MC magazine | Bird&Bird energy

magazine YEAR 6 | January 2020 | no.109 | www.avdr.nl

SOPHIE DINGENEN ABOUT Renewables MATTHIAS LANG ABOUT Energy Digitalisation

MICHAEL RUDD ABOUT Energy Management AND MORE ARTICLES BY MATT BONASS, SANDRA SEAH & RENÉ VOIGTLÄNDER

ENERGY MAGAZINE

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TABLE OF CONTENTS From the Editors p. 6 The Steering Committee p. 8 Corporate & Finance - Sale of Renewable Energy Assets

p. 14

Renewables - Corporate PPAs p. 24 Energy Digitalisation - Energy 4.0

p. 32

Energy Management - the current and future market

p. 38

Update on tender regulation energy projects

p. 62

RSG in Asia p. 70 Corporate PPAs - an international perspective

p. 78

Our Energy & Utilities Group p. 124

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FROM THE EDITORS Welcome to this special Energy edition of The Magna Charta Magazine!

The current world is faced with a huge climate problem. Alarming reports on the effects of global warming are issued on a regular basis. Whilst the economy is booming, the consumption of energy is as well. The transition towards a climate neutral society requires significant changes to our daily lives and increased investments in renewable energy are essential.

Renewable energy is not the only way to change the climate, there are plenty of other measures that also have effect and are highly necessary to achieve our climate goals. The energy transition can benefit from increased interest from governments and technology changes. For example energy management to secure a more optimised use of energy and digitalisation such as blockchain provide further intelligence on our energy consumption which enables optimised deployment of our energy sources.

To fulfil this need, established players have to adapt and a number of new and diverse market entrants are evolving and offering new business models.

At Bird & Bird we have built our team of energy lawyers across all of our legal disciplines and network of offices to anticipate these changes.

We use our knowledge of the energy industry to provide focused and commercial advice. You can count on us for our professionalism, technical expertise, responsiveness, personal chemistry and problem solving.

We advise the energy sector on all aspects of the ongoing developments and how to implement and adapt these to optimise structures and projects in order to achieve the best result for our clients. The uplifting part is that whilst advising our clients we are also contributing to a cleaner world.

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Our International Energy & Utilities sector group is focused around eight teams, or as we call them Priority Development Areas (PDAs), which are: Renewables, Energy Management, Energy Digitalisation, Energy Storage, Networks & Transmission, Oil and Gas, Mining and Minerals and Nuclear.

All our members are experts in their field of expertise and recognised market leaders in the league tables. Our team’s capabilities vary from M&A, Project Finance, Regulatory to Contracting.

We believe that our global team is ideally positioned to advise on all aspects of the energy market.

The above-mentioned eight PDAs are being led by our Energy & Utilities Steering Committee. In this edition of the Magna Charta Magazine the Energy & Utilities Steering Committee members each address a topic they have recently advised on: Matt Bonass, Head of our Energy & Utilities Group, discusses the use of warranty and indemnity insurance on transactions to sell and acquire renewable energy assets, RenÊ Voigtländer, Regulatory Partner, explores the tendering opportunities of energy concessions, Matthias Lang, Regulatory Partner and Digitalization PDA leader, on Energy Digitalisation.

Michael Rudd, Commercial Partner, on Energy Management.

Sandra Seah, Regulatory Partner, on the rise of ESG investing in Asia.

Sophie Dingenen, Corporate & Projects Partner and Renewables PDA leader together with Lizzie Reid, discuss the emerging trends on Corporate PPAs. We trust that you will find the contributions in this magazine useful and we are of course more than willing to provide you with additional insights and look forward to share some of our ideas with you!

Matt Bonass & Sophie Dingenen

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THE STEERING COMMITTEE Matt Bonass, Co-Head of our Energy & Utilities Group, Corporate Partner UK How did you first get involved in the energy sector?

The first deal I was involved in as a newly qualified lawyer was Electricite de France’s £1bn takeover of London Electricity so that really whetted my appetite for the sector. After acting on a number of European power deals I then spent several years in Asia working on oil and gas deals across that region.

In around 2008 I saw the opportunity to get more involved in the renewable energy sector which in hindsight was I think a great area to focus on.

Which energy topic are you most passionate about?

That’s a tough one as they are also so closely linked.

I would say renewable energy generally. There are so many different and challenging technologies available for energy generation, including wave and tidal that one day must be capable of commercialisation at scale. Being able to link renewable generation with energy storage will really bring renewables to the forefront of the energy mix.

What do you consider will be the next biggest game-changer in the energy sector?

I think this would have to be storage technology.

I mentioned it above in relation to renewables, but it is also key to the development of electric transportation and the establishment of a smart cities model. The key to developing storage, as well as the science behind it, is to standardise the technology - the key to any industry as we have seen with mobile phones or ATM machines - and develop critical infrastructure such as charging points to support the roll out.

How do you encourage junior lawyers to follow a career in the energy sector?

Surely the topic itself is enough!! It’s an area that all types of lawyer can get involved in. At Bird & Bird, our energy team comprises a team from across corporate, commercial, tax, finance, projects, IP, employment and dispute resolution. To be a good energy lawyer, you need to have a good knowledge of science and economics, as well as finance and politics. The people I work with in the industry are also great! ›

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From left to right: Michael Rudd, Sandra Seah, RenÊ Voigtländer Matt Bonass, Sophie Dingenen, Matthias Lang

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What do you like best about working in the energy sector?

Energy is fundamental to everything we do. The challenge of addressing the energy trilemma - low cost and affordable energy, security of supply and sustainability - affects every human being. The diversity of what I do on a daily basis, whether renewables, nuclear, oil and gas or some of the more innovative areas such as energy digitalisation, is tremendously exciting. The introduction of enhanced technology into the sector makes things even more interesting. It’s a subject that is here to stay !

René Voightlander, Regulatory Partner Germany How did you first get involved in the energy sector?

As a still relatively young lawyer, I was sitting at my desk right after nine eleven in 2001 and was terribly bored as most clients of my big law firm were gone and all projects were dead. I was about to lose my job, when a large international multi utility company called with a regulatory issue and asked me if I could help them dealing with the government in something that might cost quite a number of jobs. I told them I was going to do my best. That was how it all started.

Which energy topic are you most passionate about?

The sun, the wind, the ocean and the earth underneath our feet produce or store so much more energy than our planet would ever require, without regard to the ever increasing energy demands of our "civilized" societies and economies. If we were able to increasingly make use of only small portions of those literally unlimited natural energy resources in a carbon neutral way on a step by step basis (and provide for a fair and equitable distribution of clean drinking water to everyone) we might be able to address one of the most pressing challenges of our world!

What do you consider will be the next biggest game-changer in the energy sector?

Complex decentralized and interactive storage systems will create the required degree of independence from conventional power generation methods, especially during the wintertime.

How do you encourage junior lawyers to follow a career in the energy sector?

Learning by doing and immediate submersion in large project with lots of individual responsibility for selected tasks with nearly unlimited client contact and project exposure tends to set free incredible enthusiasm.

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What do you like best about working in the energy sector?

Energy is what everybody needs, what nobody can do without, what everybody has on his or her agenda, what keeps changing rapidly and what creates both technical and intellectual challenges calling for genuinely new concepts and solutions.

Purely out of the ordinary!

Matthias Lang, Regulatory Partner and Digitalization PDA leader, Germany How did you first get involved in the energy sector?

I have a diverse and international background in corporate, commercial, administrative and environmental law, and am interested in technical matters. I like to make complicated things work, and enjoy how technology develops. All this turned out to be particularly helpful in the energy sector.

Which energy topic are you most passionate about?

That the laws of physics in the end will trump political desire. Energy law must remain in tune with the laws of physics, and commercial reality.

What do you consider will be the next biggest game-changer in the energy sector?

Digitalisation. Only with digitalisation will be able to integrate ever growing quantities of renewable energy into our grids.

How do you encourage junior lawyers to follow a career in the energy sector?

Energy is where physics, commerce, politics and the environment meet. Plenty of new, great challenges for young lawyers to hone their skills and develop their own practice What do you like best about working in the energy sector?

It is a regulated industry that affects us all, with always something new, commercially and politically relevant happening, looking for a legally sound solution Michael Rudd, Commercial Partner UK How did you first get involved in the energy sector?

My career started in the late 90’s in Western Australia. The State’s economy is dominated by natural resource projects where energy is at its core, including the production of energy products (particularly petroleum and coal) and its use on remote mining projects. For these remote projects all input resources are precious, with a focus on technologies and operational techniques to maximise the efficient use of such resources.

One of the last projects I did before moving to the UK in the mid 00’s was a combined heat and power project on a refinery project. The first project I did in the UK was a combined heat and power project as part of the Milton Keynes’ regeneration.

Which energy topic are you most passionate about?

Energy management – I have been working in this space for over 15 years working with clients and other stakeholders to push this forward. I am enthused about the continued global focus in this area and how it interplays with all of our other priority development areas giving me an opportunity to work with a wide variety of clients and colleagues.

What do you consider will be the next biggest game-changer in the energy sector?

The challenges and opportunities coming from: the electrification of everything; the role of hydrogen; AI in oil and gas; future city energy solutions; innovative energy solutions integrated into traditional infrastructure projects; and the impact of climate change litigation.

How do you encourage junior lawyers to follow a career in the energy sector?

Our role is more than just helping clients to set strategy, get deals done and resolve disputes.

Energy is at the heart of the global economy and we are committed to play a meaningful long-term role in shaping a positive future in our sector. Junior lawyers are equally passionate about making a difference. They come to our sector with great ideas and enthusiasm. Our responsibility is to empower them.

What do you like best about working in the energy sector?

Enthusiastic, creative and persistent clients and colleagues who push the boundaries of what can be achieved in our sector.

Sandra Seah, Regulatory Partner Singapore How did you first get involved in the energy sector?

I wish I can claim that it was my true calling but actually, it was quite by accident. I joined the firm in 2001, the same year that the Energy Market Authority of Singapore was set up and we were appointed as the legal counsel as we have a regulatory practice. There were no energy lawyers in town and I have zero energy expertise. I did not even know what was “contestability”. The then in-house legal counsel and I spent a long time learning the lingo and were casted into scary calls with global experts which were engaged to set up Singapore’s New Electricity Market to introduce

contestability. 18 years on, we are still retained as the legal counsel to the regulator!

I decided to go for the unknown and I must admit that I have never regretted that decision for a single day.

Which energy topic are you most passionate about?

Energy management. I had the most amazing mentors from Bird & Bird and benefitted greatly from their experience. We worked on the first ever template for energy performance contracts in Singapore which was commissioned by the building regulator and the Singapore Green Building Council and there is great potential in expanding this area of work regionally.

What do you consider will be the next biggest game-changer in the energy sector?

The energy sources should be completely renewable and the grid must be resilient to power the economy. I’d say it’s the Smart(er) Grid (whether in a microgrid environment or a large network) that is sensitive to the needs of the consumers. It would deal with generation, storage, metering and demand response and be aligned to the prevailing electricity market, provide assurance of power quality and some form of self-healing.

How do you encourage junior lawyers to follow a career in the energy sector?

The energy practice is one that is truly a global legal practice – we can sincerely put hand on heart and say that it’s a sector where our lawyers can enjoy working on challenging legal issues which are all current-day hot topics, in a collaborative environment. The job generally fulfills those seeking intellectual pursuits and those seeking variety; it attracts the tree huggers, the geeks and even the financial whizzes! We have no lack of interest from the aspiring and junior lawyers.

What do you like best about working in the energy sector?

You can hardly find a stereotypical energy professional – the sector is a melting pot of professionals with very diverse skills sets, interests and passions! I also enjoy working on a broad range of topics, from energy regulations, policies, climate change, energy efficiency, green buildings, environmental hazards, health & safety, waste management, infrastructure, water, CSR & sustainability. There is rarely a dull moment! ›

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Sophie Dingenen, Corporate & Projects Partner, Head of the Dutch Energy Team and Renewables PDA leader, Netherlands How did you first get involved in the energy sector?

During my studies I started as a paralegal assisting the energy team with regulatory papers on new developments and new regulations. At that time I had to choose between banking law and energy law. As I did not know what energy law entailed I decided to go for the unknown and I must admit that I have never regretted that decision for a single day. Also the fact that banking law seemed boring at that time did help the decision to choose for energy law.

Which energy topic are you most passionate about?

Development of renewable energy projects combined with the latest technology. A combination with digitalisation would upgrade the value of renewable energy significantly as the intermittency becomes manageable.

What do consider will be the next biggest gamechanger in the energy sector?

Corporate PPAs are already on the scene although there should be more of them, so the next game changers would be blockchain as everything will be affected by it, and in terms of technology, I expect that hydrogen will take the forefront in the transition towards a sustainable society. We also reached the time that aging wind farms have to be upgraded and repowered, that will also be a significant part of our practice.

How do you encourage junior lawyers to follow a career in the energy sector?

Given all that happens on a daily basis and the amount of reports that go life on energy subjects, there is almost no need to encourage junior lawyers.

Lawyers are inquisitive by nature and a subject like energy keeps people interested. The combination of an ever changing field of law with continuously upgraded technology sells itself.

What do you like best about working in the energy sector?

I see it as my way to support the transition towards a more sustainable society. It is also very impressive to see a wind park or solar park arise. These are directly visible results of the hard work put in. —

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CORPORATE & FINANCE Matt Bonass, corporate partner and Head of the Energy & Utilities Sector Group, looks at the reasons why many buyers and sellers of renewable energy assets are turning to warranty and indemnity (W&I) insurance policies to cover potential claims on their transactions and how these policies work.

Selling renewable energy assets: a policy decision?

Demand for assets There is a lot of demand amongst buyers and sellers for renewable assets. Investors are keen on the long term, stable revenues which they offer. Energy will always be an essential requirement and the indexlinked subsidies offered by Governments which attach to these assets remain very attractive. The assumption is that the move towards a low carbon economy should ensure the long term health of the sector.

As a result there have been a large number of M&A transactions in the renewable sector over the past two decades. Renewable assets often change hands multiple times: from the initial “shovel ready� developer, to the entity that builds the project, through to ultimate fund owner, who may then sell on again to other long term fund holders. There is a move towards consolidation in the industry: for example, in the UK solar market, a significant number of renewable assets are held by a small number of funds, including Octopus, Next Energy, Bluefield and Foresight. In Europe, buyers are looking to acquire assets in new markets, such as Latin America, Africa and Australia. At the same time, Asian buyers are looking to acquire assets in Europe.

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Warranties and Indemnities As with any M&A deal, one of the most contentious negotiations will be on the warranties and indemnities that are to be given by the sellers of the asset. These warranties are promises made by the sellers in relation to certain aspects of the assets or the business. These warranties assist in clarifying the buyer’s understanding of the assets in that they require the seller to disclose certain issues where the warranties would otherwise be untrue. Failure to disclose fully against the warranties can result in damages claims brought by a buyer to recover any loss in value relating to the assets it has purchased.

In addition to warranties, a purchaser may also request specific indemnities in relation to certain known issues where liability is expected to arise.

This may also include a full tax indemnity or tax covenant given by the seller.

The nature of the warranties given will depend on the type of renewable asset being sold, but generally they are likely to focus on land rights and leases, planning permissions and compliance with laws and regulations. They will also focus on the key contracts to which a project company is party, typically, grid connection contracts, EPC and O&M contracts and, if in place, power purchase agreements. They are also likely to focus on environmental matters, including compliance and confirmation that there are no current proceedings.

Tensions over warranties There is often tension between buyers and sellers on an M&A deal as sellers do not readily want to give warranties. To the extent they do so, they will not want to or simply cannot sign up to a full suite of warranties that will expose them to potentially large claims that could hang over them for a number of years after completion: depending on the type of warranty, this could be for a period 1, 2 or even 7 years. On the other hand, a buyer will require some recourse if the assets that they are acquiring are not as they expected.

Matt Bonass

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never provide absolute comfort. Another solution is for the buyer to insist on a deferred consideration payment being made to the seller, perhaps one or two years after deal completion (typically when all or a significant part of the period for bringing warranty claims has expired). It could be structured as an escrow agreement where part of the consideration is held in a solicitors account and released on the occurrence of certain events so that the seller has more comfort that the buyer will be in funds at the time payment is due. However, this will not entirely solve the tensions referred to above and this can kill the deal if sellers and buyers cannot agree.

W&I insurance to the rescue!

W&I insurance is a tailored product that provides cover for losses arising from a breach of warranties, covenant (including under a tax covenant or indemnity) and in some circumstances specific indemnities given by the seller under a corporate merger or acquisition transaction. It is intended to cover unexpected issues that arise after a deal has completed - it will not generally cover known issues that the buyer is aware of or which have been discovered in diligence, although coverage for these issues may be sought through a bespoke policy with an additional premium if insurers are able to adequately quantify and price the risk. One common example of this in renewables transactions is a bespoke environmental insurance policy.

