What Is Holding Back Renewable Energy Development in Indian Country?

An energy paradox lingers in Indian Country, the land base of Native Americans in the contiguous 48 states: enormous renewable energy generation potential, but numerous barriers to development and electrification. This article is the first in a two-part series: first, exploring the barriers to renewable energy development in Indian Country, and second, laying out potential regulatory, legislative, financial, and business solutions for overcoming them.

The Potential and the Benefits

Native American tribes could provide 10% of the nation’s total energy and 6.7% of U.S. renewable energy capacity. But despite this generative potential, over 14% of households on Native American reservations lack access to electricity. Further, according to the U.S. Department of Energy, 86% of American Indian lands — 15 million acres — with energy or mineral resources were still undeveloped as of 2012.

With an estimated 9 terawatts of potential renewable energy capacity in Indian Country, tribes have the opportunity to be key players in the transition away from fossil fuels to renewable energy. And practically, much of Indian Country offers a renewable energy development environment with little existing competition, little to no legal restriction on land use, and tax-exempt status that provides a potential competitive advantage.

Renewable energy and microgrid development provide a number of potential benefits to tribes beyond energy provision, including economic development, energy cost savings and stabilization, environmental protection, climate change mitigation and increased climate resilience. The ability to develop and regulate renewable energy is also an expression of sovereignty and self-determination, Tanksi Clairmont, Tribal Solar Accelerator Fund director at Grid Alternatives, told CEFF.

“The relationship between renewable/solar energy and sovereignty is the overarching responsibility to protect the land in a way that aligns with cultural and traditional principles, while affirming the inherent powers of tribal nations,” Clairmont wrote in an email. In creating environmental codes, issuing permits, levying taxes and entering government-to-government agreements, for example, a tribe exercises its ability to self-govern.

But why, despite these benefits, are we seeing so little public and private capital flow to renewable energy in Indian Country? While investment in renewable energy in the U.S. continues to grow, according to a January 2019 article by Garrett Hering from S&P Global Market Intelligence, renewables presence on tribal lands still remains a fraction of its potential. Barriers to accessing capital, limited technical expertise and transmission infrastructure, regulatory hurdles, and minimal knowledge of sovereignty and federal Indian law amongst business and financial institutions currently prevent tribes from actualizing benefits of the renewable energy transition.  

There are unique renewable energy barriers and opportunities facing each of the 573 federally recognized tribes in the U.S. We focus on overarching trends in this article.

Land and Leasing

The benefits of renewable energy for tribes are limited by a key resource — land. At the 2019 annual Native American Finance Officers Association conference, Clairmont argued that most tribal lands are located in rural, isolated areas, which often makes renewable energy and transmission infrastructure development challenging and financially unattractive. Additionally, tribal governments may be unrepresented at local, state and federal processes charged with approving transmission and energy infrastructure in the first place.

Renewable energy and microgrid development provide a number of potential benefits to tribes beyond energy provision.

Just as significant, much of Indian Country — over 55 million acres — is “held in trust” or under the control of the federal government, meaning virtually all decisions related to land, including mineral leases and development, must be approved by the Bureau of Indian Affairs. While important for reducing the transfer of tribal land to private non-Indian ownership, tribal trust lands cannot be sold or used as collateral (and as sections below elaborate, development is encumbered by a litany of federal regulations and red tape). Without this property right, a significant wealth-building vehicle and collateral instrument is out of reach to many individuals and tribes — at any interest rate.

Since the 1930s, several legislative changes have increased tribal authority to enter into land lease agreements and sought to streamline processes for energy development on tribal lands. However, even recent legislation may require tribes undergo a lengthy and bureaucratic approval process. Further, under the Indian Tribal Economic Self-Determination Act, the U.S. relinquishes liability for damages and losses associated with such lease agreements. Tribal nations are now thus presented with a “catch-22”: exercise increased sovereignty but compromise their trust relationship with the United States.

Regulations and Legal Frameworks

In a survey of experts in the field, Sandia National Laboratories found finance to be the biggest barrier to renewable energy development on tribal lands. Indeed, a maze of federal, state, federal Indian law, and tribal law contributes to underinvestment of private capital in Indian Country and tribal businesses.

