Once a niche area of investing, renewable energy projects are booming in the U.S. and around the world, with investors spending billions to acquire solar, wind and other assets. Global renewable energy transactions, including refinancings and public market investor exits, in addition to M&A, totaled $114 billion last year, according to a report by the UN and Bloomberg New Energy Finance.
The rush into renewables can be explained in part by the fact that such projects are increasingly shedding their reputation as risky investments. “People are starting to see certain renewable technologies and projects utilizing those technologies as safe and stable, with reliable cash flows,” explained Kaam Sahely, a partner in Energy Transactions & Projects at Vinson & Elkins.
Sahely and fellow V&E partner Peter Marshall recently led a team of attorneys representing Goldman Sachs in a $350 million deal to purchase 76 solar energy projects. They also recently advised Global Atlantic Financial Group in their $1.175 billion acquisition of a minority stake in a solar portfolio. In 2018 alone, V&E attorneys have worked on over $3 billion in renewables transactions.
“There is now tremendous social and political demand for sustainable energy investment”
Sahely noted that increasing public support for environmentally conscious investing has played a role in influencing how fund managers invest. “There is now tremendous social and political demand for sustainable energy investment and as a consequence of that and other factors sustainable energy investment is starting to make more economic sense,” Sahely said. “So the confluence of those factors is resulting in vast amounts of money chasing these deals.”
Even the tariffs imposed by the U.S. on imported solar panels don’t seem to be hurting enthusiasm for renewable energy projects. But just because renewable energy deals have become more popular, it doesn’t mean they’re easier to execute. Though they bear some similarities to coal and gas power projects, renewable energy projects can also be considerably more complex from a legal standpoint. Here are three reasons why:
1. Tax Equity Financing: Perhaps the single most distinguishing characteristic of renewable energy deals, especially solar deals, is their historic reliance on tax equity financing. Although tax benefits offered on renewable energy projects are due to ramp down over time, for now renewable deals continue to attract tax equity investors—investors seeking tax credits or deductions to reduce their taxable income.
A renewable energy deal may include a mix of tax equity investors and traditional investors, with the former receiving the lion’s share of the deal’s tax benefits for a set period of time or until the tax equity investor achieves a target yield. Once that time period has passed or the target is reached, a “flip” occurs where the tax benefits allotted to the tax equity investors are substantially reduced as other investors get more.
“All or almost all of the historic and existing deals have tax structures around them, so it makes the deals very complicated,” Sahely said. “A lot of time is spent either structuring these tax equity deals or understanding how they work.”
2. Multiple Leases: Renewable projects, especially wind power projects, can require a lot of land mass, which might mean leasing property from multiple parties. Turbines that comprise one wind farm might be built on several different farms and across state and federal lands. As a result, developers and their attorneys need to hash out zoning, permitting and other real estate matters for multiple properties before a deal can be completed.
3. Power Purchase Agreements: Power purchase agreements, or PPAs, are something that renewable deals have in common with coal and gas power projects. When establishing and reviewing PPAs, investors and their attorneys must do due diligence to ensure the counterparties—the customers buying the power that the projects produce—have good credit and are likely to hold up their end of the agreement. Investors “are really buying stability of revenue, so they want to know that customers are going to pay,” said Sahely. “It’s as simple as that.”
But here’s where renewable PPAs differ from fossil fuel projects: Power production may be variable for solar and wind farms due to weather—think cloudy days or low wind conditions—so engineering studies are conducted to determine the probability that power generation will hit certain levels each year. That information is then factored into PPAs and cash flow projections.
For any renewable energy deal to succeed, investors and funds must work with experienced attorneys who can guide them through “a sea of information,” Sahely said. “It’s about analyzing the right things and knowing what matters and doesn’t matter,” he said. “You can only attain that understanding when you’ve done enough of these deals and looked at a lot of different builds and situations.”
For his part, Sahely said that he and his colleagues continue to be busy working on multiple acquisitions in the renewable space, conquering complexity with every deal.