The market for W&I insurance has become more readily available in the last decade. In its early days during the 1980s, it was seen as expensive and cumbersome when compared to deferred consideration or escrow arrangements. It has now become an increasingly common feature of M&A deals. W&I insurance is now used in more than 25% of European corporate deals and insurance has been placed on deals worth more than £1 billion in the past year.

The number of underwriters competing for business in this space the policy terms and the pricing have all become more competitive in recent years.

Insurers are aiming to differentiate themselves in terms of coverage, with new entrants seeking to provide coverage in areas that historically W&I

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insurers have been wary of. Insurers are becoming more comfortable with the risks, not least because they have hired lawyers and financial advisers from firms with relevant transactional and sector experience. As each year passes, it becomes a more and more affordable solution that is considered on virtually every M&A deal.

Why are renewable energy transactions particularly suited to a W&I insurance solution?

The renewables sector is a particularly attractive market for W&I for a number of reasons linked both to the identity of the buyers and sellers and the nature of the assets. The typical seller might fall into two camps. First, there are the individuals who have developed a project as far as they can and are looking for an exit. These sellers recognise that they will need to provide warranty coverage but are very keen to achieve a “clean break”. Second, there are private equity funds or hedge funds that will not traditionally give any warranty protection on sale, perhaps save for them having title to the shares sold and the capacity to enter into the transaction documents. These funds are prevented from doing so often by rules in their fund documents that will require that proceeds of sale are distributed to fund members as soon as possible after sale. In addition, they will wish to use the proceeds to invest in future projects. Other potential categories of seller which may give rise to W&I opportunities may include employee trusts or liquidators.

In terms of assets, risk attaching to W&I claims on renewable energy transactions is seen to be low when compared to certain other operating intensive businesses due to the real estate nature of the assets. Hence this is a risk that insurers can and are willing to price for.

What are the main advantages of W&I insurance?

Key advantages of obtaining W&I insurance in a renewables asset transaction may include the following: •

The buyer has protection under the transaction documents from an insurer with a strong covenant. The cover should to a large extent offer back to back

coverage with the warranties in the transaction documents.

•

The Seller achieves the clean break it desires giving peace of mind to individual sellers and enabling the distribution of proceeds to investors, the payment of debt or the winding-up of the business post transaction.

• Avoids complicated and emotive

discussions on deferred consideration

and escrow arrangements, enabling

a smoother transaction in this regard,

particularly where the sellers may be made

up of founders/management and passive investors.

• Can avoid protracted negotiations on

warranties and indemnities. Provided that

warranties are sensibly negotiated, a buyer

will ordinarily obtain broad and extensive

warranty coverage when W&I insurance is involved.

•

Can provide competitive advantage in an auction sale where a buyer offers to pay for W&I insurance to be put in place on an auction sale- this may be seen as a significant plus point. This is assisted by the competitive premiums in the W&I insurance market (see below for more details on pricing).

•

If one or more sellers remain in the business post completion, a claim against an insurance policy will be much more palatable than a claim against an “employee” and can help to protect the on- going business relationship post-closing.

•

A debt financier to the transaction will expect to see a robust set of warranties and indemnities, and a W&I policy can assist in achieving this.

What are the disadvantages?

The following potential challenges of using W&I insurance should also be carefully considered: The scope and amount of cover will need to be considered carefully. Take care with exclusions - the parties will need to manage any uninsured risks.

Insurance is not a guarantee, nor is it a substitute for thorough financial and legal due diligence. An insurer will not allow a buyer to simply take up a policy and “shut its eyes” as to due diligence; this would likely result in a high premium or even a refusal to insure.

The deal timetable will need to build in the insurance process (see below) which may have timing impacts on the deal.

There will be a cost and usually a heated discussion on who will pay for the W&I insurance.

Minimum premiums will apply so depending on the deal size the cost may outweigh the benefit. These are traditionally between £45,000 and £75,000 so at a certain transaction size W&I insurance may become uneconomic.

Type of policy The first question buyers and sellers will need to consider is whether to take up a sell side or buy side policy.

Sell side - the seller is insured for losses it may suffer as a result of a breach of warranty or relevant indemnity. The buyer will claim against the seller who will claim against the insurer. These were very common in the early years but are much less common now as the person giving the warranties (the seller) remains contractually liable if the policy does not pay out.

Buy side - the buyer is insured rather than the seller and the buyer makes the insurance claim against the policy. A buy side policy is particularly relevant where the buyer may doubt the financial standing or existence of the seller post-completion. ›

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Buy side policies are now the norm and on that basis the remainder of this note addresses the position on a buy side policy. The availability of the buy side policy has provided greater certainty for buyers and this has again led to an increase in use of W&I insurance.

Amount of cover Once the decision on the type of policy is taken, the next immediate question that will need to be taken early on in the deal is the amount of coverage that will be sought. It is unusual on renewable energy transactions for the upper limit to equal the value of the consideration - this is thought to be too conservative an approach given the possibility of a claim, resulting in too high a premium when compared to the deal size. Depending on the deal size, the coverage will usually be between 10% and 30% of the total enterprise value on a transaction.

Underwriters are usually able to provide around £100 million of cover, either individually or in an underwriting “stack” with other underwriters. This is sufficient to cover the majority of deals, but the amount can be higher (as high as £300 million) depending on whether insurers are comfortable with the deal and the risk parameters.

Period of cover In addition to amount of coverage, the period is another key consideration. Usually the period of cover will reflect the limitations in the transaction documents on bringing warranty claims - in the UK typically between 1 and 2 years for nontax warranties and 7 years for tax. In some circumstances it may be possible to extend the period beyond that set out in the transaction documents, which is a particular selling point for buyers. For example, the transaction documents may refer to an 18 month limitation period for bringing claims under business warranties, but the insurance may cover a two year period for no additional premium.

Pricing Payment of the premium is required on signature of the transaction. Each deal will of course be priced on its specific terms, but depending on whether any specific indemnities are to be covered and on

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the level of de-minimis and the retention point (see below), typical premiums will be between 1 and 1.75%, although premiums of less than 1% are not unheard of. In addition to this, the insured is most likely to be required to bear a retention cost as well as paying the costs of the insurer’s legal advisers and brokers fees. Finally, there is a tax which attaches to the insurance premium, typically priced between 6% and 20% of the premium.

A buy side policy is particularly relevant where the buyer may doubt the financial standing or existence of the seller postcompletion.

De-minimis and retentions Most insurers will include a de-minimis or small claims amount in the policy. This will more often than not reflect the de-minimis agreed in the transaction documents. As a result, there are no claims against the seller or the insurer under a certain level.

Typically a party (usually the seller) will be required to bear some financial risk before the policy provides cover - otherwise they do not have any “skin in the game”. The retention point will vary from deal to deal but as noted above is typically between 1 and 1.75% of transaction value.

The major recent trend in the European W&I market has been the impact of “nil-retention structures” which were first introduced into the market on real estate transactions but are now often seen on renewable asset sales. With these structures, sellers leave no “skin in the game” (often their retention amount may be a nominal £1). This is massively attractive to sellers. Insurers can often get comfortable with this structure given that renewables assets are seen to be low risk when compared to a historic operational business or an IP heavy pharma business. There is however

no substitute for full due diligence and disclosure processes which insurers will insist on. In addition, these structures are likely to demand an increased premium, a price sellers are usually willing to pay.

Exclusions and Conditions to the Policy As noted above, W&I insurance will not provide protection in all cases. The policy terms should be read carefully to ensure that the insurer has not carved out risks that are material to the transaction.

Beware of the insurer that offers the cheapest premium. Instead, ensure that the policy focuses on the protections that are most important to you.

Below are a number of typical exclusions: •

Matters of which the insured had knowledge

•

Fraud or non-disclosure

•

Fines and penalties

•

Bribery and corruption

•

Price adjustments or leakage in a locked box transaction

•

Certain tax risks, including transfer pricing and secondary tax liabilities

•

The costs of discussing and resolving claims with the insurer on a buy side policy before a claim is brought

In addition to the above and particularly relevant to the renewables market: •

Forward looking statements, for example on the likelihood of receipt of future subsidies

• Warranties that give rise to loss which may

otherwise be covered by product liability

insurance - this could include warranties

that go to the performance of solar

panels or wind turbines, so this is a

key consideration on renewables transactions

Finally, do remember that as with all insurance there is a duty to provide all material information to the insurer, given that the insurance contract is a contract of the upmost good faith. Otherwise the insured may fail to enforce the terms of the policy.

Process of obtaining a W&I policy Typically as a first step the parties will engage a broker and provide a summary of the deal to them.

Based on this summary, the broker will review the options in the market and source a number of non-binding indications from insurers in the market.

This process will usually be started by a buyer with a buy-side policy, but on an auction sale may be undertaken by the seller and then presented in the data room to potential buyers.

In order to write a policy, the insurer will need to be comfortable that the transaction has been fully negotiated and the risks adequately considered.

It will normally engage external lawyers to assist with this process. The lawyers will need to review the final and often interim drafts of the transaction documents, including the sale and purchase agreement, the disclosure letter and the legal and other due diligence reports. This will not duplicate the due diligence exercise or seek to amend or comment on the main commercial terms of the transaction documents, but rather check that relevant risks and issues have been assessed in due diligence and the transaction documents.

The buyer will be expected to have done a proper due diligence exercise, considering all material documents that have been placed in a wellstocked data room and following a proper Q and A process. This will be backed up by a comprehensive process where management of the business have an opportunity to review the warranties and indemnities being given and a detailed disclosure letter is prepared.

The lawyers will then prepare a report for the insurers and also assist the insurers in putting together a number of underwriting questions that will be discussed between the insurer and the buyer on an underwriting call - this call will usually not include the seller. The purpose of this call is to ›

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flesh out any additional risks which the underwriter needs to consider before preparing the draft policy.

Following the call, the insurer will issue a draft policy which will then be negotiated between the buyer and the insurer. The policy will generally set out each warranty and indemnity from the transaction documents and state the extent to which it is covered.

When agreed, the buyer will be required to sign a no-claims declaration stating that it is not aware of any claims or breaches of warranties or indemnities that may lead to a claim under the policy. The policy will then be put on risk at signing of the transaction documents.

The whole process will usually take between 2 and 3 weeks so it is important to build this into the deal timetable. However, underwriters are competing for business so in our experience are able to move quickly to meet transaction timetables.

Claims under W&I policies It remains the case that warranty claims on M&A deals are rare. However, as the uptake of W&I policies has increased, it is little surprise that the number of claims has increased too. The market tells us that claims tend to occur on one in every eight policies written. Claims usually fall into the following categories: breach of tax, financial statements, employment or IP warranties. Often they fall below threshold or de-minimis levels and are settled out of court with claims not being made public. Insurers stress that early engagement with them through prompt, detailed and open correspondence will greatly assist the claims process.

Conclusion There is likely to be a year on year increase in the use of W&I insurance in renewable M&A transactions. Driven by activity in the US, we see increasing use particularly in Germany, the Netherlands, the UK and Scandinavia. Such increases will continue to keep the price competitive as more insurance players enter the market and as an increase in available data allows losses to be better understood by insurers.

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Given increasing economic uncertainty and Brexit, W&I insurance can provide some much needed certainty to both parties in the M&A process, though it should not be treated as a guarantee nor should the due diligence process be compromised.

Its use should be assessed on a deal by deal basis as to whether a particular W&I insurance policy is beneficial to the given transaction.

Bird & Bird have advised on renewable transactions involving W&I insurance and are well connected to lead brokers and advisors. We would be delighted to make relevant introductions and assist on assessing the suitability of W&I insurance solutions to your transactions. —

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RENEWABLES Sophie Dingenen, Corporate & Projects partner, Head of the Dutch Energy Team and PDA leader for Renewables, explains how Corporate PPAs can accelerate the transition towards a sustainable society.

Following the Paris Agreement, serious climate goals have been set and we all, including businesses, will have to put in our chip to enable

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a sustainable energy future. Corporate PPAs are named as the new enabler for the transition towards renewable energy and several conferences are completely organised around Corporate PPA structures. Before going into the structure in more detail it is important to have a common understanding of what a Corporate PPA is.

Generally, a corporate PPA is defined as a direct long term power purchase agreement between a corporate offtaker and a renewable energy project developer where the corporate purchases all renewable electricity generated by a dedicated energy project.

Unlike the Corporate PPA structure, under the more traditional power purchase agreements, utilities purchase electricity from different sources together adding up their portfolio. They then sell the energy on to off-takers, both industrial as households. The sources of the energy are unknown, or better said, untraceable for the actual offtakers. Under the Corporate PPAs, corporates purchase their electricity directly from a dedicated renewable project, either directly or through a utility depending on the possibilities the domestic energy market offers.

Project finance Renewable energy projects are largely project financed, which entails that financing parties have to rely on the future income stream of a project rather than the balance sheet of the project company to secure the prepayment of the loan. The corporates purchasing the electricity directly of a renewable energy project can provide strong credit worthiness to lenders to repay the debt, securing better financing conditions than an SPV without a balance sheet. Of course, the Corporate PPA tariff for the generated electricity needs to be structured in such a way that both the generator and corporates benefit from it.

Drivers for generators vs corporates The drivers to enter into a Corporate PPA for the generator of a renewable project are amongst others the long term price hedge to secure the repayment of the debt to the financing parties, guaranteed long term offtake by a credit worthy corporate to reduce the costs of financing of the project, risks of regulatory changes or change in subsidy schemes are passed onto the off-takers.

Likewise, the drivers to enter into a Corporate PPA for corporates are, amongst others, long term (affordable) price certainty for the electricity which indirectly also results in less price volatility of their core products, marketing of the sustainability profile of the corporate through the environmental attributes (Guarantees of Origin or Renewable Energy Certificates) and diversification of sources which results in security of supply whilst not having to asset manage a renewable project.

Sleeved versus synthetic The traditional power purchase project structure is as follows: ›

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There are several Corporate PPA structures possible depending on the different roles of the relevant market. Below we will describe the details of different structures and which one is best depends on the actual market structure.

In Europe, the most used structure is the sleeved structure whereby the electricity is sleeved through the grid by either the utility if the market is structured based upon a licensed sleeving role for utilities (e.g. in the United Kingdom) or by the relevant grid operator as is the case in

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the Netherlands. In the UK the corporate enters into a Corporate PPA with the generator and a back-toback power purchase agreement with a utility which in its turn on-supplies and sleeves the electricity to the corporate. In the Netherlands, where the sleeving is done by the relevant grid operator, the corporate can enter into a Corporate PPA directly with the generator without the involvement of a utility. The balancing of the portfolio is then performed by a balancing party or as in the traditional structure by a utility.

In the United States, the most used structure is the synthetic structure whereby a contract for difference is entered into between the generator and the offtaker. The power produced by the generator is sold under a power purchase agreement to the utility against market prices and the corporate purchases the power from the utility against wholesale prices. The crux is that the generator and the corporate enter into a contract for difference whereby the generator and corporate agree a fixed/ strike price. Such fixed price shall determine which direction money flows depending on the difference between the market price and the fixed price. ›

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Depending on the structure accounting and financial reporting consequences may arise. It is wise to perform a thorough accounting analysis before choosing which form of Corporate PPA is most suitable.

Other structures that we have come across are of course the direct PPA which is a power purchase agreement where the generating assets are situated at the same site as the off-taker and the electricity is not put onto the grid (behind the meter). The PPA is relatively straight forward where the corporate pays the generator for its electricity needs and the rest will be put on the grid or if the electricity need of the corporate is higher than an extra PPA is entered into with a utility.

Where an asset manager owns a significant amount of power (400 MW or more), it may be beneficial to set up a utility fund to perform the licensed sleeving or balancing function. This is a relatively new structure and not suitable for all countries.

If a corporate feels that its consumption is not enough to conclude a Corporate PPA with a renewable project it may be interested to find other corporates to jointly purchase the electricity under a club PPA. This structure can be set up in various forms and ways depending on the risk allocation and the energy consumption.

Key terms of Corporate PPA Term Corporate PPAs are long term contracts, often between 10 to 15 years. This is to enable the affordability of the set price(s) formula, create price certainty and to secure the repayment of debt. In countries where there is still government support for the development of renewable projects, the term is often linked to such support schemes.

Pricing One of the key features of the Corporate PPAs is that the corporates upgrade their sustainability profile. Where branding is a key factor ensure that the environmental attributes are sold together with the power. Depending on the different phases of ›

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the development of the project we see different pricing formula being agreed.

Grid issues It is important to check the (timely) connection to the grid as the revenues of the project will need to secure the repayment of the debt for which the payment obligations usually start at the operation date of the project. Also, any congestion issues in the grid need to be reviewed in order to secure the repayment of the debt. In case there are any issues, the Corporate PPA should foresee in solutions. The Corporate PPA also needs to foresee in solutions for grid outages.

mind set and agree upfront on how to deal with certain situations. It is also important to have a balanced risk allocation between the JV partners.

It goes without saying that the more partners participate, the more important and difficult the governance may be(come). The JV will have to contain the appropriate exit arrangements and it is important for the financing banks to have a clear understanding as to what happens if one or more JV partners decide to leave the JV. A lot will depend on whether the market will be able to secure the steady cash flow for the project. —

Change in law risk A lot of national systems and even European systems are currently changing, it is therefore important that the Corporate PPA addresses an appropriate risk allocation.