One result of the federal Indian trust responsibility is that tribal lands are subject to a number of federal regulations (including the National Environmental Protection Act), permitting processes, and forms of agency oversight not required on private lands. Further, few existing frameworks for the development process such as permitting, siting, and drafting contracts exist for unique tribal contexts. These variables increase the complexity, uncertainty, time horizon and cost of projects; as a result, businesses and investors often develop elsewhere.

Further, few regulatory frameworks exist to develop projects on tribal lands. In an email to CEFF, Tara Kaushik, partner at Holland and Knight, LLP, said the “lack of a uniform policy and process to provide certainty to investors and developers of energy projects, and the lack of internal resources/expertise, make forays into the energy business an expensive endeavor for a tribe.” Energy companies often find that securing and drafting necessary development documents like permits, title surveys, and contracts specific to a tribe’s context is difficult, if not impossible, without the tribe having the support of (potentially expensive) energy and utility expertise to develop approval processes for such documents.

Access to Capital

Sovereignty and the relationship between the federal government and tribes present other financial and legal hurdles to energy development. “Since tribes are sovereign nations, they must compete against states and large entities for federal funding, corporate and foundation funding, and for state programs,” said Clairmont.

Tribes are also largely locked out of the vast global private equity market. The use of funds held in trust (typically from historical settlements) by the federal government and generated through Indian gaming is often hamstrung by initial restrictions, including the prohibition of putting principal at risk through investments.

The Indian Reorganization Act of 1934 authorized the formation of Section 17 corporations, intended to extend business formation rights to tribes. However, tribal corporations are prohibited from transferring corporate assets to non-tribal entities, including ownership shares, stock and options, without permission from the Department of the Interior. This prohibition effectively eliminates outside investment through public and private markets into Section 17 corporations. Often dependent on their credit ratings, tribes can issue bonds (albeit with restrictions), access loans, invest via investment advisors, and enter joint ventures with non-tribal companies.

Other hurdles come from national legal structures that govern investment. After the Great Depression, the Securities and Exchange Commission (SEC) adopted the Securities Act of 1933 and 1934 to regulate securities transactions. The SEC adopted Final Rule 501(d) of Regulation D in the Securities Act in 1982, creating a list of qualified organizations and individuals deemed “accredited investors,” exempt from meeting state and federal security registration requirements in order to participate in the private equity market. (An individual or organization must have a net worth of over $5 million to qualify as an accredited investor.)

Tribes and their corporations are ineligible from monetizing or transferring the production and investment tax credits to a taxable entity.

While private equity firms are not prohibited from selling securities to non-accredited investors, legal advisors highly discourage it. Tribes, tribal corporations and Section 17 corporations were not included under the 1982 rule, preventing participation in the large private equity market and raising capital through securities or shares.  In 2017, Regulation D offerings alone raised $1.7 trillion — a source of capital out of reach to tribes. A simple amendment to the rule was proposed in 2007, but the SEC failed to enact it. Tribes, thus, are limited in ability to meaningfully raise capital for tribal enterprises and economic development, largely restricted to extending capital through direct investment or making investments into private equity funds via multi-entity structures.

Finally, tribes and their corporations are ineligible from monetizing or transferring the production and investment tax credits to a taxable entity. To take advantage of the renewable energy tax credits, a deal must be structured so that the project owner is a non-tribal entity, or a tribe must form a business and enter a joint venture with a non-tribal entity. That non-tribal entity can then enter a pass-through lease with an equity investor. While wind and solar projects are becoming increasingly viable without tax credits, tribal governments are still left unable to utilize the tax credits and accelerated depreciation that have reduced capital costs up to 50%.

The technical renewable energy capacity in Indian Country is enormous, but regulatory, legal and financial barriers inhibit development. However, there is growing momentum — and there are emerging solutions — inside and outside of Indian Country to address both climate change and economic inequity. The next installment of this series will explore how American Indian tribes are addressing regulatory barriers, experimenting with energy microgrids and utility scale solar, and developing new financial tools to address disparities in energy access, generation, and resilience.

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