Renewable Energy and Foreign Investment: Q&A with CFIUS Expert Steven Klemencic

The Committee on Foreign Investment in the United States is heightening scrutiny on renewable energy deals. A BRG expert weighs in.

Spurred by the Infrastructure Investment and Jobs Act and Inflation Reduction Act, renewable energy investment in the US has exploded: 2023, for instance, saw a 22 percent increase in such inflows year over year. Domestic players aren’t the only ones entering the fray. Investors headquartered in foreign countries accounted for over 45 percent of the value of new clean energy manufacturing investment announcements in 2022 and 2023.

Yet leveraging international capital for renewable energy projects comes with its own set of challenges. The Committee on Foreign Investment in the United States (CFIUS) regulates not only investments where a foreign person acquires “control” of a US business, but those where the investment relates to a business involved with critical technologies and/or infrastructure. On both fronts, renewable projects will not be spared.

BRG Managing Director Steve Klemencic knows this firsthand. A former senior analyst at the National Intelligence Council, Klemencic developed and implemented the CFIUS threat assessment review process for the intelligence community’s support to CFIUS. At BRG, he counsels both law firms and transactional parties in all stages of CFIUS review and regularly serves as a third-party compliance auditor or monitor for these transactions.

We talked with him about current risks and how investors, developers, and law firms can navigate this increasingly complex landscape.

Let’s start by laying out the present CFIUS playing field as it relates to foreign investment in renewable energy projects. What worries CFIUS about these projects—and is the Committee’s oversight intensifying?

CFIUS is very interested in foreign investment into the US renewable energy sector for a number of national security reasons. For instance, if a foreign sovereign wealth fund is interested in acquiring or investing in a solar facility, could it gain access into the grid by disrupting Supervisory Control and Data Acquisition (SCADA) systems that control grid functions?

The electrical grid is part of the nation’s critical infrastructure. Controlling grid functions can impact grid availability and efficiency and potentially damage physical components, all of which sound the alarm for CFIUS. These risks, among others, help explain why in 2018 Congress passed new regulations that (1) impose greater scrutiny on foreign developers seeking to acquire real estate or associated land rights for wind, solar, or other energy projects; and (2) may require some foreign developers and investors involved with critical infrastructure to make mandatory CFIUS filings and undergo lengthy national security reviews.

At present, CFIUS is scrutinizing everything from electric power facilities to natural gas pipelines to solar, wind, and battery storage technologies. And they are ramping up scrutiny on such projects, which can drive longer timelines for reviewing deals and increases the number of deals subject to mitigation requirements.

What are the most common concerns from renewable energy developers, investors, and law firms on CFIUS-related issues?

At the outset of the transaction, a lot of folks are simply trying to understand why the government cares. Maybe they’re wondering why CFIUS has jurisdiction because they see their new solar or wind facility as a greenfield investment that falls outside its scope—and need to understand that CFIUS can exert jurisdiction over the transaction since the solar facility is, functionally, going to plug into the larger grid, which is critical infrastructure. Or maybe they’re putting up a solar facility in the Mojave Desert and wondering, “What’s the issue?”

Well, in the latter case, perhaps they have to think about what else is out there in the desert. Are sensitive government facilities nearby? How close are they? Could the solar facility be a physical and/or logical access point for bad actors to enter a geographic area or, as we’ve mentioned, gain access to the grid? There’s a reason that regulators tend to be most concerned about physical access to these facilities and their control systems.

Once CFIUS gets involved, stakeholders are concerned with how to comply with US government requirements. There will often be a mitigation agreement, known as a national security agreement (NSA), that is the result of negotiations between CFIUS and the transaction parties, which requires the latter to take certain actions and abide by specific requirements. For instance, maybe there is a restriction on foreign investors accessing the facility unless the US government preapproves the visit. Or the operators of the facility may be required to develop a security policy that specifically addresses the stipulations of the NSA. Operationalizing these agreements often entails developing new policies and procedures, as well as bringing in a third-party auditor or monitor to ensure compliance.

What are some best practices for those looking to comply with NSAs?

The trick is that each mitigated transaction has its own NSA. There’s no one-size-fits-all approach. But typical requirements often include the need for a security officer at the site, controls for SCADA systems, controls over physical access to the site (including restrictions on foreign persons’ access), and reporting requirements around certain aspects of the facility’s supply chain.

It’s vital to have partners on board who have firsthand experience with these agreements and the regulators themselves. It’s even better if they have members of a broader team with varied skillsets who can provide the technical know-how necessary for particular transactions.

The upcoming presidential election is obviously on people’s minds. Will the outcome have any impact on CFIUS decision-making?

It’s certainly possible. Parties involved in contentious transactions should consider the election’s impact relative to the deal. While CFIUS does not speak to the press about transactions under review, the companies and people involved often do, which means the deal becomes public knowledge and, potentially, an election issue.

For instance, does the deal impact a significant element of the voting population and/or a social media landscape with millions of participants? Is there a large union component? Does the deal possibly place at risk large quantities of sensitive US person data? Does the location or function of the transaction, such as the resulting access to or control of critical infrastructure, leave voters feeling threatened? These particular factors will influence how candidates for office react.

The transaction parties have the option of voluntarily withdrawing the transaction from the CFIUS review cycle if it looks like their deal will become political fodder. The parties can then decide when to refile, which restarts the review cycle clock and effectively pushes any decision by CFIUS well beyond the election cycle.

Of course, the transaction parties also have the option to push for a decision by CFIUS. The risk is that your potentially politically contentious deal may end up on the desk of the president for a final decision. Are you prepared for your deal to be formally and publicly blocked by the president as a result of political considerations?

Finally, there is the matter of CFIUS personnel. While CFIUS does have professional staff, the ultimate decision makers are political appointees. A new presidential administration, particularly when it involves a change in the party in power, leads to significant turnover in political appointees. These new appointees must go through a congressional approval process, and this takes time. The absence of political appointees in CFIUS during the administration turnover will result in delays in CFIUS decisions.