Forecasting Given that the production of renewable energy is subject to volatility it is important to agree strict forecasting rules and a penalty if these are not properly followed. The penalty can be linked to the additional costs that are incurred by the other party.

Credit support Depending on the credit rating of the relevant corporate, there may be a need to provide further security, such as parent company guarantees › or bank bonds. A corporate may also require a guarantee from the generator, however given that the generator often does not have a strong balance sheet, this may be a difficult requirement.

Club structures As mentioned above, depending on the profile of the corporates’ energy offtake, the formation of a consortium or club may be useful to optimise the energy prices and the offtake profiles and share risks.

As with every joint venture, contractual structured or through an SPV, the success stands or falls with its governance. It is important to have a similar

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ENERGY DIGITALISATION Matthias Lang, regulatory partner, Germany, and PDA leader for Energy digitalisation, describes how digitalisation impacts upon the energy market.

Energy Digitalisation – Energy 4.0 Introduction The world’s energy supply is changing – and will continue to do so. With intermittent renewable energy supply being available in large quantities, matching large swings in supply and demand is a new technological and regulatory frontier that we need to deal with. Digitalisation of the energy sector is a very likely answer to most intermittent energy challenges going forward. However, where we are now, energy digitalization provides a few further challenges and opportunities of its own.

Not surprisingly, digitalisation is an expanding topic in the energy sector. And it is not only related to electricity but also to gas, heat and utilities in general. Beyond the energy sector “Digital Transformation“, „Industry 4.0“ or „Awakening of the Data Economy“ are key contributing issues, describing a rapid and profound transition of our economic life.

While digitalisation of the energy sector has already arrived in corporate reality, there are still huge challenges and corresponding opportunities. In the non-energy world, there are estimates that approximately 40% of the companies that are around today won’t exist anymore in 10 years, because they did not implement the digital change in a timely manner, or they did not implement it at all. The energy sector is facing political, technological and regulatory challenges in addition.

It is certain that the energy industry that we know today will be dramatically different in less than 10 years from now. „Energy 4.0“stands for the potentially disruptive as well as beneficial interaction of digitalisation and energy.

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In the following, we will address a selection of aspects related to energy digitalisation - without any claim to comprehensiveness.

Impact of digitalization on energy systems Digitalisation is set to make energy systems around the world more connected, intelligent, efficient, reliable and sustainable.1 It is already improving safety, productivity, accessibility and sustainability of energy systems. At the same time, digitalisation raises new security and privacy risks.2 Numerous generating plants, storage facilities and new units like electric vehicles have to be added and intelligently integrated into the energy supply system. Therefore, not only an efficient, secure and cost-effective communication infrastructure is necessary but also standards to ensure data safety, data protection and interoperability of the systems are required. Digitalisation shall also reduce energy consumption in all areas of life and work.

Improving energy efficiency Energy digitalisation contributes to the improvement of energy efficiency. Transparency on the consumer side regarding energy consumption has an enormous potential to reduce energy consumption and to move energy consumption into times of low electricity prices. The deployment of smart meter makes it easier for the individual consumer to retrace his energy consumption and to steer energy consumption efficiently and in a timely manner. This provides a reduction of energy costs of the individual household. A time-real overview of the energy consumption can finally lead to a lower energy demand.

In the industry sector, digitalization can help to better adjust processes in production and automation systems based on real-time available information on production status and energy demand. Adjusted production processes go together with a lower energy demand and finally to higher energy efficiency. In a nutshell, improvements in energy efficiency can help to limit energy demand in all areas. › 1

2

International Energy Agency, Digitalization & Energy, 2017, page 15.

International Energy Agency, Digitalization & Energy, 2017, page 15.

Matthias Lang

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Integrating renewable energy Fluctuating energy generation from renewables puts a strain on the energy supply system. For the integration into the grid and the market, sufficient capacities and flexibilities have to be ready at all times to balance or purchase the volatile renewable energy. Communication becomes a fundamental requirement of intelligent grids.

Digitalisation can help integrate variable renewable energy by enabling grids to better match energy demand to times when there is a high offer of electricity from renewables, e.g. when the sun is shining or the wind is blowing. Digital technologies could therefore help integrate higher shares of variable renewables into the grid by better matching energy demand to solar and wind supplies.

In this context, digitalisation can facilitate the development and integration of decentralized generation, such as household solar panels, making selling of electricity surplus to the grid easier. Digitalization can facilitate the integration of larger shares of decentralized energy generation, turning consumers into “prosumer”, not only consuming but also producing energy. On demand side, digitalization enables consumers to directly participate in the energy market through demand response, helping to balance supply and demand locally. While on the supply side, they can become local producers and sellers of energy to the grid.3 New tools such as blockchain help to facilitate peer-to-peer electricity trade within local energy communities.4 Blockchain Blockchain is a decentralized data structure in which a digital record of events such as a transaction or the generation of a solar power unit is collected and linked by cryptography into a time-stamped “block” together with other events. This block is stored collectively as a “chain” on distributed computers where any participant to a blockchain can read it or add new data.5 Blockchain systems are transparent 3

4

5

International Energy Agency, Digitalization & Energy, 2017, page 87.

International Energy Agency, Digitalization & Energy, 2017, page 18.

International Energy Agency, Digitalization & Energy, 2017, page 97.

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and trustworthy, facilitating direct exchanges between parties, peer to peer, without a third party as intermediary institution. Blockchain has a potential to coordinate the increasing numbers of actors within the energy market, helping to buy and sell locally generated renewable electricity peer to peer within the neighbourhood.

Blockchain electronic wallet can be used to manage billing for electric vehicles. Car owners will be able to pay using smart meter contracts for charging at different points, parking fees and highway tolls.6 Demand response An exceptional peak in consumption due to extreme weather conditions or unforeseen outages in supply could adversely affect the security and regular operation of the grid, and in the worst case even result in an electricity blackout. With the ability to collect increasing amounts of data, e.g. consumption patterns, generation volumes of renewable energies etc., the energy sector has a chance to use digital technologies to address and deal with these upcoming challenges. Provided this can be done in a commercially efficient way.

Digitalisation can help to implement a demandside management aimed at providing flexible and rapid response to the needs of the grid operator in situations of imbalance between generation and demand. By implementing a demand-side management, large electricity consumers, e.g. large energy-intensive industries, can reduce their consumption in response to an order issued by the system operator to help maintain the balance between generation and demand. In return, they receive financial rewards for providing this service.

This is not only addressed to large consumers.

Interrupting demand is conceptually also possible in the private sector. Using data, private consumers may help grid operators to handle peak loads in the distribution networks by shifting consumption to off-peak load periods. This requires the access 6 International Energy Agency, Digitalization & Energy, 2017, page 98; Innogy, Blockchain car payments at CES, available at https://innovationhub. innogy.com/news-event/2isB4LLzhKwwi 4MiagAa46/blockchain-car-payments-at-ces.

to flexible consumers, for example electric vehicles. On the other hand, the charging process of electric vehicles may also lead to overload in the distribution network. Depending on the grid structure, only 36 electric vehicles in a certain area would be sufficient to overload the distribution grid otherwise supplying of 120 households. This example shows the importance of flexible charging processes. Steering charging processes of electric vehicles to periods when electricity demand is low and supply is abundant is not only able to avoid peak loads but can also avoid the expansion of the distribution network. Grid expansion would be the cost intensive alternative to handle peak loads and to ensure security of supply related to a higher simultaneous energy demand.

Internet of Things Energy digitalisation encompasses a range of digital technologies such as artificial intelligence and the Internet of Things. The Internet of Things is the network of physical devices, vehicles, home applications and other items embedded with electronics, software, sensors, actuators and connectivity which enables these items to connect to each other and exchange data. Where everyday objects are connected to networks this offers a platform for significant benefits in terms of energy efficiency. Smart metering devices directly connected with the internet and exchanging data with the electricity supplier can sustainably affect the consumption behavior and lead to a rational use of energy.

While he Internet of Things Internet could provide significant benefits, it also can make energy systems more endangered to cyber-attacks. To date, disruptions causes to energy systems causes by cyber-attacks have been relatively small. However, cyber-attacks appear to become easier and cheaper to organize. The Internet of Things provides an increasing potential for cyber-attacks in energy systems as it will link millions of new small-scale prosumers and billions of devices into the electricity system as well as large critical energy infrastructure.

Through the Internet of Things hackers can cause physical and economic damage to critical energy infrastructure.

A recent study by the European Parliament concluded: “The development of smart energy has also led to exponential growth of networked intelligence throughout the energy grids and also consumer premises. The result is that a massively expanding ‘attack surface’ now forms the operational foundation of the energy ecosystem.

As the energy system is also fundamentally interconnected with every other critical infrastructure network, the cybersecurity threat to the energy sector impacts every aspect of our modern society”.7 Avoiding cost intensive grid expansion Energy digitalisation may also contribute to avoiding cost intensive grid expansion. The integration of renewable energies into the grid and the transport of generated electricity of renewable energies to the consumer often require a cost intensive and long lasting grid expansion to ensure the security of supply. At the same time volatile generation of power from renewable energy makes it necessary to establish efficient links between grids, power generating facilities and the power consumers. The generation and consumption of electricity must be linked to take the demand and the actual consumption into account. Smart grids will pay a decisive role in this system. Smart grid describes the communicative connection of the actors in the energy supply system to the power supply grid, from power generation, transmission, storage and distribution through to the consumption of the electricity. Information and communication technology will therefore play a central role in connecting the components in the energy systems. It will facilitate the monitoring and optimization of the interlinked components.

The aim is to ensure the power supply on the basis of an efficient and reliable operation of the system. ›

7 European Parliament, Cyber Security Strategy for the Energy Sector, 2016, ITRE Committee, page 7

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Impact on energy demand in transports, buildings and industry Digitalization has a major impact on energy demand in transport, building and industry.

The transport sector notably contributes to the global final energy demand and to the global CO2 emissions from fuel combustion.8 Digitalization in the transport sector could have an impact on the road transport, where connectivity and automation could reshape mobility. Digitalization is enabling new mobility concepts, e.g. car sharing services potentially leading to a decrease of traffic, emissions and energy demand. The use of electric vehicles run by electricity from renewable energies contributes to a reduction of CO2 emissions. Intelligent transport systems can improve safety and efficiency.

In the building sector, digitalization may lead to efficiency gains, particularly in heating and cooling through the use of smart thermostats and sensors, the use of real-time weather forecasts to better predict heating and cooling needs and in lighting using lightning sensors. Buildings can therefore reduce their energy use by using real-time data and smart home appliances to improve operational efficiency. Digital devices can also integrate and intelligently link building energy services with information from the grid, allowing for better management of supply and demand.

Industry has already been using digital technologies to improve safety and to increase production through automation. Improved processes lead to significant energy savings and therefore contribute to energy efficiency. Digitalization can better connect producers along the product value chain, thus facilitating the reuse, recycling of materials and avoiding of waste. Digitally optimized supply chains can use inventories informed by real-time demand data to maximize asset utilization and minimize freight energy costs.

8 International Energy Agency, Digitalization & Energy, 2017, page 35.

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Oil, Gas and Coal Industry The oil and gas sector has a relatively long history with digital technologies, notably in upstream, but still potential remains for digitalisation to enhance operations further.9 The oil and gas sector is facing intense pressure to improve operational efficiency as lower oil prices continue to crimp margins.10 The deployment of digital technologies can decrease production costs and boost technically recoverable oil and gas resources.11 In the coal sector, digitalization can improve geological modelling, mining optimization, automation, predictive maintenance and worker health and safety.12 Legal Challenge and Opportunity A key feature of energy digitalisation is that in this area modern technology meets an existing energy law landscape that was not originally designed to address the specific challenges and opportunities of the digital world. At the same time, digital, internet driven industries historically did not heat homes or produced the power to run the computers, and their legal framework was not geared towards very long term investments in industrial assets.

Energy digitalisation means combining two previously rather separate worlds with different rules. And making the legal system work in such a way that secure, inexpensive, efficient and consumer and environmentally friendly energy will be available also in tomorrow’s digital world.

Our lawyers are very much at home both in the tech & comms as well as the energy world. We very much look forward to working with our clients to make the most of energy digitalisation, using our experience in both worlds to reduce risk and maximize opportunities. — 9 International Energy Agency, Digitalization & Energy, 2017, page 65.

10 PwC, Improving oil and gas efficiency through digital, available at https://www.pwc.com/us/en/ energy-mining/publications/assets/pwc- strategy-digitial-in-oil-and-gas.pdf 11 International Energy Agency, Digitalization & Energy, 2017, page 65.

12 International Energy Agency, Digitalization & Energy, 2017, page 65.

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ENERGY MANAGEMENT Michael Rudd, commercial partner, UK and PDA leader for Energy Management, explains the current and future market for energy management.

THE CURRENT AND FUTURE MARKET Introduction Since the mid 80’s the electricity sector in various countries has focussed on privatisation. Privatisation models have been developed and implemented with many then refined (or in some instances restructured) to implement evolving regulatory requirements (particularly with the continuing aim to improve competition), correct market design flaws and respond to broader market dynamics.

Michael Rudd

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The majority of the stakeholders remain large national and multi-national stakeholders, governed by independent regulators. Standardisation exists across the utility value chain ranging from how to structure an independent power project, industry codes and agreements for network access and the trading and supply of utilities. New products emerged such as ‘fix/unfix’ flexibility electricity supply contracts.

In many of the same countries (and particularly since the mid 00’s) there was then an upsurge in laws and policies1 that required or encouraged behavioural change in order to meet policy objectives including the trilemma of needing low (moving to zero) carbon and low cost energy and security of supply. This led to the deployment of innovative (often decentralised) technologies, the entry of non-traditional stakeholders, the creation of new business models and the adaptation of existing market arrangements to enable integration. The responsibilities of many independent regulators now extend to implementing, monitoring and managing these non-traditional policy areas (sometimes with objections raised about the appropriateness of this).

As with privatisation, the regulatory regime in these new areas continues to evolve, sometimes with a degree of criticism including periodic regulatory changes create uncertainty and regulation is constantly playing “catch up” with innovative technological and business solutions.

Standardisation is prevalent in certain areas (e.g. renewables) but less so in other areas.

For many electricity market stakeholders the last few years have created various pressures.

1 For example: in France, Law n ° 2015-992 of 17 August 2015 relating to the energy transition for green growth (https:// www.gouvernement.fr/en/energy-transition); in Sweden th 2018 Climate Act (Govt. Bill 2016/17:146) (https:// www.government.se/495f60/contentassets/883ae8e123b c4e42aa8d59296ebe0478/the-swedish-climate-policy-frame work.pdf); and the United Kingdom the Climate Change Act 2008 SI 2019/1056 (https://www.theccc.org.uk/ tackling-climate-change/the-legal-landscape/the-climate change-act/). For a broader overview of climate change policy in Europe, see the report entitled “Overview of Emission Reductions and National Climate Policies in the Non-ETS Sectors Across Europe” (https://www.euki.de/ wp-content/uploads/2019/01/20181221_Overview-of-Emis sion-Reductions-Natl-Climate-Policies-non-ETS-sectors_FI NAL.pdf).

•

Fossil fuel generators must comply with various climate change laws as well as growing competition from low carbon and renewable generation.

•

Low carbon and renewable generators are, in mature markets, adapting to a “new world” with no or diminished regulatory fiscal support, including resurgence in the use of corporate PPAs (applying “lessons learnt” from when they were utilised in the 00’s).2

•

Transmission and distribution network owners and operators must invest in smarter grids grids responding to energy digitisation and “electrification of everything” trends while responding to potential revenue reductions due to the increase in decentralised energy directly supplying consumers.

•

Large utility suppliers, who often still dominate most markets, continue to face increased regulatory responsibilities to demonstrate compliance with customer protection measures (particular customer choice and utility cost).

•

Smaller, often disruptive, stakeholders continue to face market entry barriers with the consequence that the electricity market can be slower to adopt innovation.

The above has and will continue to influence energy management activities of industrial and commercial (“I&C”) energy consumers. Energy management is an established global market yet remains, in many respects, a market with vast opportunities. In this article we examine the current and future state of the energy management market, with a primary focus on Europe. ›

2 See Bird & Bird’s Corporate PPA report (September 2019) - https://www.twobirds.com/en/news/articles/2018/global/ bird-and-bird-and-corporate-ppas-an-international perspective

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Overview of the Energy Management Market Over the years I&C energy consumers have had to respond to these market changes as well as laws that require or encourage such energy consumers to manage their energy consumption (particularly cost and security) and their related environmental impact (e.g. emissions). The key trend is that I&C energy consumers have taken and continue to take greater control of their energy needs. There has been a growth (in some cases, rapid) in innovative products and services offered to I&C energy consumers by traditional and non-traditional stakeholders. This has given greater choice to energy consumers as what type of energy they buy (particularly low carbon and renewables), where they buy it from (e.g. on-site or from another location, including from other countries) and how they use that energy more productively. Sometimes business opportunities are also created for energy consumers – such as themselves creating products or services to offer to other energy consumers and/or utilising their I&C sites to generate revenue (e.g. distributed generation or demand response grid balancing solutions).

