A changing climate for energy
20 June 2008
Over the past 18 months there has been a seismic shift in public attitudes towards climate change: the publication of the report commissioned by the Government from Sir Nicholas Stern entitled The Economics of Climate Change in October 2006 coincided with the release in the UK of Al Gores documentary, An Inconvenient Truth, which brought climate change to the front and centre of both personal and political debate worldwide. The policy debate has moved on from whether climate change exists, or whether mankind has contributed to it. Today the public and private sector around the world are increasingly focused on what to do and what it means for business.
At a series of debates hosted by Linklaters over the past 12 months, the keynote speakers Sir Nicholas Stern, John Shepherd of the Tyndall Centre and Lord Browne have driven home three overriding messages.
The first is that time is of the essence: early action is much more effective than late action, and correspondingly cheaper for the global economy.
Second, this is a solveable problem: the technologies required to effect change already mostly exist, and innovation is improving this position continually.
Finally, the implications for business are huge and wide-ranging comparable with the telecoms explosion or the internet, both in terms of how business is done and the opportunities for new businesses and products.
There are also signs that policymakers are responding. The European Commission recently agreed a far-reaching package of proposals to deliver the European Councils commitments to fight climate change and promote renewable energy.
The proposed measures rely heavily on the increased use of renewable energy in each country and for the first time set legally enforceable targets for governments to achieve them. The package seeks to reduce EU greenhouse gas emissions by at least 20 per cent by 2020 and increase to 20 per cent the share of renewable energies in total energy consumption by the same year.
The UKs Climate Change Bill, which is currently in draft form, but which should recieve Royal Assent this summer, sets out, among other provisions, limits on CO2 emissions and the establishment of an independent climate change committee to monitor the UKs compliance with targets.
Initiatives such as these, which have a wide reach across all 27 EU members, combined with the voluntary targets being devised by China and India, not only reflect the worlds concern about global warming, but help to create potentially lucrative new markets.
The effect on the energy market
The energy market will be a key part of any solution. The Stern Report calls for power generation worldwide to be 60 per cent decarbonised by 2050, which if it happens would require a transformation of existing energy markets. Recognising this need, international businesses, including both traditional power producers and
smaller, more specialised renewable energy suppliers, have intensified their focus on available opportunities in the clean generation market.
Perhaps surprisingly, law firms have also been quick to respond. A number of firms that now lead the market were actively developing their practice in this area five years ago, before the massive appetite for energy derived from renewable sources had really become apparent. Perhaps because up until recently much of the change had been led by regulatory measures, or maybe just because they enjoy the subject matter, increasing numbers of lawyers skilled in wider energy markets are turning their attention to renewable energy. The result has been an incredibly rapid evolution in the size, sophistication and complexity of transactions relating to renewable energy, from the simple financing deals worth just a few million five years ago to the cross-border financings and IPOs of portfolios that are worth many billions today.
Financing renewable energy projects
Renewable energy is now at the cutting edge of the project finance market. The number of renewable energy deals done in the Linklaters Global Energy and Infrastructure Department from 2005 to the end of 2007 was more than double the number of deals completed in the period from the mid-1990s to the end of 2004 and has expanded out of a few leading jurisdictions to the whole of Europe and further afield. With this explosion comes the opportunity to become involved in all stages of development of renewable energy projects, from advising on the ever-changing regulatory environment (including planning and permissions) to complex financial structuring of transactions to take advantage of renewable energy incentives, and advising lenders and sponsors on all aspects of construction and operating risk.
Project finance deals are usually structured using a company set up for the specific purpose of the project. This project company borrows money for the purpose of designing, building and operating the project, which in turn will (it is hoped) generate sufficient revenue through the sale of electricity to pay off its loan and generate a profit. It is therefore extremely important to lenders that the asset, for example a wind farm, does indeed get built and, once built, functions sufficiently well to ensure that the project company can repay its debt. This makes both the due diligence on the project, and its security package, extremely important. The lenders will take security over all the assets of the borrower, including its shares and over the asset, once built, and the entire contractual structure surrounding the transaction.
Clients expect their project lawyers to not only know the law, but to also have an extensive knowledge of the commercial risks of their business. These risks can take many forms, some more unexpected than others. One of the bigger issues on a solar project can be security solar panels are surprisingly hot property. Other issues include, as well as conventional construction and operational risks, changes in law/regulatory risk (it seems the political temptation to announce a new green bill is irresistible), access (wind turbine blades are too long to go around corners, so many a dry stone wall has had to come down and go back up again afterwards) and environmental/planning issues, such as lobby groups objecting to the loss of grazing rights for sheep around solar panels and the danger of birds flying into wind turbines.
One of the largest and most exciting recent renewable energy transactions was a 1.13bn (900m) financing of a portfolio of wind farms, on which Linklaters acted for the lenders. The transaction included four wind farms in Germany and nine separate Italian project companies, each owning a number of wind farms across Southern Italy, with a total of 748MW (the size of a large conventional power station). The shareholder of the borrower, and the ultimate parent company of each of these individual project companies, was incorporated in Ireland, and the portfolio also included Delaware (US) and Hungarian companies.
The transaction, codenamed Project S, was unusually complex. Security was taken over assets in five jurisdictions with more than 150 documents (in three different languages and as many as 15 copies of each) signed over five days.
Although extensive, much of this paperwork across the portfolio was along similar lines, adjusted for the particular circumstances of each project company. This created an ideal opportunity for a significant and responsible trainee role, developing a lot of the new documentation from agreed forms, but requiring an understanding of the overall transaction and the differences between the projects.
And then there was signing. It is no small task on a deal such as this to ensure that your client (accompanied by their local lawyers, power of attorney and notary where necessary) turns up to signing in the right country and on the correct day.
Other typical trainee tasks on this (and other renewable energy deals) include:
Regulatory research and advice: much of the revenue for renewable energy projects comes from regulatory incentives that differ from jurisdiction to jurisdiction across the EU. I became an expert in the regimes that apply in Germany and Italy, not least when the latter changed mid-deal.
Handling project documents: reviewing any contracts that the borrower has in place, advising on the main commercial risks and negotiating direct contractual arrangements between the lenders and the contracting counterparty to protect lenders against the risk of termination of the contracts.
Liaising with foreign counsel: to the extent that
foreign counsel have been appointed to advise on the individual requirements of the different jurisdictions involved, ensuring that they have a full understanding of the deal structure and of all the documents that they have to review or prepare.
Condition precedents: managing the collection of condition precedents, ensuring that the documents received meet the requirements of the loan agreement and coordinating with the lawyers on the other side to make sure that everything has been finalised before financial close.
Organising: collating the execution versions of the documents from all jurisdictions and ensuring that there are sufficient copies of each document for signing in the correct country and at the correct time along with the people who need to sign them and the celebratory champagne.
Tying up loose ends: being responsible for ensuring that the morning after the night before executed documents find their way to the right home and that security is registered, etc.
As the renewable energy market continues to expand and governments around the world commit to attaining lower emissions targets, transactions will be likely to become more international and more interesting, with the added sense of personal satisfaction resulting from knowing that the deal you are working on is helping, in some small way, to combat climate change.