Solar energy is key to the UK's energy future and developing solar assets represents both an opportunity and a challenge. So, what are the key legal questions developers of solar farms need to consider?
The number of legal issues facing a solar developer depends upon their aspirations. Some developers seek to be involved in only the early stages, developing a solar farm through to securing planning consent. Others may wish to be involved in the construction phase and/or ultimately own and operate the assets. It is important that each stage of development is considered however, regardless of individual aspirations. Failure at any stage can frustrate a developer wishing to raise finance against the development or sell it to a purchaser.
Site selection is critical. Irradiance levels and proximity to a grid connection will drive returns and, ultimately, the economic success (or failure) of the development. The developer may wish to enter into a series of licences for a number of sites which have the potential for further development. The licence terms should allow the developer to conduct initial site investigations and also take initial data/readings. The best site(s) can then be selected and others discarded at minimal cost. The developer should then seek an option over relevant land on the preferred sites, or possibly enter into an agreement for lease.
Key commercial terms, such as the option fee and duration, will be at the forefront of a developer's mind, but it is vital to consider a range of related legal issues at this early stage including:
- Does the person you are dealing with properly own/lease the land? This seems basic, but there may be factors (such as agricultural tenancies) which affect some or all of the land. Such matters can delay the subsequent grant of the lease but if they are identified at an early stage, the option terms can regulate who deals with the time and expense of managing the issues.
- Is the land subject to a mortgage? If so, it is likely that the relevant bank will need to give consent to the grant of the option. If the land is leased by the landlord, it is likely that the freeholder will also need to give consent to the grant of the option and additional bank consents will be required if the freehold is similarly subject to a mortgage.
- Will the land owner permit the existence of the option to be noted against the title? If not, it is much more difficult to protect option rights in the event of the land owner's death or bankruptcy.
- Is the developer confident that detailed lease terms can be agreed quickly at a later stage? We recommend a draft lease be appended to the option. The developer can then be more confident in the knowledge that the land owner is then committed to terms when the developer is ready to move quickly to the next stage.
These questions will also be of relevance when the developer is ready to call for the grant of the lease. Along with key commercial terms like rent and duration of the lease, developers ought to consider that if they wish to raise finance against the development, a project financing bank would require that the landlord (and possibly any superior landlords) enter into a form of direct agreement with the bank. It is important that the developer secures a commitment from a land owner now to deliver this at the later stage.
The granting of planning consent represents a significant milestone and is the first point at which the developer might experience a significant uplift in the value of the development. It is also the first milestone at which a serial developer may wish to sell the consented project as progressing to the next milestone involves a great deal of time and expense.
The risk of the consent being challenged is a key issue. In England and Wales, a newly given planning consent can be challenged within six weeks (a recent reduction, the period used to be 12 weeks). Typically a bank will not allow any drawdown on financing and a purchaser will not fund payment on an acquisition, where a judicial review risk remains outstanding.
A purchaser or bank will focus on whether all of the planning conditions attached to the planning consent have been met. We advise early engagement with the planning authorities and remember, planning permissions can expire if a development is not commenced within a given period.
As mentioned above, proximity of the development to a suitable grid connection and the associated costs is critical to the success of the development. Popular areas for solar farm development, such as south west England and south Wales are already experiencing constraints on economically available grid connections. Developers should speak with the distribution network operator (DNO) early in the process to assess anticipated costs of the solar farm being connected to the grid.
Timing of the connection is another crucial factor. There are limits on available, qualified, personnel [and long lead-times on connection assets] which are impairing the ability of DNOs to commit to prompt connection dates. We have seen connection offers with a scheduled date for energisation more than 18 months from the date of the offer!
The timing of the connection influences which subsidy level the development will receive. It has become the norm for the period between the start of September and the end of March to be very busy, as developments rush to secure accreditation before a subsidy reduction (arising from the ROC banding regime). For schemes seeking support under the small-scale feed-in tariff, the tariff can potentially change on a quarterly basis.
Following discussion with the DNO on terms, the DNO will issue a conditional grid connection offer with an expiry date. Typically, the developer will then make an agreed deposit payment in order to secure a binding offer. These payments can be significant. Typically, a developer will want to have obtained planning consent or be sufficiently certain that planning is about to be granted before making any payment.
Further questions to consider include:
- Does the offer permit the export of electricity at the capacity the development requires (and are there any constraints outside of the connection point, such as upgrade works to the local grid)?
- Has the connection offer been made to the correct entity? (Typically developers hold the solar farms in special purpose vehicles). If not, the DNO should be invited to reissue the offer or arrangements need to be made for the offer to be novated to the correct entity.
- Have arrangements been agreed with an independent connection provider (ICP) in relation to the contestable works, or are these to be undertaken by the DNO?
Construction and maintenance
With planning permission and a connection secured, construction can get underway. The prevailing model has been for the developer to engage an engineering, procurement and construction (EPC) contractor at this stage. Often the same contractor will perform on-going site services under an operation and maintenance (O&M) contract.
The EPC contract typically gives rise to the most significant payments entailed by the development and price and payment terms are often fiercely negotiated. There are a wide range of issues to consider in relation to both the EPC and O&M contracts such as:
- What is the identity of the contractor and what is their credit rating? Buyers and funders will be interested to know, particularly with regard to equipment performance warranties.
- What steps have been taken to protect the development against the insolvency of the contractor and any of its sub-contractors? This can include phased payment milestones, performance bonds, payment retentions and parent company guarantees.
- What performance warranties are offered on key assets, such as the panels/modules, inverters and frames and are the warranties freely assignable? How performance warranties tie into the financial model of the development will be key when a bank is assessing how much funding it is prepared to make available.
- Does the developer have the right to require the EPC contractor and O&M contractor to enter into direct agreements with a funding bank (usually a bank will require both).
Selling the power and benefits
The developer has options when seeking to secure agreed terms for the sale of the power and benefits from the development. Developments below 5MW are eligible for the small-scale feed-in tariff (FiT). Developments over 50kW can either opt for the FiT or for renewables obligation certificates (ROCs).
Those that seek support under the ROC regime will generally seek to sell the electricity and ROCs under a bundled power purchase agreement (PPA). Although FiT projects can opt to receive the statutory export tariff, most choose to sell the exported power at a commercially-agreed rate under a PPA.
The developer ought to engage in discussions with a range of offtakers to gauge the market for the best PPA terms. Typically the offtaker will seek a minimum level of information, such as who the seller will be, project details, progress in relation to the milestones above and credit status. The offtaker can be invited to sign a simple confidentiality agreement at this stage.
The developer ought to seek agreement on key commercial terms such as term of the agreement, pricing structure and treatment of imbalance risk. Prices tend to be better under short-term PPAS, but project finance lenders will often want long-term agreements that provide protection against changes in law. If the offtaker is interested, they will typically issue a non-binding offer and negotiations can commence on PPA terms. PPAs are complex arrangements and the developer will need to seek legal advice on the detailed terms.
This area is undergoing significant change as a result of wide-ranging Electricity Market Reform (EMR). New legislation came into effect on 18 December 2013. From the autumn of 2014, developers will be able to opt for the new contracts for difference (CfD) regime instead of ROCs. However, ROCs will still be an option until the scheme closes to new entrants in April 2017. Developers need to select which subsidy regime to go with as this stays with the assets for the whole of their life. All developers should be assessing whether to opt for the FiT, ROCs or the CfD regime.
It is crucial that the developer takes steps to assess the requirements of a future target audience –buyers and/or funders. By addressing these concerns at an early stage, the developer will maximise their chances of both delivering a timely and managed development and securing the best possible offer and terns when they wish to exit the project.