In many of the jurisdictions in which we operate distributed generation has the biggest market share followed by demand management.

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Demand response, although permitted in many of those jurisdictions is often a distant third. Demand storage is the ‘new(ish) kid on the block’.

Policy & Regulation All stakeholders advocate the importance of a positive and stable policy and regulatory environment that supports growth. On 26 February 2015 the Energy Efficiency Financial Institutions Group published a report entitled “Energy Efficiency – the first fuel for the EU Economy, How to drive new finance for energy efficiency investments – Final report covering buildings and industry”3 being the outcome of an EU wide survey. The report identified a number of drivers that would encourage energy efficiency investment.

A common demand driver across owners of all buildings types was “strong regulatory framework with effective enforcement of regulation”. The survey considered the same issue from the perspective of those supply energy efficiency solutions (i.e. products and services) to buildings, with the common driver being regulatory stability and standardisation.

3 http://www.eefig.com/index.php/the-eefig-report

These drivers along with many other factors4 have resulted in an evolving policy and regulatory framework intended to achieve: 1.

market actions – such as policies to require properties to achieve minimum level of energy performance and provide energy efficiency with a market value;

2. economic actions – such as policies to

incentivise reduction in energy consumption; 3. financial actions – such as policies to improve

affordability of energy efficiency improvements; and 4. institutional action – such as policies to

encourage implementation of energy efficiency measures.

Various policy and market drivers over the last 20+ years have also influenced the extent of investment in energy management technologies and the policies and regulations to support such investment. 5 For example, in the context of distributed generation, Central and Eastern Europe has greater investment in combined heat and power, with others, including the UK and France, lagging behind.6 Increasing renewable / low carbon heat (including through scalable distributed generation networks) forms part of the Europe energy efficiency agenda – with each member state implementing different policies and regulations reflecting the level of distributed generation in their country.

Based on objective metrics, many countries are considered to be doing a “good job” from a regulatory and policy perspective. The American Council for an Energy-Efficient Economy produced its fourth edition of “The 2018 International Energy 4 While there are common barriers, trends and solutions found across Europe, there are also regional and coun try specific trends including energy consumption, productivity, intensity and energy dependency patterns (see: https://ec.europa.eu/eurostat/cache/infographs/ energy/index.html) 5 The latest in Europe being the clean energy for all Europeans energy package (https://ec.europa.eu/energy/en/topics/ energy-strategy-and-energy-union/clean-energy-all europeans), a key element of which is that energy efficiency is first.

6 Eurostat - Combined heat and power generation % of gross electricity generation (2014).

Efficiency Scorecard”7. The report examines the efficiency policies and performance of 25 of the world’s top energy-consuming countries (up from 23 countries in the 2016 third edition). Together these countries (as of 2014) represented 78% of all the energy consumed on the planet and over 80% of the world’s gross domestic product (GDP). The report: evaluates each country using 36 policy and performance metrics spread over 4 categories: buildings, industry, transportation, and overall national energy efficiency efforts; and allocates 25 points to each of these 4 categories and awarded the maximum number of points for each metric to at least 1 country. Europe and AsiaPac countries continued to dominate the ‘top 10’. Germany and Italy both earned the highest overall score with 75.5 out of 100 possible points. France and the UK were also in the top 5, along with Japan. Spain, the Netherlands, China, Taiwan and Canada/USA (tied for tenth) make up the remainder of the top 10.

Notwithstanding these objective metrics, some stakeholders in highly ranked countries have a (mis) perception that such regulations and policies are ineffective. Let’s take the UK as an example: 1. There current UK regulations and policies

continue to evolve including:

a. degressing and closing (completely or

for certain fuel or generation types) various

fiscal incentives for low carbon and renewable generation;8 ›

7 http://aceee.org/sites/default/files/publications/re searchreports/i1801.pdf 8 For example, removing green certificate regimes such as the Renewable Obligation Regime in the United Kingdom.

In addition, concerns have been raised about the current low cost of carbon (e.g. see page 74 of the Department fo Business, Energy and Industrial Strategy “Greenhouse Gas Removal policy options – Final Report” (June 2019) (https:// assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/833145/Greenhouse_ Report_Gas_Removal_policy_options.pdf ) which states “Carbon prices in the near term (£20/tCO2) are far too low to provide sufficient incentives for GGR deployment. Only from 2030 onwards, as carbon prices are expected reach £100/tCO2, incentives would become more relevant”).

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b.

continuing to implement (but not yet substantially deploying) various energy management initiatives including the Electricity Demand Reduction Pilot project9, Demand Side Response arrangements10, enhanced capital allowances11 and the Heat Networks Investment Project12; ›

c. policy initiatives to manage energy costs

including introducing exemptions for

energy intensive industries from

a proportion of the indirect cost of certain

fiscal incentives included on electricity bills13

the and the “Control for Low Carbon

Levies”14; and

d. policy initiatives which will streamline

relevant organisational reporting

requirements, particularly carbon

reporting.15 2. Volume 26 of Energy Efficiency Trends report (published by EEVES and Bloomberg New Energy Finance on 6 March 2019) summarises survey respondents views on the effectiveness

of such laws as follows:

9 https://www.gov.uk/guidance/electricity-demand reduction-pilot and https://assets.publishing.service.gov. uk/government/uploads/system/uploads/attachment_data/ file/828569/edr-final-evaluation-report__3_.pdf.

10 https://www.ofgem.gov.uk/electricity/retail-market/ market-review-and-reform/smarter-markets programme/electricity-system-flexibility.

11 The Capital Allowances (Energy Saving Plant and Machinery) Order 2018 came into force on 22 March 2018. It details the plant and machinery which qualifies as energy saving. A copy can be found at: http://www. legislation.gov.uk/uksi/2018/268/made. BEIS also published the latest Energy Technology Criteria and Products lists, at https://www.gov.uk/guidance/energy-technology-list.

12 https://www.gov.uk/government/publications/heat- networks-investment-project-hnip-scheme-overview 13 Electricity Supplier Obligations (Amendment and Excluded Electricity) (Amendment) Regulations 2017 14 In the Autumn 2017 Budget, the Control for Low Carbon Levies replaced the Levy Control Framework - see https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/660986/Control_for_ Low_Carbon_Levies_web.pdf. The aim is to protect electricity consumers from additional costs on bills and to provide certainty to investors by allowing the government to control public expenditure on incentives (such as Renewable Obligation, Feed-in Tariff and Contracts for Difference).

15 In the UK the streamlined Energy and Carbon Reporting framework came into force from 1 April 2019 to simplify carbon and energy reporting requirements for businesses (https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/791529/ Env-reporting-guidance_inc_SECR_31March.pdf).

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“Government Action: Negative attitudes

toward energy efficiency policy have

strengthened as 53% of respondents

reported the government’s approach to

be ineffective or very ineffective. Low levels

of confidence were also shared in relation to

the wider economy. The slight increase in

support for government action in the last

quarter has been lost with only 19%

of suppliers considering the Government’s

management of the economy to be

effective.”16 3.

Common stakeholder complaints include a lack of stability, lack of regulatory / policy comprehensiveness and co-ordination, and a failure to “keep pace” with market dynamics.

4. While there is no acknowledgement by the

UK Government regarding the (in)effectiveness

of the current UK laws, there has been an

increased focus on “listening to the market” in

order to set future policies (see, for example,

the UK Government’s response entitled

“Helping businesses to improve the

way they use energy: call for evidence”17 published as part of the UK Government’s

“Clean Growth Strategy”18) So what does this mean going forward?

1.

Policy makers will continue to focus on the optimal policy mix that will stimulate energy management deals in both the public and private sector. In some countries the barriers to be removed a more fundamental (e.g. the removal of budget and procurement law barriers which prohibit or limit the public sector from procuring energy management solutions). In others the aim is to refine (but ideally, not restructure unless necessary) to implement evolving regulatory requirements, correct market design flaws and respond to

16 http://www.eevs.co.uk/media/trendsq418.pdf 17 https://www.gov.uk/government/consultations/ helping-businesses-to-improve-the-way-they-use energy-call-for-evidence 18 https://www.gov.uk/government/publications/ clean-growth-strategy

broader market dynamics. While this sounds similar to the evolution of the approach to privatisation and renewables, stakeholders have observed that energy management is, in many respects, more complicated because energy management interfaces with every sector (i.e. every sector consumes energy and will have its own unique regulatory features that need to be considered when designing an effective energy management policy framework).

offering (increasingly standardised) deal

solutions. This growth is set to continue, particularly as the UK Government seeks to

deploy the £320m available under the Heat

Networks Investment Project20.

These and other market dynamics has led to the UK Competition and Markets Authority to recommend and the Department for Business, Energy and Industrial Strategy to confirm that distributed heat networks should be regulated.21 ›

2. Policy makers also now have to deal with convergence:

a. within the energy market – energy

management interplays with regulation

and policy on a variety of matters including

within the energy market including low carbon and renewable generation and energy digitalisation; and

b.

with factors outside the energy market – for example, energy management often forms part of regulatory and policy initiatives concerning smarter cities where cities are considering (initially at a macro level) how they will manage the energy needs of the public and private sector within the city.

This interplays with a variety of strategic decisions including a city’s infrastructure investment plans as well as citizen wellness (e.g. clean air quality initiatives).19

3.

Certain energy management activities will become the subject of specific rather than general (e.g. competition and consumer law) regulation. For example, the quantity of residential homes being served by distributed heat has grown in the UK - primarily as a consequence of planning requiring new developments to have or connect to distributed heat resulting in a growth in stakeholders

19 See the Environmental Industries report entitled “Getting the green light – Will smart technology clean up city environments” - http://eic- uk.co.uk/wp-content/uploads/2018/02/Will-smart technology-clean-up-city-environments-FINAL.pdf

20 https://www.gov.uk/government/publications/heat networks-investment-project-hnip-scheme-overview 21 https://www.gov.uk/government/news/heat-networks must-be-regulated-cma-study-finds and https://www. gov.uk/cma-cases/heat-networks-market-study and https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/774586/ heat-networks-ensuring-sustained-investment protecting-consumers.pdf

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While we maintain the view that a positive and stable policy and regulatory environment supports growth, we also believe that deals can get done notwithstanding the help or hindrance that the regulatory and policy landscape can provide. This is because regulation will only enable and encourage deals to happen (in a typical investment process up to “evaluation and choice”) - it is for the deal stakeholders to make the deal happen. This places increased importance on factors beyond policy and regulation such as stakeholder engagement, capacity building and standardisation.

Stakeholder Engagement An I&C energy consumer correctly engaging with all relevant stakeholders provides the best chance for it to formulate and implement its energy management strategy. Identifying early the extent of alignment between stakeholders should minimise the risk of subsequently encountering issues that delay or prevent successful implementation. This is amplified in certain situations. One key example is when a government wishes to stimulate energy management investment, for example, within the public sector in order to achieve objectives such as reduce public energy expenditure, achieve citizen wellness benefits and increase market confidence hopefully stimulate energy management deals in the private sector. To achieve this may require various laws to be amended or introduced, various template

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documents to be created and a capacity building programme. Success requires the input from multiple public sector stakeholders as well as the private sector including those who will be procured to provide the energy management goods, works and services. Other stakeholders include investors, insurers, supply chain and professional advisors.

Success could depend on how they share the risk and reward in the building manager’s appointment.

Another example is when implementing energy management solutions across property portfolios where there is likely to be a greater volume of stakeholders (including within the same stakeholder class). Beyond building occupiers and public sector stakeholders two additional key stakeholders are: 1. Lenders – a.

For property owners, this includes lenders providing acquisition finance and re-financings. Traditionally, such financings will contain covenants to limit borrower

debt levels and a security package to

preserve the lender’s debt seniority. This

can often limit the way in which a property

owner structures and funds energy

management solutions for its property portfolio. b.

Looking forward, lenders are progressively requiring property owners to invest in energy management solutions. One motivation is to minimise the risk of building devaluation and/or reduced income from the building (e.g. arising from a building which is not compliant under the Minimum Energy Efficiency Standards), both of which impact on the security package and the property owners ability to repay the debt.

Property owners who do not invest in energy management solutions run the risk of: a smaller pool of lenders prepared to provide re-financings; and potential building purchasers being “put off” because they are unable to obtain acquisition finance.

(whether formal or informal) will enable

them to propose, properly consider and,

where appropriate, implement energy

management solutions. Success could

depend on how they share the risk and

reward in the building manager’s appointment.

Other stakeholders include investors, insurers, employees, customers, supply chain and professional advisors. Each of these will have similarand additional considerations to that of lenders and building managers. Each can have a broader role, particularly professional advisors, to create standardised processes, solutions and documents. Relevant industry bodies can play a similar positive role.22 ›

2. Building managers –

a. A building manager’s appointment may

contain features that either hinder or encourage the deployment of energy management solutions across a portfolio.

For example, if its remuneration is tied to each building’s revenues (including energy costs paid by tenants) then reducing energy costs could negatively impact on its revenue. However, it is possible that a failure to implement energy management solutions could impact on a building’s primary revenue (i.e. rental income) more than the energy cost reduction. This could incentivise a building manager to propose energy management solutions to the property owner and support any property owner’s proposal.

b. The property owner and its building

manager(s) should consider how a

partnership relationship between them

22 Also see the Environmental Industries report entitled “Driving Energy Efficiency in Property Portfolios” - http://eic-uk.co.uk/wp-content/uploads/2018/01/ Driving_Energy_Efficiency_Report_Print_Version.pdf

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Capacity Building Education and training is important to assist stakeholders to undertake a consistent, wellconsidered and focussed process. It enables the implementation of an appropriate process to “get the deal done” focussed on having good leadership and team, with good communication, verifiable data and a standardised process (flexibility in the process is OK so long as it is done for the right reasons and appropriate communicated)23.

“Government and professional bodies should develop competencies across a wider group of societal stakeholders through education tools.”

1. Clear instructions Devote time to the specification of requirements to be submitted to the fulfilling party. Consider which performance indicators are important. Be clear and act as an intelligent client. Accept that you cannot do this 100% comprehensively and perfectly.

2. Confidence Develop a relationship based on trust and strive for a win-win situation. Agree on what to do if trust is lost.

Talk to each other about expertise.

3. Contract manager Appoint a contract manager who is knowledgeable about buildings, energy and procurement and who can deliver results.

4. Available data Make a baseline measurement.

Set out what will be measured and how.

Make as much data available as possible about the building and its energy consumption history.

5. Open questions Ask open questions.

Ask the fulfilling party to propose performance indicators and innovations.

6. Flexible Ensure a flexible contract that can accommodate changing circumstances, such as changing hours of use and occupancy rate.

7. Communication Create a clear and open communication structure and include it in the contract: who communicates with whom, in what manner, and about which subjects.

8. Employees Take account of employees’ experiences in the specification. Listen to employees who will have to deal with the consequences of environmental changes.

9. Expectations Manage end users’ expectations of the environment and services to be provided under the contract.

10. Manual Ask the fulfilling party to prepare a building use manual for end users and building managers.

As an example of capacity building, the Energy Efficiency Financial Institutions Group report entitled “Energy Efficiency – the first fuel for the EU Economy, How to drive new finance for energy efficiency investments – Final report covering buildings and industry”24 contains a comprehensive analysis of (at the time of publication in 26 February 2015) mature and emerging financing techniques.

In March 2018 the UK’s Green Finance Taskforce 23 Table reproduced from the Netherlands Enterprise Agency report entitled “Guideline for Tenders for Energy Performance Contracts”; page 17 (http://www. rvo.nl/sites/default/files/2015/08/Leidraad%20 Prestatiecontracten%20-%20english.pdf). Also 24 http://www.eefig.com/index.php/the-eefig-report

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published its first report entitled "Accelerating Green Finance” containing 30 recommendations on how the UK Government could achieve the investment the UK needs to meet its carbon and environmental goals25. “Recommendation 22” was that “Government and professional bodies should develop competencies across a wider group of societal stakeholders through education tools.”26 In July 2019 the same task force published “Green Finance Strategy - Transforming Finance for a › 25 http://greenfinanceinitiative.org/wp-content/ uploads/2018/04/Report-of-the-Green-Finance Taskforce-1.pdf 26 http://greenfinanceinitiative.org/wp-content/ uploads/2018/04/Report-of-the-Green-Finance Taskforce-1.pdf at page 52

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Greener Future” which committed to launching a ‘Green Finance Education Charter’ to “that commits professional bodies to taking prompt action to identify and address gaps in the development of green finance knowledge and skills, and engage members on the risks and opportunities climate change and environmental challenges present to their professions”.27 Standardisation - Process Stakeholder engagement and capacity building can assist with standardisation in both the process of entering into a deal and the deal structure itself. Various template documents (particularly agreements and guidance) have been prepared by the public sector28 (e.g. to comply with their obligations pursuant to the Energy Efficiency Directive29). This is supplemented by guidance produced by others, particular industry bodies.

