Wind power in Norway
Parties and corporate structure
Financing by assignment of cash flow
Investing in wind power is becoming increasingly popular in Norway due to stable winds, an efficient market for physical delivery and hedging of exposure, and possibilities for foreign ownership. Recent legislation which provides financial support for new projects through the issuance of energy certificates which are tradable in Norway and Sweden has led to renewed interest in this sector.
Wind power in Norway
For power producers and investors, wind power is an interesting alternative to hydro-electric power as a means to increase total power production in Norway. Wind power can also be balanced with hydro-electric power production in order to deliver larger quantities of energy consistently throughout the year.
Foreign investors may also be attracted by the absence of requirements pertaining to hydro-power monopolies, whereby two-thirds of hydro-power-producing companies, as a main rule, must be owned by a public entity. Wind power also secures the availability of 'guarantees of origin' – a credential issued by the regulator which ensures the quality of the delivered energy (EU derived) – and energy (green) certificates, a market-based instrument for promoting the development of alternative energy (Norwegian/Swedish initiative).
Parties and corporate structure
In order to isolate risk and obtain a higher grade of gearing, the party which is to construct a wind farm and produce power is typically structured as a special purpose vehicle – usually a limited liability company which can be capitalised as required and in which new investors can be invited to participate.
The main parties to a wind power investment are the power producer, the power purchaser and the financer – typically a bank. Additionally, the power producer's parent company may be required to guarantee the obligations of the special purpose vehicle during the construction phase until the facility is up and running, and the power purchaser may need to substantiate its financial standing by a parent company guarantee.
Financing by assignment of cash flow
The traditional means by which a power producer finances power projects is by taking out bank loans against security in its tangible assets. Since the secondary market for tangible assets from a wind farm is limited, a bank will usually require additional security. A typical asset used as additional security is the future cash flow generated from power production. Such stable cash flow can be established by entering into a power purchase agreement whereby the power producer sells all produced power to a power purchaser for a certain time period at a fixed price. By entering into the agreement, the power producer is ensured a future stable cash flow for several years even before the power plant has been constructed.
A power purchaser which agrees to purchase all of the produced power from a plant at a fixed price for a certain period of time will require a well-functioning market in order to hedge its exposure. The power producer can utilise the future cash flow from the agreement as additional security for the bank financing by assigning the cash flow to the bank by way of security. Such assignment will typically result in a direct agreement between the power producer, the power purchaser and the bank, to ensure that the power purchaser is notified of the assignment, and giving the financing bank a direct contractual relationship with the power purchaser.
The assignment of the cash flow will increase the bank's interest in upholding the cash flow generated from the power production. In order to further secure the bank's interests, the direct agreement regularly contains provisions that give the bank a right to suspend any termination by the power purchaser of the agreement for an interim period. This gives the bank the possibility to review possible future scenarios, while maintaining operation of the power-producing facility and sale of power.
For further information on this topic please contact Aksel S Tannum or Peter L Brechan at Advokatfirmaet Haavind AS by telephone (+47 22 43 30 00), fax (+47 22 43 30 01) or email ([email protected] or [email protected]).