Northern Ireland remains a highly attractive place to invest in small-scale renewables, whether as a landowner, developer, technology provider or funder, but these different parts of the jigsaw can sometimes be difficult to piece together to the satisfaction of each party. This has seen projects delayed or abandoned in recent years. However, as the market continues to mature, these sometimes competing interests are being resolved and sound legal advice is a key element in this process.
In April 2017, the current subsidy framework for renewables in Northern Ireland will change, and whether this will be for better or worse remains unclear at this time. However, at least for the next two years, Stormont has signalled that the levels of subsidy currently enjoyed by certain renewables technologies, most notably anaerobic digestion and small-scale wind, will remain higher than in other parts of the UK.
So the race is on to get projects across the line within this period, as any project that achieves grid connection before April 2017 will be guaranteed subsidies at the prevailing rate for 20 years. Once planning permission and a grid connection are in place, the next challenge for many projects is obtaining funding.
At the smaller scale of renewables projects, a significant proportion of potential funding opportunities come from private equity funds, and typically these funds are – rightly – highly risk-averse. This means that all of the elements of the project must meet stringent conditions dictated by the funds from which, typically, are not open to significant negotiation. If any of the elements of a project are not ‘funder-friendly’, a project will potentially fail.
It is critical that that the requirements of a funder are given serious consideration from the outset.
The usual starting point for renewables projects will be the developer entering into an option agreement upon grant of satisfactory planning permission, a lease for the land.
In many cases, the developer will be seeking external funding and therefore it is critical that the option and lease include rights for a funder to ‘step in’ to the option or lease in the event that the developer or operator defaults on any finance provided by the funder. This may be unpalatable for the landowner as they are being asked to potentially cede control to what at this stage may be an unknown third party. The issue may need to be approached sensitively but without step-in rights, it may not be possible to secure external funding.
A funder’s due diligence for a renewables project will extend to the planning permission and it is essential that any conditions or limitations to that permission are not prohibitive. The project should not be constrained, for example, in relation to noise emissions for a single turbine, or onerous vehicle operating hours for feedstock deliveries to an anaerobic digestion plant. The temptation could be to accept any conditions to secure the coveted ‘green form’ but ultimately this could prove counter-productive.
With regard to technology providers and construction of the relevant plant, funders will insist on extensive warranties and performance guarantees. Many projects have stalled in the past due to manufacturers refusing or being unable to provide what funders would consider to be adequate guarantees in terms of energy output and plant availability.
However, the market has made significant advances to meet these requirements but choice of technology provider and building contractors can still be critical to the viability of a project. Funders will often insist on either bespoke building contracts or variations on standards such as the NEC3 or FIDIC contracts, contractors and sub-contractors may be required to enter into collateral warranties in favour of the funder and in a form acceptable to the funders.
Many projects are developed to be sold on and the issues outlined above are equally important to third parties seeking to acquire projects as well as their funders. It is therefore critical that each part of the development jigsaw is put in place with expert legal advice to ensure the project is fundable and marketable.
Tughans Energy Team includes experts in all of the elements of this process, including site acquisition and assembly, planning, funding and construction. The team has been advising in the energy sector for many years and has acted for landowners, developers, funders, technology providers and construction companies in bringing renewables projects – from small-scale to major wind farm and energy from waste developments – to a successful conclusion.
James Pringle is a Partner with Tughans
Tel: +44 (0) 28 9055 3300
Dir: +44 (0) 28 9082 0524