There is also useful guidance derived from actual deals that in themselves creates standardisation such as the Berlin Energy Savings Partnership30 and RE:FIT London31.

27 https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/820284/190716_BEIS_ Green_Finance_Strategy_Accessible_Final.pdf at 64.

28 For example, country specific guidance, such as Ireland (https://www.seai.ie/business-and-public-sector/business grants-and-supports/energy-contracting/) and the United Kingdom (https://assets.publishing.service.gov.uk/govern ment/uploads/system/uploads/attachment_data/file/395076/ guide_to_energy_performance_contracting_best_practices pdf) as well as more generally (http://www.transparense.eu/ download-library/epc-manual and http://www.sustain able-procurement.org/resource-centre/).

29 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/ EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC Text with EEA relevance.

Directive (EU) 2018/2002 of the European Parliament and of the Council of 11 December 2018 amending Directive 2012/27/EU on energy efficiency. For more information see https://ec.europa.eu/energy/en/topics/energy-efficiency/ energy-efficiency-directive.

30 For more information see: http://www.citynvest.eu/ sites/default/files/library-documents/Model%202_ Berlin%20Energy%20Saving%20Partnerships_final.pdf 31 For more information see: https://www.london.gov. uk/what-we-do/environment/energy/energy-buildings/ refit and the presentation entitled “RE:FIT LONDON – Making London a resilient, sustainable and resource efficient city”; Virginie Caujolle-Pradenc RE:FIT Programme Director; EMEX, November 2016 - http:// www.slideshare.net/emexlondon/refit-london-making -london-a-resilient-sustainable-and-resource efficient-city

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Regarding standardising the process, over 10 years ago as the UK energy management market, particularly energy performance contracting, started to emerge in the UK a core group of stakeholders, including Bird & Bird, looked at where the project specific barriers are in the process of getting deals done. The table below outlines the typical phases of an energy performance contracting deal and the key considerations for each phase that will help determine the optimal deal structure and process.

This table shows a typical process: 1. the words highlighted in green were potential barriers in which stakeholders have developed standardised solutions; 2. those words highlighted in orange are those were there may not be a standard solution but stakeholders are aware of what issues need to be considered and how best to resolve them in the context of each project; and 3. the accounting treatment is in red primarily because we are of the view that this remains an area with the highest uncertainty.32 ›

32 Although it is recognised that various stakeholders have prepared guidance to progress this issue including, for the public sector, the Eurostat and European Investment Bank report called “A Guide to the Statistical Treatment of Energy Performance Contracts” (May 2018) (https://www.eib.org/ attachments/pj/guide_to_statistical_treatment_of_epcs_ en.pdf).

Phase 1 High grade audit undertaken

Phase 2 Proceed to an investment grade audit

Phase 3 Proceed to the design, installation and commissioning of the energy management solutions.

Phase 4 Energy management solutions start generating financial benefits to ESCO and the consumer

Phase 5 Periodic review of the performance of the energy management solutions including, where appropriate, a periodic measurement and verification process

Key considerations for phases 1-3:

Key considerations for Phases 4-5:

•

Bankability – for ESCO (its funders) and the consumer

•

Performance monitoring

•

Which energy management solutions – demand management, distribution generation and/or demand side response

•

Change in building usage / consumer demand profile

•

Who undertakes the high grade audit – ESCO or consumer

•

Distribution of the transaction’s financial benefits

•

Setting the energy savings baseline

•

Allocation of O&M responsibilities

•

Allocation of D&B responsibilities

•

Periodic reconciliations (e.g. M&V)

•

CAPEX funding

Key considerations for all Phases: •

Ownership of each energy management solution, including during the contractual term and following expiry / early termination

•

Ownership / occupation arrangements for the relevant site(s) in which the energy management equipment is to be installed

•

Accounting treatment (e.g. balance sheet treatment) of each energy management solution

•

Consumer's existing relevant contractual, funding and property arrangements

•

Corporate policy / governance requirements of each stakeholder

•

The parties to each contract

•

Duration of each contract

•

ESCO's funding strategy

•

ESCO's sub-contracting strategy

•

The property rights granted to ESCO

•

Consumer's site disposition rights / obligations

•

Assignment / novation regime under each contract

•

Insurance regime under each contract: both pre-existing and on entering into each EnPC

•

Liability regime under each contract

•

Termination rights and consequences under each contract

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Standardisation – Deal Structure Like with all standardisation, the challenge for the energy management market is creating an appropriate level of standardisation to, among other things, instil market confidence, while maintaining an appropriate level of adaptability.

For example, there are several ways to deploy energy management solutions including: •

Insourcing – that is, solutions are implemented and managed internally;

•

Contracting out –the consumer contracts out and pays for the energy management services, work and goods. For example, this may be done as part of a broader estate / facilities / asset management contract; and

•

ESCO model – involving a third party (usually referred to as an energy services company or “ESCO”) with the typical key features outlined in more detail below.33

Insourcing and contracting out are more commonly used. They are often considered the simpler

33 There is also a trend for the ESCO entity to either be established by the public body and owned solely by it or together with private sector organisations.

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and most efficient way to implement energy management solutions. Although used less often, the ESCO model could, in certain circumstances, be the optimal solution, including where the capital deployment required to achieve the I&C energy con energy management strategy across its portfolio exceeds its own available capital.

As organisations learn from previous success stories, best practice and standardisation become established and – with clear policy and legislative support from the government – it is hoped that the ESCO model is seen as one of the core structural options alongside insourcing and contracting out. However, it is recognised that various steps still need to be taken to improve stakeholder confidence in, and minimise any “hassle” factor perception of, the ESCO model.

Below is diagram of an exemplar contractual structure for a typical ESCO model. The main agreement is the energy performance contract (“EnPC”) between the consumer and ESCO.

The key features of this exemplar ESCO model include: 1.

Core Activities: ESCO is fully responsible for the core activities of design, installation, commissioning, operation and maintenance of the energy management solutions. ESCO may: (i) fund itself and/or utilise third party funding, some examples of which are contained in the diagram; and/or (ii) have internal resources to undertake the core activities or outsource some or all of these activities to a specialist contractor.

2.

Use: for certain energy management solutions, the consumer is entitled to use such solutions as part of its use of the building (e.g. intelligent lighting system).

3.

Remuneration: the consumer pays ESCO an amount determined by the actual energy savings achieved by the energy management solutions determined through a measurement and verification process.

4. Title / Possession of the energy management solutions: ownership remains with ESCO throughout the term of the agreement with th consumer.

However, there are often appropriate variations to this typical ESCO model: 1.

Core Activities: the consumer may undertake certain activities, such as some of the operation and maintenance (e.g. through an existing estate / facilities / asset management arrangement) or obtaining certain consents, such as planning (e.g. perhaps because it forms part of a broader building refurbishment programme). Additionally, the consumer may contribute to the CAPEX or OPEX funding to: improve bankability where some of the energy management solutions or sites are marginal; increase the consumer’s share of the energy savings during the EnPC term; and/or reduce the EnPC term so that the consumer more quickly receives the direct financial benefit of energy management solutions that remain in situ post expiry of the EnPC.

2.

Remuneration: in certain circumstances, such as to secure third party funding, ESCO may require that a portion of its periodic payments is fixed rather than variable based on actual energy savings. Fixed periodic payments require the energy savings to be pre- determined at the time of signing the EnPC and may, in certain circumstances, re-categorise a shared savings EnPC into a service concession EnPC. Further, the remuneration arrangements will also need to take account of any:

a.

low carbon and renewable distributed generation solutions, where the consumer pays ESCO either for energy it consumes from the on-site generation or an availability / tolling payment for the consumer’s use of the on-site generation; or

b.

demand side response solutions where the consumer may receive a portion of the revenue ESCO receives if it takes advantage of one of thedemand response market arrangements currently available.

3.

Title / Possession of the energy management solutions: the consumer may want to have ownership of some or all of the energy management solutions following installation.

Further, even if both parties wish ownership to remain with ESCO, there may be other considerations that prevent this. For examples, we have seen instances where the property law concept of fixtures may result in ownership transferring from ESCO to the landowner following installation.

In determining the optimal ESCO model transaction structure two important questions should be answered: 1.

Will there be one “framework EnPC” covering all of the relevant commercial property portfolio sites or one template EnPC adapted and then entered into per site or basket of sites (e.g. a basket of sites with homogenous features / transaction structure)? Answering thi question typically comes after Phase 1 and ›

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certainly before Phase 3 when there is more certainty between the consumer and ESCO on:

a.

the extent to which the key features and considerations outlined above are consistent across the relevant commercial property portfolio sites. While a framework EnPC can be drafted to deal with differences between sites, greater heterogeneity may be better dealt with in one EnPC per site or basket of sites (based on a template containing common provisions where appropriate); and

At the other end of the spectrum, this could commence once

all energy management solutions

are installed across all the sites

(which could have a negative impact

on ESCO’s financial model given it

typically funds the CAPEX); and 2. will the financial benefit be ring fenced for each site or consolidated across all sites? iv. what is the level of flexibility given for each site including:

b. how the parties wish to deal with specific

key considerations. For example:

1. the consumer’s rights / obligations

to dispose of a site;

i. the process for determining the relevant

sites (which is considered in more detail below);

2. each party’s ability to assign or

novate a site;

ii. roll-out programme for the design,

installation and commissioning of

the energy management solutions on

each site. This will need to balance

a number of different factors including

ESCO’s objective of generating

project income at the earliest

opportunity (given it typically funds the

CAPEX) and the consumer’s business

(sometimes site specific) needs,

including the requirement that ESCO’s

activities cause no or minimal business interruptions; iii. regarding the financial benefits

generated by the energy management solutions:

3. a party’s ability to terminate the

EnPC in relation to a site with site

specific issues without terminating

the EnPC for the remaining sites; and v. site specific versus a portfolio liability

and insurance regime.

There may be alternative EnPC structures, including a “hybrid framework EnPC” in which the consumer and ESCO sign a framework agreement which attaches a template EnPC and contains a call-off process enabling the parties to adapt the template for each site or basket of sites.

2. When will EnPC(s) be signed? a.

1. when will ESCO start to receive

these financial benefits? At its

most granular level, this could commence following commissioning

of each separate energy

management solution on each site.

An EnPC will need to be signed at the least before Phase 3 commences. If the EnPC is signed at that point then ESCO may have carried out Phases 1 and 2 at its own cost and risk. To deal with this, ESCO may require the consumer to sign a separate agreement prior to Phase 1 or 2 to deal with what happens if the consumer elects to not proceed with the next Phase, ›

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including the consumer paying for some or all of ESCO’s costs in preparing the high grade audit and/or investment grade audit.

b.

If a framework EnPC or hybrid framework EnPC is signed before Phase 1 or Phase commences, then it will have to set out the process for deciding which sites will proceed to Phase 3. The consumer may be willing to commit to ESCO a minimum number of sites within its portfolio that proceed to Phase 3 (and so a longer list of sites may need to go through the Phase 1 and/or Phase 2 process).

c.

If the consumer and ESCO adapt a template EnPC on a per site or basket of sites basis then there is also the consideration of undertaking a “pilot energy management project” across certain sites which, if successful, is then rolled out to a broader portfolio (including through a framework EnPC or hybrid framework EnPC).

Even with the all of the above variables, standardisation can be achieved. It has been done elsewhere – the construction and oil and gas industries being just two leading examples.

This is because proper standardisation enables adaptability – e.g. by including suggested drafting (with guidance) for the various common deal options available in the market and having a process to periodically review and update those options to reflect market trends.

Looking ahead Just like other markets, the energy management market has its complexities and not every complexity can be solved at the time when a stakeholder needs the solution. Notwithstanding the various frustrations and barriers, we remain positive that more (and bigger) deals will continue to be done. With that in mind, we have three key recommendations: 1. The public sector, as an exemplar, must do more than their minimum legal requirements

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(e.g. under the 2012 Energy Efficiency Directive as amended in December 2018) to procure energy management solutions.

The public sector has the scale of energy consumer assets to ‘really make a difference’.

It also has the potential to be wrapped into other initiatives including those related to smarter cities.

2.

Core stakeholders should ensure the wider stakeholder community understands and appropriately uses the structural solutions available to them rather than push one structural solution over another. For example, we have seen certain initiatives focus primarily on the ‘ESCO Model’ referred to above – this is sometimes in reaction to the majority of the energy management solutions being done utilising the ‘Insourcing’ and ‘Contracting Out’ models. We remain advocates of the role that the ‘ESCO Model’ can play and agree that capacity building of that model is often required. However, there is often a (mis) perception by stakeholders (including I&C energy consumers) that the ‘ESCO Model’ is the ‘only way to go’ rather than an option that should be appropriately considered. Positively (and creatively) we are seeing deals being done which are “hybrids” of these and other models where informed stakeholders adapt the most appropriate model features to suit the deal.

3.

Given the diversity of I&C energy consumers, there needs to be both general initiatives available to all and targeted initiatives that genuinely understand the dynamics of the target stakeholders. Often policy initiatives bundled I&C energy consumers by energy consumption patterns (e.g. energy intensive industries at one end and SME’s at the other) rather than a consumer’s business activity / sector. It raises the question about whether a co-ordinated public policy initiative (which included industry body support) focusse on a particular industry (e.g. data centres) or building type (e.g. commercial and retail buildings) would have a greater impact than one based on energy consumption patterns. —

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UPDATE ON TENDER REGULATION ENERGY PROJECTS René Voigtländer, regulatory partner, Germany, explains the tender regulation impacting the energy market in EU and Germany.

Tendering of energy concessions in the light of the recently reformed EU and German law German law on energy concessions has been reformed and the process and principles of tendering such concessions has finally been codified in 2017 with a view to strengthening competition and creating more legal certainty Europe 2020 strategy In the “Europe 2020” strategy , set out in the Commission Communication of 3 March 2010 public procurement is one of the key market-based instruments to achieve sustainable and inclusive growth while ensuring the most efficient use of public funds. In that respect, all kind of concession contracts represent important instruments in the long-term structural development of infrastructure, fostering competition within the internal market, facilitating to benefit from private sector expertise and helping to achieve technical innovation and efficiency. In order to implement this strategy, concession law was to be revised extensively.

Need for new rules On EU level the principles of the award of services concessions were subject of the TFEU - particularly the principles of free movement of goods, freedom of establishment and freedom to provide services, as well as the principles of equal treatment, transparency, non-discrimination and proportionality. This led to legal uncertainty related to divergent interpretations of the principles of the Treaty bynational legislators and of wide disparities among the legislations of various Member States.

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In Germany the rules for the tendering of energy concessions technically were not part of public procurement law but subject to the Energy Industry Act (Energiewirtschaftsgesetz - short “EnWG”). The rules herein were rather general and imprecise. In order to outline a legal framework for the process of tendering and awarding such concession contracts principles of public procurement law were partially applied. But no clearly defined and coherent set of rules existed. Consequently, there were numerous legal disputes about the selection procedures and details of the acquisition of gas and electricity networks. Untypically for German law, extensive case law basically governed the procedure of tendering gas and electricity concession contracts.

German courts, nevertheless, have only partially addressed certain procedural aspects. This resulted in significant legal uncertainty and consequently in restraints within municipalities to initiate tendering procedures though their energy concession contracts had expired.

The rules herein were rather general and imprecise.

Reforms on concession law On EU level directive 2014/23/EU of 26 February 2014 on the award of concession contracts forms the new legal basis for all kind of concessions, including works and services concessions. Though this is debatable, in our view the directive is as well applicable to energy concessions, as these are services concessions. The directive provides for the goals and general principles of the tendering of concessions and roughly outlines the procedure (notice, award notice, time limits, provision of information to tenderers etc.).

In Germany this directive was implemented as part of the overall reform of public procurement law in force since 18 April 2016. Nevertheless the substantial rules for energy concessions are not part of German public procurement law but ›

René Voigtländer

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were incorporated via a long awaited reform of the EnWG, in force since 3 February 2017. It contains a legal framework and special rules for concessions in the energy sector which principally override public procurement law. Public procurement law only complements the special rules of the EnWG and is applicable only in case of a regulatory gap.

Overall, the energy concession tendering process has significantly been aligned to public procurement law. Next to the principles deriving from the directive on the award of concession contracts, the new legal provisions are mainly based on the extensive German case law on energy concessions.

Basic principles of the reformed German law on energy concessions Specification of the selection criteria The reform clarifies that the purpose of the selection process for the future concessionaire is to identify the bidder offering the supply of gas or electricity primarily in the most secure, affordable, consumerfriendly, efficient and environmentally-friendly way with a special focus on renewable energies.

Information rights and requirements Furthermore the information rights of the municipality against the holder of the concession were regulated. On the other hand the municipalities now face more extensive information obligations towards the bidders, especially in case they are not awarded the concession contract.

a short period of time, comparable to those in public procurement law. This fosters legal certainty tremendously as according to the prevailing case law, procedural errors could still be asserted years after the conclusion of the concession contract.

Besides, losing bidders now have more information rights, in order to prepare a potential reviewing procedure.

