Wind in your sail

Energy is an indispensable ingredient for everyday life '“ and as the economy and population grow, so does the need for it. Depleting oil stocks, as well as global warming, make a move away from fossil fuels inevitable. One way to replace fossil fuels and meet the demand for an uninterrupted supply of energy is renewable energy sources: notably, wind, solar and biofuels.

Renewable energy is now at the top of the agenda for just about every government. The EU recently increased its binding overall target for the share of renewable energy from 10 per cent to 20 per cent by 2020. And, despite a lack of federal support, the US is rapidly catching up, with about half the states (27, plus the District of Columbia in July 2007) having adopted renewable portfolio standards. These standards require utilities to derive a certain percentage of their electricity from renewables '“ sometimes with targets even higher than those in the EU. Countries such as China and India, despite their negative image in this arena, have embraced this market as well and show growth rates for renewable energy exceeding those of many Western countries.

Likely investment in renewable energy for the immediate future exceeds anything the world has seen before. Annual installed capacity is predicted to reach 21 gigawatts (GW) in 2010, an increase of 38 per cent from the 15.2GW installed in 2006. Furthermore, the World Energy Council predicts that by 2010, the volume of global investment in renewable energy will have reached US$625bn and could rise to US$1.9trn by 2020. In the US, wind energy alone should require an investment of more than US$20bn over the next few years to increase capacity by at least 10,000 megawatts (MW). And investment should continue to reach even higher levels. In 2006, total installed wind energy capacity increased by 25 percent globally, generating some ‚¬18bn (US$23bn) worth of new generating equipment and bringing global wind power capacity up to more than 74GW. Figures for Europe reach similar levels, with the EU remaining the leading market in wind energy at more than 48GW of installed capacity. Even these make up only a part of the world's total investment requirement.

New technologies such as tidal and wave energy which do not yet provide proven and bankable technology, will eventually reach maturity and can meet a highly valuable share of the world's energy requirements. Ancillary markets, such as carbon trading, will contribute substantially to the investment requirement and should be tailored into any financing plan for a renewable energy project.

The market can still be described as only just gearing up. Wind projects especially, as well as other projects, require a development phase of two to three years. Since investors began looking to the US market in earnest only a few years ago and have spent much of the time since developing projects, many projects are likely to reach maturity and require financing next year or thereafter - with a constant flow of additional projects following.

Key legal issues

The legal issues relating to renewable projects, which can be manifold, depend on the technology used and the project's location.

For example, a small wind project in northern Germany will probably pose relatively few problems, whereas a large photovoltaic (PV) project in New England could pose many. Usually the legal aspects, and the role of law firms, in a renewable energy project can be divided into those arising during the development phase and those arising during the financing and construction phase.

Very often, investors seeking to embark on a project call in a small local firm for legal advice during the development phase, not least because many projects are abandoned during this phase and developers try to keep legal fees as low as possible for projects that may never come to fruition. However, all project documents need to be acceptable to investors and banks, and frequently smaller firms have difficulties advising on the bankability of, for example, engineering, procurement and construction (EPC) agreements. Usually, advice provided during the development phase should include advice on land lease and rights agreements, EPC agreements and interconnection agreements.

Power purchase agreements

More often than not, a developer will also at least begin negotiations on power purchase agreements (PPAs), equipment supply agreements (for example wind turbines) and operation and maintenance agreements. This second phase of legal advice, reviewing all project documents for bankability, may run into snags when performed by purchasers, investors or their financing institutions using their regular legal advisers.

While these advisers may know exactly how project finance works and what is usually expected from a bankable agreement, they frequently lack sufficient understanding of the underlying renewable energy market situation and conditions. They may, for example, reject the type of clause that is standard in an EPC agreement for a solar PV project, yet overlook a highly unusual warranty clause in a wind turbine supply agreement.

Highly interesting legal work may also take place at an even earlier stage. For example, a developer and an investor or purchaser may negotiate a co-operative framework or joint venture agreement if a group of parties agree to work together seeking connection or offtake agreements, or when equity investment is sought for developers, as well as in many other instances.

