the 2030 delivery year. The IPA is also directed to conduct a forward procurement of new renewable projects within the first 240 days following the CEJA’s enactment in order to meet the requirement of 10,000,000 RECs for the 2021 delivery year. Therefore, the renewable industry should be expecting a flurry of activity around renewable projects in the coming months.

Under the Future Energy Jobs Act, distributed generation systems were categorized by nameplate generation capacities of (i) 10kW or less and (ii) more than 10 kW but no more than 2,000 kW. The CEJA increases the nameplate generation capacity categorizations to 25kW or less and 5,000kW, respectively. The IPA will utilize competitive procurement for projects with nameplate capacities of more than 5,000kW (referred to as being “utility scale” projects) and projects that are located on either former coal mines on which all cleanup and remediation obligations have been completed, or on other sites regulated by the state or federal environmental protection agencies (such sites are referred to as “brownfield” sites).

RECs are purchased under the Adjustable Block Program through contracts between project developers and the applicable utility provider (a “REC Contract”), the terms and conditions of which are set by state law, as now amended by the CEJA. REC Contracts for distributed generation, public school¹ and certain “equity” projects will have a 15-year term, and the payment for RECs expected to be produced over the 15-year lifecycle of such projects will be paid out upon energization, with the balance to be paid ratable over the next six years. The CEJA reduced the upfront payment from 20% to 15%, and it increased the payout period from four years to six years. Conversely, REC Contracts for community solar and utility scale projects will have 20-year terms, with the REC payments to be made evenly over the course of the full term. Community solar projects were previously entitled to a 20% upfront payment, but the CEJA eliminates the upfront payment in favor of the REC payments to be made over the full term.

Out of the new REC commitment allocated for new projects, 45% are to come from wind projects and 55% from solar projects. Out of the target from solar projects, 50% of that generation capacity must come from community solar and distributed generation projects,² 47% must come from utility-scale projects and the remaining 3% must come from brownfield projects. In addition to the RECs to be purchased in support of the new projects, a total of $280,500,000 is available in the “Coal to Solar and Energy Storage Initiatives Fund” for grants to support the installation of such projects.

Estimates suggest that the new infusion of RECs will direct an additional $350,000,000 annually toward renewable projects. The CEJA also protects the approximately $315,000,000 of existing tariffs that have been collected to date to pay for RECs procured through the Adjustable Block Program. Prior to passing CEJA, those funds were subject to a statutory sunset and primed for rebate to ratepayers. The CEJA amends this provision to protect all such tariffed funds, whether existing or future, to pay for renewable generation projects that are subject to a REC Contract. The protection of existing funds gives projects currently under contract additional time to become energized without the risk of losing the funding source. As such, investors in renewable energy projects (whether existing or future) should be confident in the availability of existing and future tariffed funds.

Accompanying the increases to funding for renewable projects are provisions that expand the application of certain labor requirements. For example, all utility-scale wind and solar projects and high voltage direct current (“HVDC”) transmission lines will be required by law to have a project labor agreement, and payment of the prevailing wage will be required on nearly all non-residential wind and solar projects.

The CEJA further incentivizes new development of utility-scale solar projects by making such projects eligible for designation as a “High Impact Business.” Designation as a High Impact Business may qualify new utility-scale solar projects for investment tax credits, a sales tax exemption on building materials and/or utilities and a sales tax exemption on purchases of personal property used or consumed in the manufacturing process. Minimum qualifications for designation include (i) a minimum investment of $12,000,000 and the creation of 500 new, full-time equivalent jobs or (ii) a minimum investment of $30,000,000 and the retention of 1,500 existing, full-time equivalent jobs. Projects must apply for the designation prior to commencement, including the purchase of building materials.

Finally, the CEJA allows large commercial and industrial customers to offset the tariffed surcharges that would otherwise be assessed by purchasing RECs from utility-scale wind and solar projects. This new program may create new opportunities for renewable generation developers to partner with large commercial and industrial customers directly.