Purchase price of the network The year-long uncertainty about the calculation of the purchase price in case of acquisition of the network has been reduced by a clarification on the calculation method in the EnWG. First impressions and outlook The reform of energy concession law in the EnWG successfully managed to outline and codify some key aspects and clear rules, especially with regard to the procedural aspects. Nevertheless many issues were deliberately not regulated in detail in order to give the municipalities a margin of discretion. This is at the expense of legal certainty.

The German legislator has also not touched one of the basic problems - the two-sided position of the municipalities. Municipalities will continue to independently select the concession holder and at the same time will be able to participate as bidders in the selection process by means of a municipal network operator. In practice, this conflict of interests has considerable potential for disputes.

So enough material for further discussion… —

No in-house procurement The EnWG foresees that municipal network operators are not privileged by the so-called “inhouse procurement”. We highly welcome this central provision as it fosters competition and diminishes the incentive to build municipal network operators only to award them the concession as otherwise there is a risk of an unbreakable monopoly of municipal network operators and loss of quality at the expense of network customers.

Requirement to make complaints within a short period of time and fostered legal protection Of great practical significance are the new rules on legal protection. Bidders now observe strict and staggered requirements to make complaints within

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RSG IN ASIA Sandra Seah, regulatory partner, Singapore, looks at the rise of ESG investing in Asia.

The rise of ESG Investing in Asia What is ESG? Environmental, Social and Governance (ESG) criteria is a set of sustainability standards directed at a company’s operations, which socially conscious investors may use to evaluate potential investments: •

Environmental criteria look at how a company performs as a steward of the natural environment;

•

Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates; and,

•

Governance refers to a set of objective metrics that evaluate a company’s leadership, executive pay, audit processes, internal controls and shareholder rights.

Examples of ESG criteria used by investors include determining a company’s impact on climate change or carbon emissions, water use or conservation efforts, anti-corruption policies, board diversity, human rights efforts and community development.

Investors who want to purchase securities that have been screened for ESG criteria can do so through socially responsible mutual funds and exchangetraded funds. According to the US SIF Foundation, the value of ESG funds totalled more than $2.5 trillion by the end of 2016, while U.S. investments in companies that actively pursue responsible, sustainable growth accounted for about $8.7 trillion in assets under management (AUM) at the end of 2015.

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ESG investment in Asia Singapore-based Asian venture Philanthropy Network estimated that in 2016, less than 1% of investment funds in Asia have been placed in investments that strongly meet ESG criteria in comparison to 50% globally. Nevertheless, there is now tremendous stimulus for ESG investment in Asia as its financial markets mature and gain sophistication.

Champions of ESG investing tout the many studies that show a positive or neutral correlation between ethically minded investing and stock performance (92% of more than 2,000 studies support this assertion), i.e. there is money to be made (or at least especial prejudice is caused) by ESG investing.

There are several reasons that explain why ESG investing yields such results, namely: •

Halo effects attract customers and investors, thereby boosting a stock’s price;

•

Avoidance of regulatory scrutiny and fines arising from unsustainable practices; and

•

Baseline shifts in Asian societies toward environmentalism, and ESG compliant firms are well placed to capitalise on such opportunities.

Halo Effects: When companies commit to having sustainable and ethical practices, they are also perceived as committed to building a better shared world, connected to the current issues of the globe, and looking beyond pure financials and short term gain. Such positivity generates goodwill from customers and quantifiable marketing benefits, which leads to consumers, suppliers and employees alike to assume other positive things about the same company. This results in stronger sales, cheaper inputs and a more engaged workforce.

As a whole, these contribute to positive financial returns, and the interest of investors.

Avoidance of Fines and Regulatory Scrutiny: The surge in ESG is also related to the incidence of major disasters that increasingly attract huge fines and non-financial directives that result in ›

Sandra Seah

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high compliance expenses and subdued revenues for those involved. For instance, the Deepwater Horizon oil spill in the Gulf of Mexico, which killed 11 people and spewed oil into the water for 87 days in 2010 resulted in significant fines and greatly affected the community surrounding the oil rigs thereby turning political will against drilling in the area for the medium term. The US courts attributed 67% of the fault to BP, 30% to Transocean, which owned the Deepwater Horizon drilling rig, and 3% to Halliburton, the cement contractor. Such accidents forcefully bring home the need for responsible business practices and stringent reporting and accountability standards.

Baseline Shifts: The Asia-Pacific region is also one of the most disaster-prone areas in the world, with frequently occurring natural disasters affecting millions of people every year. Southeast Asia, already on the path of tropical storms originating from the Western Pacific and Indian Oceans, has also seen a spike in climate disasters as global warming aggravates these extreme weather patterns. The dangers are compounded by the fact that the region also has a high population density, with large urban populations in low-lying cities such as Jakarta and Manila. Consequently, environmentalism is on the rise across all parts of Asia, triggering a deeper conversation on the need for companies (and the citizenry to demand that companies) to engage in ethical practices and reporting, to ensure that harm to the environment is minimised. The rise of Millennials as the largest bloc of voters and consumers also exacerbates the trend towards environmental and sustainability consciousness. Such trends would confer a positive investment outlook for ESG compliant firms versus those that do not adequately prioritise ESG, as it would be the ESG compliant firms that are best placed to assert dominance and capture a new wave of discerning consumption. Such firms will also likely avoid costs and inefficiencies arising from prospective environmental laws and regulations that are around the corner, since environmental issues are increasingly at the top of the citizen’s minds and governments (whether democratic or otherwise) will be compelled to act to quell any discontent.

As Millennials age and have more funds to invest

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in their retirement, they will also likely seek out portfolios that reflect their values and interests.

Thus, the desire to invest according to value systems is translating into a steady rise in ESG investment in Asia.

Impact of ESG investment Many sustainability issues – such as scarcity of clean water, resource depletion, pollution and waste – are caused by businesses operating without a strong ethical compass. A change may only be wrought if cost-effective, environmentally friendly and long term solutions can be found. With institutionalized and legislatively mandated low-carbon goals as a driver of ESG, companies must evolve and excel in operational efficiency in the key areas of energy, waste and water usage by using clean tech.

Asia in particular is experiencing a deep need for ESG initiatives as the leading contributor of carbon emissions, having contributed 85% toward the growth of carbon emissions globally. Hence, Asia faces great pressure both internationally (in multilateral power constructs) and internally (by an engaged citizenry) to reduce carbon emissions through innovative methods.

Although the United States is withdrawing from the Paris Climate Accord, Asian economies such as China, Japan and India are demonstrating political will and clear commitment to cut emissions. China for instance is seizing the opportunity to be a leader that is committed to solving global environmental issues. It has come up with plans to invest in clean energy to support its green policies. Governmental support and consumer demand are boosting China’s growth in the areas of renewable energy and sustainable infrastructure. With quantifiable demand and strong bankability, such areas are rich for ESG investment.

Institutional investors can transform their portfolio companies by providing guidance by mandating minimum sustainability practices and enhanced sustainability reporting requirements. In turn, these reinforce in the investee companies the need to prioratize issues not adequately captured

by balance sheets but that nevertheless impact balance sheets: such as energy management, employee engagement and education, the impact of operations on community health, holistic stakeholder engagement and overall sustainability of the business.

Metrics: UN SDGs and Indices and Investment Potential The United Nation’s 17 Sustainable Development Goals (SDGs) launched in 2015 has gained traction among investors, corporates and policymakers in Asia. These 17 aspirational global goals range from tackling poverty to the creation of sustainable cities and communities. As the SDGs go hand-in-hand with strategies for economic growth, shrewd ESG investors have already started to allocate capital to the SDGs, recognizing that this is a new way to identify and unlock value in sustainable investing.

New financial products such as funds and indices themed around the SDGs are also in the pipeline or in development.

The SDG agenda is also enormous as in order to succeed in meeting the goals, the total required investment over the next 15 years is US$90 trillion with over 80% of that investment projected to come from private capital.

Useful tools, such as Thomson Reuters / S Network ESG Best Practice Indices, help investors assess the risk of companies against ESG factors, and help socially responsible investors navigate ESG risks.

Such indices are designed to provide a benchmark for companies exhibiting best corporate social responsibility practices as measured by their superior ratings. The ratings rank the constituent companies on ESG performance and represent a comprehensive benchmarking system for impact investors. In the case of Thomson Reuters / S Network, a universe of over 6,000 companies worldwide are rated in over 400 key indicators of ESG performance. Companies with higher ESG ratings were associated with higher profitability, lower tail risks and lower systematic risks.

The current ESG landscape Asian treasuries currently hold a total of US$500 billion ESG assets under management. Japan holds 90% of these assets whilst Hong Kong, Malaysia and South Korea hold most of the remaining 10%.

Japan continues to top the list with the highest amount of ESG investments, due to skyrocketing investments from US$7 billion in 2014 to US$473 billion in 2015. This can be attributed to the lead taken by Japanese pension funds in sustainable investing activity.

Furthermore, the Commission intends to make environmental reporting mandatory for all listed firms by 2020.

Asian leaders are also stepping up in recognition of ESG principles. South Korea’s National Pension Service and Japan’s Government Pension have both allocated sizable investments toward ESG strategies. Japan plans to put US$8.9 billion to raise its ESG investments to 10%of its holdings, up from 3%. Taiwan’s Bureau of Labour Funds also plans to invest US2.4 billion for the Global ESG Quality Fix Equity Indexation mandate.

China too has taken bold strides to encourage the take up of ESG investment by issuing US$36 billion of green bonds in 2016 in collaboration with European nations to combat climate change.

The China Securities and Regulatory Commission has also just issued new guidelines in 2018 to encourage listed firms to disclose important information on their community engagement and social responsibility. Furthermore, the Commission intends to make environmental reporting mandatory for all listed firms by 2020.

Taiwan is making bold moves to up the ante. In April 2018, Taiwan’s Bureau of Labor Funds has appointed seven asset managers for its NT$42 billion ESG mandate. These managers include Cathay Securities Investment Trust Co, Capital Investment Trust Corp, Fuh Hwa Securities Investment Trust Co, ›

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Taishin Securities Investment Trust Co, Allianz Global Investors Taiwan, President Securities Investment Trust Co, and Prudential Securities Investment Trust Co. These managers will be given NT$6 billion each to invest in ESG related funds.

Investors can then analyse such reports, and theoretically the disclosures and non-compliances are supposed to be accounted for via stock prices.

The Singapore Exchange (SGX) has also recently mandated sustainability reporting for listed companies, requiring them to self-evaluate their performance against several sustainability indicators and provide a board statement presented in a sustainability report. Investors can then analyse such reports, and theoretically the disclosures and non-compliances are supposed to be accounted for via stock prices. This is essentially a self-regulating and market-oriented regulatory framework, similar to the one practiced by the LSE and HKSE. The Singapore format of the report will set out information on sustainability governance, and include confirmations as to whether the company applies Global Reporting Initiative (GRI) or industryspecific sustainability reporting guidelines. These guidelines are now also gaining some acceptance as an evaluative tool for private or non-Singapore domiciled companies.

Outlook and conclusion Investment in ESG from Asia will continue to rise as investors undergo ideological shifts in favour of ESG initiatives, in tandem with widespread governmental and industry support, coupled with strong propagation of UN’s SDGs, Millennials, who are more willing to invest according to their value systems, and who are more receptive toward ESG, will hold 35% of the wealth in Asia

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in the next 5 years. This is likely to accelerate the uptake of ESG investing as well.

Global sustainability challenges such as global warming, privacy and data security, demographic shifts, and regulatory pressures, are all introducing new risk factors for investors that may not have been seen previously. As companies face rising massive complexity on a global scale, the modern savvy investor will likely re-evaluate prevalent shortterm and excessively profit-oriented investment approaches, opting instead for an approach influenced by ESG. —

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CORPORATE PPAS

advantage of a range of economic, reputational and sustainability benefits.

By Sophie Dingenen, corporate and projects partner, The Netherlands and Elizabeth Reid, commercial partner, UK

Bird & Bird’s lawyers advised on some of the earliest Corporate PPAs (in 2007 in the Netherlands and in 2009 in the UK). We have become an experienced advisor on these structures globally.

- AN INTERNATIONAL PERSPECTIVE

Introduction Large corporations are continuing to set the agenda for the growth of renewable energy across the globe. In 2018, 121 corporations purchased 13.4 GW of clean power directly from generators under a Corporate Renewable Power Purchase Agreement (Corporate PPA). This more than doubles the record of 6.1 GW for 2017. A Corporate PPA allows corporate consumers and generators to take

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This paper looks at the main drivers behind the growth of Corporate PPAs, and addresses several structures and comments on the market for them in key jurisdictions across Western and Eastern Europe, the Nordics and Asia-Pac. The Global Corporate PPA Market What is a Corporate PPA? A Corporate PPA allows corporate energy consumers to purchase power on a long term

basis directly from renewable energy generators without being co- located. This is an alternative to the traditional model where a utility purchases power from lots of energy generators, transports it on the electricity grid and then on-supplies power to the corporates. Corporate PPAs are long term agreements (typically between 10 – 20 years) and provide price certainty for both the corporate and the generator by using fixed or floor pricing structures. Please see pages 7-8 of this paper for further information on structures. For the purposes of this paper we have excluded discussion about on- site PPAs. The Global Market As stated in our introduction, we saw rapid growth in the Corporate PPA market in 2018. 5.7 GW of Corporate PPAs have been signed January – July 2019 with an even split between wind and solar.

The largest markets continue to be the USA and the Nordics, accounting for over 80% of Corporate PPAs being concluded.

Within Europe, activity remains particularly strong in Norway and Sweden, where companies are attracted to plentiful wind resources and the Nordpool power market, facilitating the crossborder sale of power between Sweden and Norway.

In Denmark, one of the first offshore wind Corporate PPAs was concluded in 2018. Markets in Spain, Italy, Poland and Germany are picking up. Elsewhere, Australia is an exciting market particularly for synthetic and behind the meter PPAs, driven by relatively expensive wholesale power prices and strong renewable resources.

sustainability credentials to sell aluminium at a premium in some markets. Telecom companies are now also participating in the market and in November 2018 Exxon Mobil announced its first two Corporate PPAs (250 MW onshore wind project and 250 MW solar PV, both in Texas).

New structures such as the proxy generation PPAs and volume firming agreements are being explored (see further information on page 11). Also, new club structures are enabling smaller corporates to benefit from Corporate PPAs, and this is a concept that continues to be developed further (see further information on page 10). As well as some very large individual Corporate PPA deals, 2018 also saw a real upswing in club deals and the emergence of smaller, first-time corporate buyers, with new market entrants responsible for 31% of the total 2018 Corporate PPA activity in the USA. The future outlook provides for optimism. Global corporates continue to be increasingly conscious about managing their energy needs and being seen to act sustainably by procuring electricity directly from renewable sources has become a strategic priority. ›

Major players in the global Corporate PPA market to date have been tech companies and data centre owners such as Google, Apple, Amazon and Microsoft. For example, in April 2019 Amazon announced three new Corporate PPAs for a combined total of 229 MW from new wind projects in Ireland, Sweden and California. However, chemical companies have also been active in 2018 through the likes of aluminium manufacturers Norsk Hydro (235 MW onshore wind project in Sweden) and Alcoa (330 MW and 197.4 MW onshore wind projects, both in Norway), both of whom are using

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191 companies are now members of RE100, a group of companies who have pledged to work towards meeting 100% of their energy requirements from renewable sources, and the numbers are continuously increasing. In addition to this, economic drivers such as the continued fall in the levelized cost of electricity/energy (LCOE) with regard to renewables and the phasing out of feed-in-tariff based fiscal incentives in several jurisdictions should continue to push the growth of Corporate PPAs globally in the second half of 2019 and beyond.

financial support from a support scheme are placed into a central auction, as opposed to allowing them to be transferred directly to offtakers under a Corporate PPA. This would have had a negative effect on Corporate PPAs given that one of the key drivers to a corporate entering into a Corporate PPA is being able to demonstrate through GOs that it has procured power from renewable sources.

However, Member States can (still) opt not to allow the issue of GOs in this way for renewable generators that already receive financial support from a support scheme.

Further cause for optimism can be seen through the EU’s adoption of the recast Renewable Energy Directive (RED II) in December 2018. RED II includes ambitious drivers for the uptake of Corporate PPAs in Europe including a binding EU-wide 32% renewables target for 2030 and an enabling framework for the uptake of Corporate PPAs. Importantly, RED II requires Member States to assess the regulatory and administrative barriers to Corporate PPAs and to remove unjustified barriers to, and facilitate the uptake of, Corporate PPAs. This will be monitored through the integrated national energy and climate plans which Member States must submit pursuant to directive. In addition to this, RED II:

Member States must transpose RED II into national legislation by 30 June 2021. While certain aspects will depend on how each Member State transposes the requirements of the directive into national law, the creation of an enabling framework to facilitate the transfer of GOs across borders and to encourage the conclusion of Corporate PPAs can only help to drive growth in this exciting market.

a.

requires Member States to recognise guarantees of origin (GOs) issued by other Member States in accordance with RED II; and

b.

clarifies that Member States may allow the issue and transfer of G directly to corporate offtakers pursuant to a Corporate PPA from renewable generators that already receive financial support from a support scheme (e.g. feed in tariffs).

