March 01, 2012

Keys to Wind Energy Development in Baja California

Brian Orion

A number of forces are driving renewable energy developers to look south of the border for the next big opportunity in wind energy. Rising along the U.S.-Mexican border between the cities of Tijuana and Mexicali, the mountainous region known as La Rumorosa is thought to have such plentiful wind resources that developing only a fraction of the technical potential could nearly triple the amount of wind power installed in California today. The region’s location directly adjacent to the California border gives project developers an opportunity to sell this plentiful resource into the substantial renewable energy market in California, where California utilities are striving to satisfy 33 percent of their retail electricity demand with renewable energy by the year 2020. And despite efforts by regulators to speed the process along, building utility-scale renewable energy projects in California has proven to be a multiyear undertaking, often leading to costly delays in obtaining necessary approvals.

These converging forces have set the stage for a significant new cross-border market in renewable energy. Counsel advising project developers should be prepared to provide strategic advice on a number of unique legal and regulatory challenges facing such a venture, including securing land rights for the facility, transporting the power, ensuring it satisfies California’s requirements for out-of-state renewable energy, and complying with Mexico’s statutory environmental review process.

The process of securing land rights in Mexico is often bewildering to foreign developers. The Mexican Constitution places restrictions on foreign ownership in the 100-kilometer strip of land along the U.S.-Mexico border (which includes most of Baja’s wind region), requiring foreign owners to establish a Mexican corporation to take direct title of land to be used for commercial purposes. Finding the correct party from which to purchase the land can be surprisingly difficult, however, as land in Baja California is notorious for being encumbered with conflicting claims of title. Stories abound of unwary buyers who purchased land from a seller only to later find out that a third party has a conflicting claim of title. Sempra Energy found itself enmeshed in one such controversy when a local landowner stepped forward to claim rights to land within a buffer zone that was required to be maintained around Sempra’s liquefied natural gas terminal in Baja, triggering protracted litigation that has threatened revocation of the facility’s operating permits. An additional complication is that half of the land in Mexico, including much of the land around La Rumorosa, is owned by land collectives called ejidos. Doing business with an ejido requires strict adherence to the decision-making procedures set forth in the ejido’s regulations (for example, on the number of members who must assent to a transaction) to ensure that a transfer of land will be enforceable. Retaining experienced local counsel is highly encouraged.

Deciding the best way to transport the power is as important as securing land rights. The first major project in the region, known as the Sempra Energia Sierra Juarez project, will include the construction of a new transmission line and substation switchyard, which will connect to the Southwest Powerlink in San Diego County near the town of Jacumba. Because building a new international transmission line requires approval from the U.S. Department of Energy, this approach will require review under the National Environmental Policy Act. See, e.g., Border Power Plant Working Group v. Dept. of Energy, 260 F. Supp. 2d 997, 1006 (S.D. Cal. 2003). Building a new transmission line may be less feasible for future projects, as the region extends for more than 100 miles to the south, and later entrants may be farther from the border.

The other option for delivering power is to transport it through the existing transmission grid (called “wheeling”). There are two major north-south transmission lines crossing the border, one near Tijuana and the other near Mexicali. An east-west transmission line connects the two and is operated by the Mexican federal utility, the Federal Electricity Commission (CFE). However, the existing transmission lines are severely capacity constrained, and Mexican law prohibits CFE from building new capacity for the sole purpose of exporting power. Wheeling power through the CFE grid will incur charges that must be considered in evaluating the project’s costs.

Once the transmission pathway is secured, the next hurdle is ensuring that the power will qualify for the California Renewable Portfolio Standard (RPS) program. This is crucial because the RPS program requires California’s utilities to meet 33 percent of their retail demand with renewable energy by 2020, and they will not likely contract for power unless it is RPS-compliant. The California Energy Commission (CEC) is tasked with making the certification determination according to standards set forth in the statute. Of particular importance for out-of-state sellers, like those in Baja, is the requirement to show that the project will not contribute to the violation of any California environmental standard or requirement. Cal. Pub. Res. Code § 25741(b)(2)(B)(iv); see also Commission Guidebook, Renewable Portfolio Standard Eligibility, Fourth Edition at 53–55 (Jan. 2011). Demonstrating such compliance requires the project developer to summarize all state and local Laws, Ordinances, Regulations, or Standards (known as LORS) that may be violated by the project and to evaluate whether the project will contribute to any such violation. The CEC reviews these applications on a case-by-case basis, but allows an applicant to seek provisional or “precertification” subject to verification after the facility comes online.