High Voltage Direct Current Transmission

The CEJA promotes the development of HVDC transmission infrastructure, such as transmission lines and converter stations, by incentivizing the installation of such assets in Illinois. Even if the power transmitted through HVDC infrastructure is generated at a facility outside of Illinois, the CEJA deems that power to have been generated within Illinois if the transmission lines cross an Illinois border and deliver the power to a converter station located within Illinois. Certain regional and capacity restrictions apply. If HVDC infrastructure satisfies all required conditions, it may be treated as a “renewable energy resource” eligible for a competitive REC procurement. Finally, the CEJA provides authorization for, and direction to, the Illinois Commerce Commission regarding the award of certificates of public convenience and necessity regarding the placement of HVDC infrastructure throughout the state. A certificate of public convenience and necessity must be obtained before a HVDC project can begin construction, and the application for the certificate of public convenience and necessity must be submitted on or before December 31, 2023.

Net Metering, Distributed Generation and Energy Storage

The CEJA makes several noteworthy changes to Illinois’ net metering program. Prior to the CEJA, when the electricity demand of a given utility’s net-metered customers reached 5% of that utility’s total peak demand for the previous year, its net metering customers would no longer be entitled to receive the retail electricity rate for electricity delivered to the grid. That threshold has been replaced with a hard date, December 31, 2024, and the CEJA now expressly “grandfathers” any net metering customers as of that date, such that the new rate only applies to new customers. In addition, the rate to apply commencing in 2025 is now expressly required to be calculated with values for capacity and transmission. The CEJA also provides that systems eligible for net metering may include energy storage systems co-located with solar, and it increased the size cap on net metering installations at community solar and multi-unit properties from 2MW to 5MW.

The CEJA expands the distributed generation rebate program in at least two material ways. First, consistent with similar changes discussed here, it increases the size of eligible distributed generation systems from 2MW to 5MW. Second, it requires the rebate to compensate the owner of the distributed generation for system-wide grid services that it provides for a period of at least 25 years. The CEJA also requires utility companies to provide rebates for energy storage that is collocated with distributed generation and requires the Illinois Commerce Commission to undertake a study of the potential benefits provided by energy storage systems that the rebate does not already compensate. (Elsewhere, the CEJA requires the Illinois Commerce Commission to undertake a study regarding further mechanisms to support energy storage, potentially including minimum procurement levels.) The rebates are US$300/kWh of capacity for customers that are eligible for net metering and or US$250/kWh for customers that are not, with additional rebates in the same amount available for the collocated energy storage system, if any.

Electric Vehicles and Transportation Infrastructure

As part of Illinois’ effort to become a “net-zero” state, the CEJA establishes the goal of putting one million electric vehicles on the road by 2030. The headline incentive to drive this increase is a maximum of $4,000 rebate for Illinois residents who purchase an electric vehicle from an Illinois dealer. When combined with proposed federal legislation, the total tax incentive could be as high as $16,500.

One million additional electric vehicles will require significant new infrastructure development and capital improvements throughout the state. In order to substantially offset the installation costs of new electric vehicle charging infrastructure, beginning July 1, 2022, the Illinois Environmental Protection Agency will issue rebates to public and private organizations to install and maintain Level 2 or Level 3 charging stations. The rebate may fund up to 80% of the cost of installing such charging stations, with additional incentives “per port” installed. To qualify for this rebate, project owners must apply using a to-be-developed application process (including the promulgation of new administrative rules) and commit to paying the prevailing wage for the installation project.

¹ The CEJA requires that the procurement of RECs generated distributed generation projects must also include projects that are installed at public schools, with separate pricing and payment terms that are designed to make it feasible and affordable for public schools to install such projects.

² The CEJA requires that the procurement of RECs generated by utility-scale projects must also include projects that meet the following criteria: (i) the facility must be developed at or adjacent to sites of coal-fired power plants that as of January 1, 2016, burned coal as the primary fuel source; (ii) with respect to the first of such procurements, the facility will be located south of Interstate 80; (iii) the facility must have battery storage capacity; (iv) the resulting REC Contract will be for a 20-year term; and (v) the awarded RECs will be valued at $30 and fixed (not indexed) for the entire 20-year term.