The latter point is important as it reverses a previous proposal by the European Commission that would have required Member States to ensure that GOs from renewable generators that already receive

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Corporate Consumer Opportunities • Fix/floor/cap power price - hedge against

rising or fluctuating energy prices in the

wholesale markets.

•

Achieve sustainability targets and objective to buy 100% of power from renewable sources.

This has become as important, if not more important, than economic drivers.

•

Smaller corporates can club together to share risk and enhance bargaining power.

Threats • Board appetite for the deal – economic benefits

only stack up if the board trusts the power price forecasts. Board often unwilling to pay more in short-term for lower prices in long term.

•

Complexity/costs in negotiating the contracts.

Power purchase is not core business. Hurdle for small and medium sized enterprises.

•

A utility will still be required to provide power when the generating station is not generating (renewable power is intermittent). Allocation of volume and shaping risk is a key issue – it can affect the level of price certainty that is achieved and means the corporate is buying power at a profile/volume that doesn’t match its demand.

•

If a project finance lender has financed a project it may require further security from the corporate: e.g. direct agreement or parent company guarantees.

• Change in law risks affecting the commercial balance of the deal and triggering re-negotiation.

Generators Opportunities • Generator can achieve a stable price over the long- term as the corporate often has more appetite to hedge against rising/fluctuating power prices. This is particularly attractive for projects financed by listed yieldco funds and project finance.

•

The corporate is sometimes willing to pay higher than wholesale prices in the short term (on the expectation that this will pay off in the long-term when prices rise and corporate still has the benefit of the fix).

•

The phasing out of renewable subsidies means that Corporate PPAs offer a new route to marke for generators.

Threats • Price – the price the corporate is willing to

pay / set the floor at may not be sufficient to bank the project.

•

Creditworthiness/bankability of offtaker – a bigger issue for unsubsidised projects as the Corporate PPA will represent almost 100% of total project revenues.

•

Power offtake not core business for the corporate: if wholesale power prices decline will the corporate default in order to buy their way out of a bad bargain?

•

Inconsistencies between regulatory regimes in different member states making it difficult to achieve scale across jurisdictions with one offtaker.

•

The deal will need to be bankable. More complex to get a Corporate PPA approved by banks/investors? ›

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Corporate PPA contract structures The two leading models for Corporate PPAs are (a) the “Sleeved” Corporate PPA; and (b) the “Synthetic” Corporate PPA. The Sleeved Corporate PPA is the contract structure that has mainly been adopted in Europe, whereas the Synthetic Corporate PPA has been the preferred contract structure in the USA. A) “Sleeved” Corporate PPA

Key features Generator sells power directly to the corporate and the utility then sleeves the power through the grid and supplies it to the corporate’s site (together with top up power as necessary):

5.

The generator can be entirely independent or sometimes the corporate consumer may make an investment into the generator itself to support the project (and open a new revenue stream in potential dividends).

1. Generator sells power at the meter point to corporate consumer under PPA1.

6.

Depending on the regulatory regime, the licensed utility and balancing party may be the same entity (as in the UK) or separate entities (as in the Netherlands).

2.

Corporate consumer immediately on-sells power at the meter point to the utility under PPA2. The utility then “sleeves” the power through the grid and sells power to the corporate consumer at its site. The utility will perform a balancing service under this PPA2 (renewable energy is intermittent) by topping up the renewable electricity with extra if needed (for example when the generator is not generating).

3. Renewable benefits can be sold either from generator to utility or from generator to corporate consumer.

4.

Regulatory regimes usually require a licensed utility to be involved to put electricity onto the grid (i.e. transport the power from the generator’s site to the corporate consumer’s site).

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B) “Synthetic” Corporate PPA

Generator “virtually” sells the power that it produces to the corporate for a strike price.

1. Generator sells renewable electricity to a utility under a standard power purchase agreement at

a market price.

4.

Generator and corporate consumer settle the difference between the strike price and the variable reference price. This reference price is usually based on a wholesale price index.

The contract for difference therefore provides a hedge between the strike price and the reference price. ›

2. Utility continues to sell power to the corporate consumer under a standard electricity supply agreement at a market price.

3.

In parallel to these conventional contracts the generator and the corporate consumer enter into a contract for difference, option or other financial hedge where they agree a strike price for the renewable electricity produced by the generator.

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WHICH MODEL TO CHOOSE? SLEEVED OR SYNTHETIC

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Optimisation of structures Aggregation models As the volume under a single Corporate PPA is often large with long term commitments, the traditional Corporate PPA structures are predominantly used by large energy consumers such as tech companies and the chemical industry. There is an increased interest from smaller corporates looking to move to renewable energy consumption, however often smaller corporates will find themselves with projects which are too big for their offtake requirements. In that case, one of the following aggregation models might be a solution.

Club Under the club structure, large corporates club together to aggregate their energy offtake. A great example of the club structure is the Dutch wind consortium formed by Google, AkzoNobel, DSM and Philips. The corporates joined forces to optimise the Corporate PPAs they entered into for the offtake of energy produced by two wind farms. The corporates each committed to one quarter of the energy offtake of each project, all on similar terms and conditions. The search for the “ideal partners� and the formation of the club takes a considerable amount of time, however, once clubbed together the corporates can benefit from the economies of scale and power of negotiation. Also, the model can be re-used several times. This club was the first in Europe. In the US, the structure is more commonly used.

Anchor tenant Under this structure, a large offtaker commits to the offtake of a large portion of a project, securing the repayment of the debt by the generator. Smaller corporates can tag along to the project and may secure a Corporate PPA for a smaller part of the project and for a shorter term, either with the large offtaker or with the generator itself. However, some generators may be reluctant to be flexible on the contract terms as the smaller corporates are not material in obtaining financing.

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Reselling This structure is less common as the benefits are limited. Here a large corporate purchases 100% of the offtake of a project and then resells it in predetermined tranches to smaller corporates. There is little to no flexibility for a smaller corporate to negotiate the terms of the contract. This reduces the upside compared to buying on the market.

Proxy Generation PPA & Volume Firming Agreements Price risk As there are plenty of hedging and other financial instruments available in the market, price risk (taking on the risk of a fixed/floor/capped price) often sits well with the corporate as its main reason for entering into Corporate PPA is price predictability.

Also, this may provide the flexibility a corporate needs from an accounting point of view to avoid the Corporate PPA being classified as a derivative.

Operational risk Often the negotiations of a Corporate PPA evolve around an appropriate risk allocation. As corporates may not have the in-depth knowledge of the project specifics (as it is not their core business) or the ability to control the operation of the project, it can be argued that the risk associated with the operation of the plant should not sit with the corporates, and should remain with the generator.

The generator is the party that selected the turbines or panels, ancillary equipment and arranged the (terms of the) relevant contracts (including performance, maintenance and curtailment clauses), all determining the actual performance or output of a project.

Whereas the traditional PPA is calculated against the actual output of a project, a ‘proxy generation PPA’ is calculated against the expected output based on the projects specifics and its power curve, shifting such operational risk back to the project.

Upon agreeing the terms of a proxy generation PPA, the parties agree on a number which reflects the expected operational performance of that project. If the project performs better than the agreed number, then the upside is for the generator, however if the project lags behind the agreed expectations, the generator will suffer. A calculation service agreement with an independent calculation agent is required to assess the expected output of a project which could make arranging this structure costly.

Microsoft has been very active in developing solutions for the allocation of operational risk. It has also developed, together with its partners, the ‘volume firming agreement’ protecting corporate buyers against the intermittency that comes with renewable projects. These agreements, which are often concluded with insurers who are comfortable with dealing with weather-related risks, shift the risk relating to the intermittency of a project away from the corporate buyers. The parties taking on such weather risk will resort to storage and balancing solutions. ›

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INTERNATIONAL CASE STUDIES

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United Kingdom An established contractual model and safe regulatory environment has made the UK an attractive market for Corporate PPAs. Corporate PPA Market in the UK Corporate PPAs have been around in the UK for some time. However, it is only in more recent years that they have become more prominent.

This is most likely because the availability of fiscal incentives, such as FiTs and ROCs, meant that there was little commercial imperative on generators to explore such arrangements. Instead, they would enter into shorter term utility PPAs with a licensed supplier, often on standard forms, for the offtake of all of their power as the support payments were sufficient to demonstrate the long term fixed/floor income stream to lenders.

More recently, the rise of wind and solar in the UK and the convergence of a number of market conditions has created the perfect storm for the growth of Corporate PPAs. The closure of the ROC scheme to new participants from 31 March 2017 means that utility scale generators are seeking alternative routes to market. A long term PPA with a credit-worthy corporate offtaker could be the difference between a bankable and non-bankable project. In addition, the ever decreasing cost of generating renewable energy means that a project can be viable without subsidy. Furthermore, in very recent months we have seen that Corporate PPA prices can even be lower than wholesale electricity prices. From a corporate perspective, Corporate PPAs are an attractive prospect to companies who increasingly want to be seen to be acting sustainably and who want to protect against highly volatile electricity prices.

As a result, major corporates playing in the UK Corporate PPA market now include Shell, BT, M&S, EE, Unilever, Mars, Ford, Sainsbury’s, Nestle, McDonalds, HSBC, Lloyds and Nationwide. In addition to this, many more corporates with operations in the UK (including companies such as Unilever, Tesco, Sky, Mace, Virgin Media and the City of London Corporation) are also members of RE 100, the group of companies who have pledged

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to work towards meeting 100% of their energy requirements from renewable sources. However, to date only three RE100 members headquartered in the UK have signed Corporate PPAs (M&S, BT and HSBC).

In February 2019 Northumbrian Water announced it had signed the first offshore wind Corporate PPA in the UK, a 10 year deal for Ørsted to deliver 100 GW per year of electricity from Race Bank offshore wind farm.

Despite the UK’s established and attractive market for PPAs, 2019 has seen a somewhat slower rate of deals being signed than in recent years. We would attribute this to an uncertain investment environment due to Brexit, and we expect the market to pick up over the next year as corporates continue to focus on green energy buying. A forthcoming Energy White Paper (which was expected to be published in summer 2019) should provide clarity on the UK government’s approach to Corporate PPAs, which we see forming a large part of the UK’s commitment to net zero by 2050.

Corporate PPA Structures in the UK The aggregated nature of the electricity grid and the regulatory framework has meant that the large majority of Corporate PPAs in the United Kingdom have been concluded using the “sleeved” structure.

While Marks & Spencer was an early pioneer of the “synthetic” model using a contract for difference type structure across 20 sites, we are not aware of this approach being widely adopted since then.

That said, we are beginning to see a number of new models emerging within the market, or at least being discussed.

These include: • The “mini-utility” or “supply-lite” model where a corporate sets up an affiliated mini supply company and becomes the balancing party itself. The generator sells output to the mini-supply company who then sells it to the affiliated corporate under an electricity supply agreement. This model is commonly used in Ireland and is discussed in more detail

in the Irish section of this paper. This requires significant investment by the corporate consumer in setting up a licensed supply company and gaining the expertise required to manage its own energy supply or outsource this function.

However, the benefit to the corporate is to disrupt the energy supply chain, reducing the number of parties needed to negotiate an energy supply deal and take control of its energy procurement strategy for the long term.

•

Building on the “mini-utility” model, Octopus Investments, the UKs largest investor in solar farms, has set up its own licensed supply company, Octopus Energy, offering a range of 100% renewable tariffs to business and domestic customers. Octopus Energy may well be able to procure the power from its own generating assets, disrupting the role of the utilities. This will enable asset owners to offer a simple integrated service to corporate customers.

•

The “club” or “consortium” model where small or medium sized companies may begin to take advantage of Corporate PPAs by grouping together to share the risks and enhance bargaining power. This approach has been successfully used in the Netherlands. We think this will be attractive for larger deals such as offshore wind projects. Please see further information on this structure on page 82. ›

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Sweden The Nordic countries, Sweden, Denmark, Norway and Finland are diverse when it comes to energy mix, and also have different support schemes for renewable energy.

Sweden has a target to achieve 100 % renewable energy production by 2040 and net zero emissions by 2045.

Wind power investments in Sweden have been built at record pace and, according to the Swedish Wind Energy Association’s (SWEA) prognosis, wind energy production is expected to double from 20 TWh to almost 40 TWh within the next four years, meaning that it would correspond to 25% of the electricity use. Sweden is on track to reach its 2020 renewables target and, according to SWEA, the target of 18 TWh renewable energy by 2030 is expected to be reached in 2021. Sweden has a target to achieve 100 % renewable energy production by 2040 and net zero emissions by 2045.

The joint Swedish and Norwegian support scheme for renewable energy, the Swedish-Norwegian electricity certificate system, is a market based system, and does not guarantee the owner of the renewable installation a specific price for the power generated. As the power generator takes a price risk related to the sale of the electricity from the renewable installation, and as there may be a continued surplus of power production, many financers, such as banks, require that the price risk is hedged. One way to hedge the price risk is to sign a long term Corporate PPA with an off-taker. The PPA may be the enabler of the project and also provides a “green” profile to the corporate buyer. While they are interested in having a predictable price for their energy over a longer time period, many corporates also want to show that they are acting sustainably and are contributing to put additional renewable capacity onto the electricity system. However, there are corporates that claim that recent contracts are driven purely by economic considerations.

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As there is an integrated Nordic whole-sale energy market, Nord Pool, this facilitates price visibility and cross-border sale of power between Sweden and the other Nordic countries, and Sweden has had PPAs in place for many years. However, more recently large corporates are entering into Corporate PPAs buying directly from the renewable generator.

In recent years we have seen more long term Corporate PPAs being entered into in the Swedish market. In 2013, Google signed a 10-year Corporate PPA for all the electricity output from a large wind farm, to be used in another Nordic country. Since then there has been a big growth of Corporate PPAs in Sweden and Norway. Other large corporates such as IKEA, Facebook, Norwegian aluminium corporates Alcoa and Norsk Hydro, and Swedish mining corporate Boliden have signed Corporate PPAs, and the trend is increasing. Norsk Hydro, which has long been an active off-taker, signed a groundbreaking 29-year PPA including 1.65 TWh wind power per year with Green Investment Group, one of the world’s longest and largest corporate wind PPAs in July 2018. As the support scheme is market based, and as offshore wind is more expensive, so far mainly onshore wind has been developed in Sweden. However, there is now a discussion to enhance the development of offshore wind in Sweden through scrapping the cost for grid connection. Furthermore, we have recently seen some solar PPAs being entered into on the Swedish market. In June 2019 Swedbank announced that it will enter into a Corporate PPA with Eneo Solutions, and be the sole off-taker of what will become Sweden’s largest solar PV plant to date, and in July 2019 Swedish bank Sparbanken Skåne entered into a 10-year PPA to purchase one third of the output of a wind farm in Skåne. ›

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Finland Use of Corporate PPAs has recently increased in Finland and the market is very well suited for them.

The new support mechanism being introduced for renewable projects seems to have led to reduced levels of subsidies, meaning that generators have started increasingly to utilize Corporate PPAs in order to hedge against volatile prices and secure a long term fixed price.

In exchange for being awarded the premium (in addition to the market price for electricity), the successful generators have to produce the amount of electricity they have agreed to in their offer. A failure to do so will result in the generator having to pay the State compensation. A generator’s obligations under the premium system will last for a pre-determined time period and the premiums will be paid for a maximum of 12 years.

The new competitive bidding system for renewable energy In November 2017, the Finnish government published a new legislative proposal (Act on Production Aid for Renewable Energy 30.12.2010/1396) to introduce a new competitive auction system for renewable energy projects.

This proposal replaced the old feed- in tariff based support scheme and was accepted with moderations in June 2018 and came into force in September the same year.

Corporate PPAs in the context of the Finnish electricity market Finland is part of the Nordic wholesale electricity market, which includes the Nordic countries as well as the Baltic countries. The power grids in different countries are interconnected. The Finnish system is in direct contact with the system of Sweden, Norway, Estonia and Russia. According to an estimate made by VTT Technical Research Center of Finland in 2017, by utilising the best wind production sites and the latest technologies, Finland could be producing 300 TWh of electricity annually from wind power, which would be three times more than Finland’s current demand for electricity. Due to the interconnected systems it is fairly easy to trade electricity from one country to another. For example a large IT-company has concluded a long term Corporate PPA with a Swedish wind farm for its Finland base premises.

Accepted changes permitted wind, biogas, firewood, solar or tidal electricity generators to participate in a competitive process to bid for state-offered subsidies (“premiums”). All bids are considered equal in terms of the technology used and the premiums are awarded to the most cost efficient projects as a result of the competitive bidding process.

The competitive bidding process is now organized by the Finnish Energy Authority subject to a specific budget mandate for each year. The government has set the maximum amount of generation capacity to be awarded premiums at 2 TWh, which would be awarded from 2018-2020. Due to the relatively small amount of 2 TWh, it is likely that this quota will be used up rapidly. The auction bidding process is in a form of closed tendering and the premiums awarded is determined based on a generator’s bid for the premium it requires when the market price for electricity is less than electricity’s reference price (30€/MWh). The premium paid will decrease if electricity’s market price exceeds the reference price and will ultimately reach zero during high market prices.