Project developers will need to comply with environmental requirements on the Mexican side of the border as well. In 1988, Mexico established a comprehensive environmental review process modeled on the process in the United States. See General Law of Ecological Balance and Environmental Protection, tit. I, ch. IV, sec. V, art. 28–35, in Diario Oficial de la Federacion (Jan. 28, 1988) (General Ecology Law). The General Ecology Law requires the preparation of an environmental impact assessment when certain types of projects (including wind farms) could cause an ecological imbalance or exceed environmental conditions prescribed by statute, regulation, or norm. Id., art. 5, 28. The review process requires the project proponent to prepare an environmental impact assessment and submit it to the Secretary of the Environment and Natural Resources (SEMARNAT) for approval. Upon receipt, SEMARNAT, a cabinet-level agency of the Mexican government, comparable to the U.S. Environmental Protection Agency, will review the submission for compliance with the General Ecology Law and applicable regulations and technical norms promulgated thereunder. Id., art. 35. Within a maximum of 180 days, the agency must issue a determination either granting approval for the project as proposed, denying approval of the project, or granting approval subject to modification or establishment of additional protective measures. Id.

By way of overview, Mexican environmental law is a three-tiered system consisting of statutes, regulations, and norms. Norms are technical standards promulgated by agencies of the federal government that tend to be media and industry specific. Mexico has established a norm relating to the development of wind energy projects that establishes technical specifications for protecting the environment during all phases of the project, from initial site preparation through construction, operation, and eventual decommissioning of the facility. See Norma Oficial Mexicana PROY-NOM-151-SEMARNAT-2006 (Norm).

During the site preparation phase, the Norm requires implementation of measures to avoid contamination of storm water, procedures for storage of extracted materials, procedures for cleaning spills, and specifications for the location of the wind turbines in relation to one another. Id. ¶¶ 4.2.8–9, 4.2.12, 4.2.14. During the construction phase, the Norm contains provisions for the handling and disposal of construction materials and hazardous waste, provisions for discharge of wastewater, limits on the discharge of air pollutants, and activities to prevent erosion from roads. Id. ¶¶ 4.3.2–7, 4.3.9–11, 4.3.14. Of note, the Norm also contains provisions related to wind turbine design, intended to minimize impacts to visual resources in the surrounding area. Id. ¶ 4.3.18.

During the operation phase, the Norm contains requirements for ongoing maintenance and repair of facilities and provisions designed to avoid water pollution. Id. ¶¶ 4.4.1, 4.4.3. In addition, where impacts to birds are likely to occur, the developer must draw up measures to mitigate those impacts. Id. ¶ 4.4.5. Finally, the Norm contains provisions for decommissioning facilities, which include removal of above-ground infrastructure, restoration of affected areas with native vegetation, and removal of all waste generated at the facility. Id. ¶ 4.5. Compliance with these provisions is ensured through a process of third-party verification performed by either the Federal Attorney for Environmental Compliance (known as PROFEPA, a department of SEMARNAT), or a duly accredited and approved third-party verifier.

Because wind energy projects are covered by an official Mexican norm, the developer need not conduct a full-blown environmental impact assessment for the project. See Regulation Implementing the General Law on Environmental Protection and Ecological Balance as It Relates to Environmental Impact Evaluation, ch. IV, art. 29, in Diario Oficial de la Federacion (June 7, 1988) (Environmental Impact Regulation). Instead, the developer prepares and submits to SEMARNAT a more streamlined environmental assessment known as a Preventive Report. Norm ¶ 4.1.1. Among other things, the Preventive Report must: identify the project and the developer; describe the equipment to be used and the affected environment; discuss the emissions, discharges, and wastes expected to be generated by the project; and identify the significant environmental impacts of the project, along with measures to prevent and mitigate those impacts. Environmental Impact Regulation, ch. IV, art. 30. The Norm explicitly requires the Preventive Report to take account of certain environmental resources, including thorough studies on wind conditions and the impact of the project on soils, geological resources, flora and fauna, and visual resources, among others. Norm ¶ 4.1.3 & Annex A.

Like any major project, the unique challenges of developing wind energy projects in Baja California must be weighed carefully before proceeding. For those willing to undertake the venture, the scope of the challenge will be matched by the scope of the resource and market potential available, which presents an attractive opportunity for developers. Though environmental compliance procedures in Mexico differ from those in the United States, those who are eager to see increasing quantities of renewable energy flowing into the system should recognize the benefit of developing not only the resources available in our own back yard but also those available right next door.

Brian Orion

Mr. Orion is a partner at Lawyers for Clean Energy in San Francisco, CA.