At this stage, the role of the legal adviser is much more proactive and creative, requiring substantial knowledge of the markets, the players, their interaction, costs and prices, structures and more. In addition, legal advisers must understand international bankability standards and structures. Today, very few lawyers bring this combination of skills to the table.

This second phase of a renewable energy development project is more or less dedicated to financing, to an extent that has not existed in the development phase, as well as to the conclusion of some of the larger project agreements. In any sizable project, this phase is usually placed in the hands of firms with experience in project finance '“ both on the borrower's and on the lender's side.

Role and position of law firms

Law firms in the renewable energy market can be divided into a number of groups.

US-based firms primarily serve the US market. Pan-European firms, which primarily advise clients across Europe, tend to be located in London. In addition, traditional local firms, many of them Germany-based, have advised Germany-based clients for many years and have been part of the German renewable energy success story. Some local firms in Denmark and Spain have similar histories in their countries. Other renewables markets, notably Latin America and Asia, are usually served by US or pan-European firms.

The original renewables market was dominated by small companies with strong links to the industry but limited knowledge of international transactions, especially international finance '“ and the same holds true for their legal advisers.

Early legal documentation

Many legal documents from the early days of renewable energy, especially in Germany, were very basic. It was common for a construction agreement for a large wind project to consist of fewer than 10 pages, broadly referring to statutory provisions. Financing agreements might not be required to comply with international standards (understandably, if the financing was for no more than ‚¬10m) and were equally basic.

However, the market has changed, and so have the expectations of the community involved. Short, sharp, slimmed-down project agreements are no longer bankable on an international level. Still, many of the smaller and formerly successful players in the renewable industry (as well as their local law firms) have not come to terms with this change.

The inexperience of small local law firms in structuring the kind of renewable energy project agreements that meet today's needs has presented an opportunity for global firms with their wealth of experience, understanding of what makes projects bankable and numerous contacts per square mile. Local firms have often found it difficult to compete with these international players. However, global firms often lack an understanding of, and contacts in, the local market. They may provide the same type of finance and mergers and acquisitions advice for a renewable energy project that they would provide for any other type of project.

The obvious solution is for a firm to combine local renewable energy knowledge with international project experience, yet this can prove challenging. While it works on paper, in reality, the renewable energy experts in small firms can be an ill fit with large international firms and vice versa.

A lack of sufficient training, skills and understanding of the role of legal adviser and the operation of an international firm can make it difficult for a lawyer from a local firm to work for one of the global players. A deficiency in English language skills and an approach to drafting legal documents that fails the test of a global environment are just two of the most important obstacles for these lawyers to overcome.

Law firms are beginning to address these hurdles and are, in fact, endeavouring to establish full renewable/project finance capabilities. Today, if a lawyer wants to advise a renewable energy company, it is probably more important for him or her to understand the rules of international project finance than to know the CEO's golf handicap. Unlike earlier days, executives at these companies now come and go. Increasingly, highly skilled professionals who understand the international market are brought into play. Moves for the sake of consolidation '“ which can be expected to continue '“ compound this trend.

There will probably always be a market for small and sophisticated firms capable of providing local advice '“ for example, on planning and permitting '“ or in markets where small projects, such as those whose debt providers do not demand complex project finance structures, are being constructed.

However, complex projects involving finance structures or where international investors get involved, smaller projects use larger firms for financial advice and require local firms to provide essential local legal advice.

Future prospects

• Wind, solar and biofuels are the main sources of renewable energy. New technologies, such as tidal and wave, will pose new challenges as these technologies reach maturity and begin providing a valuable contribution to the world's energy requirements.
• The legal market in renewable energy is divided between small, well-experienced local firms and international project finance firms.
• There are usually two main phases in any renewable energy project: the development phase and the financing/construction phase.
• There will always be a role for smaller firms, notably for local planning, zoning and permitting, but increasingly, they are less involved in the financing of renewable projects. Firms need to take steps to ensure they gain the work for an entire project, beginning to end, but this is not always easy to do. Often, more than one firm will be involved in a single project.