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The number of PPAs for renewable energy has increased in recent years. It is also expected for PPA contracts to increase in Finland. According to The Finnish Wind Power Association (FWPA), during 2018, production of wind power was 5,857 TWh. For example, Google has recently signed three Corporate PPAs in Finland with leading European renewable energy developers CPC, Neoen and wpd. These Corporate PPAs are the first for Google in Europe which do not involve a government subsidy for renewable energy.

In Finland no license or permit is required for wind power itself. However, a building permit, granted by the Municipal Building Control Services, is always required when planning a new wind power system.

Usually, wind farms do not require environmental permit in Finland. No permits under Water Act are

typically required either, unless the planned wind farm concerns offshore wind power. Wind power turbines over 30 meters high and situated near airports or wind power turbines over 60 meters high elsewhere in Finland require a permit granted by the Finnish Transport and Communications Agency (Traficom), and all the wind farms defined as industrial in size require a permit from the Finnish Defence Forces.

The Finnish Energy Authority must be notified in order to construct an electricity generation plant with an expected capacity of over 1 MVA. Interconnection to the transmission grid is based on the principle of open and non-discriminatory network access. In accordance with the Finnish Electricity Market Act, a network operator is obliged to connect all generation facilities that fulfil the technical requirements and pay the relevant grid fees.

In order to become an electricity supplier in Finland, a generator must acquire a party code and enter into an agreement with a company to act as a balancing party. Alternatively a generator could perform the balancing function itself or enter into agreement with another electricity retailer who has an agreement with a balancing party (the so called “chain of open delivery�).

Corporate PPAs are known in Denmark and due to its open economy and the international outlook of Danish businesses many of the Corporate PPAs entered into by Danish parties are related to activities outside Denmark. As a result, some of the biggest and publicly advertised PPAs are physically placed outside of Denmark but with Danish developers or sponsors. Others are foreign data centre owners wanting to operate their data centres with green electricity. However we also see a number of local off-takers entering into Corporate PPAs. Only a small number of Corporate PPAs have yet been announced officially but we know that there are a number of major Corporate PPAs in the pipeline.

One officially announced Corporate PPA ›

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is for the offshore wind farm Kreigers Flak, signed between Vattenfall, Novo Nordisk and Novozymes mid-2018.

While there is a lot of interest in Corporate PPAs in Denmark, there are some fundamental issues making the use of them difficult. There are a number of legal issues which are not clarified and hence it is still difficult for financial institutions to provide financing in respect of a Corporate PPA. Work is going on to eliminate or solve these obstructions and it is expected that these uncertainties will be resolved in the near future.

That said, the Danish FSA has not yet issued any guidelines when a Corporate PPA may be subject to financial regulation.

The energy policy regarding renewables has changed considerably in recent years. There has never been a stable, long term legislative framework. Instead there have been a number of changes in fundamental and basic factors affecting the investment into renewable assets. Indeed, the Government has recently announced that it will be introducing new legislation. If such legislation follows recommendations from the Energy Commission, we can expect the new legislative

framework to be technology neutral and only offer very limited if any subsidies. Despite this, there is a general consensus amongst politicians in Denmark that the amount of renewable energy sources shall continue to grow in the coming years and the climate challenge was a key topic in the 2019 elections. In the 2018 Energy Agreement the ambition to achieve 55 % of renewable energy share by 2030, a complete phase-out of coal by 2030 and a fossil fuel free energy supply by 2030 was concluded as a broad political agreement. Wind has dominated the renewable energy generation in Denmark for many years (energy derived from wind accounts for 47% of the total gross electricity consumption in Denmark and is expected to reach around 92% by 2040) but solar projects are increasingly being completed. Biomass has been, and is still, popular. It is certain that solar projects may the most suitable vehicle for Corporate PPAs and there are a number of major companies who are interested in procuring electricity directly from solar plants under a Corporate PPA either for financial reasons or in order to raise their green profile (or both). There is growing pressure on corporates to act sustainably meaning that companies will consider these solutions even though they may not financially be their best investment case. ›

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The Netherlands Corporate PPAs have shown to be an excellent instrument not only to lower the financing costs of renewable energy development but also to raise the sustainable profile of large corporates and create price predictability.

Dutch regulatory environment The EU has set targets for renewable energy generation, the reduction of CO2- emissions and measures to halt global warming. These targets are extremely ambitious for the Netherlands. By 2020 it must generate 14% of its energy from renewable sources, increasing to 16% in 2023 as well reducing its total energy consumption by 1.5% on an annual basis. The EU recently agreed to another binding renewable energy target of achieving 35% of renewable energy production in the EU in 2030.

The Dutch renewable energy goals have become even more ambitious thanks to a successful liability case brought against the state by Dutch citizens and the Urgenda Foundation. In its ruling, the District Court of The Hague ordered the state to increase its binding target for the reduction of greenhouse gas emissions from 14-17% to 25% by 2020.

The Dutch government has implemented a variety of measures and regulations to support investment in renewable energy projects such as the SDE+ (Stimulation of Sustainable Energy Production) regulation and the EIA (Energy Investment Taxreduction) however it is far from achieving its sustainability goals. The SDE+ is an operating feed- in-tariff subsidy and is designed to compensate renewable generators the difference between the cost price of generation and the market value of the electricity for each kWh of generated electricity: the so called “non-profitable portion”. From 1 January 2020, the new SDE++ will come into force replacing the current SDE+ system. Subsidies will be calculated against reduced emissions rather than as per the SDE+ system, per generated kWh electricity. In addition to the SDE, companies investing in renewable energy and energy-efficient technology may also be entitled to the EIA, which allows companies to deduct 55% of the investment costs from the fiscal profits, on top of any permitted depreciation.

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Despite these regulatory changes and a favourable investment climate, the Netherlands is still lagging behind in achieving its 2020 targets. However, change is on its way as large quantities of PV panels are being installed in dedicated ground-mounted solar parks as well as on rooftops and both onshore and offshore wind parks are underway.

Mandatory unbundling The Netherlands has implemented EU unbundling requirements in a very restrictive way, prohibiting electricity and gas network operators from being part of a corporate group that includes companies generating, supplying or trading in energy in the Netherlands (the “group prohibition”). The group prohibition has adversely affected the credit worthiness of the traditional offtakers, i.e. utilities, stripping the grids of their balance sheet taking away security for financing. Long-term Corporate PPAs with corporate offtakers with a high(er) credit rating provide an alternative way for generators in attracting cheaper finance and meeting their bankability requirements.

PPAs cornerstone in project finance Increasing the deployment of renewable generation assets is capital intensive and, as with any project finance structure, large amounts of funds need to be committed before any revenue is generated by the project company. As is typical for project finance structures, the security for the lenders sits in the long term projected cash flows of the project, rather than the company’s assets or balance sheet.

The PPA is crucial to this and making a project “bankable”.

Well structured Corporate PPAs certainly help to fill this void. A long term PPA with a credit worthy corporate counterparty that has a stable preagreed price formula, ideally containing cap and floor mechanisms to mitigate the volatility of the electricity prices, could secure a steady revenue for the project to repay its debt and be the difference between the project being “bankable” or not.

Corporate PPA structures in the Netherlands Mandatory unbundling requirements in the Netherlands mean it is possible for a generator and

a corporate consumer to enter into a Corporate PPA without needing a utility to enter into a “backto-back” PPA with the corporate consumer. This is because the “sleeving” of the energy is done by the grid operator, rather than by the utility. Rather than entering into a “back-to-back” PPA with a utility, the corporate consumer can transfer its program responsibility to a trading or balancing party, thereby reducing costs of its energy consumption.

An increasing number of Corporate PPAs are being concluded in the Netherlands. On the one hand they provide corporate consumers with the ability to accurately forecast their cost of energy over a long term and increase their sustainability profiles, while on the other hand, unlocking lower financing costs for renewable generators. A few examples of corporates that are taking the lead in this area are Google, Philips, AkzoNobel, DSM. In addition to the rise of Corporate PPAs in the Netherlands, there are still also an increasing

number of long terms PPAs entered into with utilities focussing on renewable generation equal to the more international structures such as the long term PPA that the Dutch railway entered into for the offtake of the electricity of wind farm Luchterduinen and the PPA that Google entered into for the offtake of the largest solar park in the Netherlands, both enabled by Eneco. These structures provide the utilities with the economic certainty to invest in new renewable energy projects.

Offshore wind parks The tenders for the Dutch offshore wind farms have been very successful with two of the tenders resulting in subsidy free projects. The winning bids of these tenders are all backed with long term (corporate) PPAs securing the financing of the projects. Once all planned offshore wind farms are being built and become operational, it is expected that the Netherlands will be able to meet its sustainable goals. ›

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Spain Corporate PPAs could be used successfully in Spain to stimulate the development of new renewable projects. However, certain market barriers have so far prevented their widespread use.

Since 2013, the main support mechanism for renewable generation in Spain entitles generators that export power to the national pool to earn a “reasonable return” which is calculated by reference to the average return in the secondary market of 10-year Spanish government bond. To achieve this they are paid a “specific remuneration” on top of the market price that they receive for the electricity from the CNMC. However, the legislation allows the government to review and amend the specific remuneration every six years. To this end, the Spanish government published a preliminary bill on 28 December 2018 for the purposes of regulating the “reasonable return” that generators are entitled to earn for the next six year period from 2020 – 2025, which is proposed to be reduced from 7.398% to 7.09%. While this provides some added certainty for now, the risk of a project’s revenues changing every six years has led to a decrease in the length of financing terms available in the Spanish market for renewables projects, which in turn has had negative impact on the number of new renewable projects being developed in Spain.

The last two auctions held in May and July 2017, which awarded a total capacity of 3,000 MW to generators, have shown that an unsubsidized renewables market is gradually becoming a reality without the need for any additional specific remuneration. While this removes the uncertainty of the level of specific remuneration that a project would receive, it would still leave a project exposed to volatile electricity prices that could go up or down, again negatively affecting the length of financing terms available.

National Integrated Energy and Climate Plan 20212030 At the beginning of 2019, the Council of Ministers of the Spanish Government approved the submission to the European Commission of the draft of the Integrated National Energy and Climate

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Plan 2021- 2030 (PNIEC, in its Spanish acronym).

This text, to be submitted by all Member States in order the EU can plan the fulfilment of its climate change objectives and targets in line with the Paris Agreement, defines the national targets for reducing greenhouse gas (GHG) emissions, the incorporation of renewable energies and energy efficiency measures, among other issues.

One of the main goals is, together with a 21% reduction in greenhouse gas emissions with respect to the 1990 level or an improvement in employment, to achieve 42% renewable energy over the country’s final energy use. In the case of electricity generation, the percentage of renewables in 2030 will be 74%. Thus, for the year 2030, this would require a total installed power in the electrical sector of 157 GW, of which 50 GW will be wind energy and 37 GW solar PV.

However, the legislation allows the government to review and amend the specific remuneration every six years.

A long term Corporate PPA with a fixed price would help to solve both of these issues and allow lenders to offer longer tenures of debt. In addition to this, there are several other factors that would support the growth of Corporate PPAs in Spain. This includes: • the price on carbon emissions is putting upward pressure on electricity prices meaning consumers may be more willing to enter into a long term fix; •

large corporate (and progressive smaller corporates too) are committing to use renewable electricity;

•

there some renewable projects that are no longer entitled to receive specific remuneration as they would have reached the reasonable rate of return established by the government as a condition to receiving; and

•

there are renewable generators that are looking for potential alternatives outside the specific remuneration support scheme.

Recent Corporate PPAs in Spain: During the last year (2018-2019) in Spain a total of 4 GW PPAs have been entered into. Examples of these are EDPR with Calidad Pascual, Holaluz with EDP Solar, Factor Energía with Grupo Enhol (a 20-year-term agreement, being the longest PPA signed to date in Spain which will allow the development of two wind farms with a total installed power of 90 MW), BBVA with Endesa, Nike with Iberdrola (to supply energy to Nike facilities in Europe from 2020 onwards), X-Elio with Nexus.

However, there are still a number of barriers to overcome in order to unlock the Corporate PPA market in Spain: • Term of the PPAs. Long term certainty of revenue is vital in order to construct, develop and finance a renewable project. At present corporates are reluctant to sign up to long term PPAs with fixed prices. However, this should change as the rationale behind this thinking is more a matter of inertia and historical practices.

•

Price of the energy. While a fixed price under a Corporate PPA provides a generator and a corporate with certainty and a hedge against market volatility, some corporates will be wary to sign up to a long term Corporate PPA if they think there is a possibility that spot power prices will reduce in the future. Traditionally, corporates have preferred to agree power prices year by year and so company boards are not accustomed to assuming the risk of a fixed price over a long term.

•

Regulatory burdens. The Spanish Energy Act 24/2013 expressly contemplates renewable generators and corporates entering into Corporate PPAs as an alternative to selling and buying electricity on the spot market. However, in order to do so, the parties to a Corporate PPA would have to comply with certain regulatory requirements to supply information

about the contract to the Spanish market operator and the Spanish regulator. This includes notifying the market operator on a daily basis of the electricity supplied and consumed pursuant to the Corporate PPA. This information must be provided to the market operator by a regulated market agent.

Generators will typically have to subcontract this service to a professional market agent (usually supply companies provide this type of services) and the fees for such service would have to be built into the Corporate PPA. Additionally, corporates would still have to enter into a contract with the network distribution company in order to pay the necessary grid access charges to take the power from the renewable generator. These additional costs could make a Corporate PPA a less attractive prospect to a corporate (or a generator if the corporate is not willing to pay these additional costs). Finally, the Spanish Energy Act 24/2013 grants the Ministry of Energy power to further regulate bilateral agreements for the sale or purchase of electricity, including Corporate PPAs which may impose additionally regulatory burdens in the future. ›

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Italy In Italy we are entering a new era where generators and off-takers will soon be able to take advantage of new developments in the PPA legislative and regulatory framework.

Towards the end of the last decade, the Italian renewables market entered into a period of rapid growth and transformation. This was due not only to the country’s favourable climate but also, and mainly, to a legal framework known as “Conto Energia” which provided economic support to the renewable energy sector through the “feed-intariffs” scheme. This scheme provides a guaranteed payment for electricity generated and exported

by PV plants to the grid. Italian legislation grants generators the option to sell electricity, either through a mandatory purchase regime (ritiro dedicato), through bilateral agreements (PPAs) or on the electricity exchange market.

Since 2008, generators have opted more often for the mandatory purchase regime (ritiro dedicato) than for PPAs. The mandatory purchase regime is a simplified purchase and resale arrangement, entered between the generator and Gestore Servizi Energetici (GSE), the Italian national grid operator, whereby GSE purchases and resells the electricity to be exported to the grid (at a zonal price or a minimum guaranteed price) and, on behalf of the generator, transfers the fees for the use of the grid (dispatch and transmission fees) to distributors and to transmission system operators (TSO). However, since the beginning of 2013, the GSE has been charging generators of renewable energy who benefit from the mandatory purchase regime further extra costs, such as imbalance costs (“costi di sbilanciamento”), costs originating from the participation of the GSE in the intra-day market (“mercato infragiornaliero”) and other relevant administrative costs for the services it supplies in relation to the mandatory purchase regime. This trend, along with a significant drop in the electricity demand and a sharp decrease in prices, pushed many generators (usually electricity generators on large scale) to explore how to increase their revenues by selling electricity power generated by their plants. PPAs are hence a valid alternative for generators to the mandatory purchase regime.

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PPAs in Italy are bilateral contracts executed “over-the- counter” at a purchase price directly negotiated with energy traders/wholesalers, which in turn negotiate with the TSO the price deriving from the energy generation. In a limited number of occurrences, where a generator and a corporate can be physically connected through a private network, generators may find it convenient to enter into a Corporate PPA to sell directly to a customer who has a stable need for large volumes of energy.

Although no regulatory provisions prevent parties from entering into long-term Corporate PPAs, Corporate PPA structures have not yet been explored in Italy. However, corporates are starting to look at them with increasing interest due to the fact that sustainability and CSR aspects are becoming increasingly important and also because they can provide a direct economic benefit in the background - for instance in terms of access to green bond financing.

We are currently entering a new era where generators and off-takers will soon be able to take advantage of new developments in the legislative and regulatory framework that governs Corporate PPAs which were introduced in August 2019 and are expected to be further supplemented later in 2019.

In this respect, the Italian Government, in addition to enacting a public platform to facilitate matching demand and supply of PPAs, is also expected to agree to enact a change in regulations to provide tax relief to corporates buying green energy, and/or to provide a form of guarantee to parties entering into long term PPAs in order to encourage their uptake and drive growth in the market, in line with trends that are being seen across other parts of Europe. ›

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Germany Corporate PPAs are currently on the rise in Germany. Until now, they have not been widely used due to the historically attractive support scheme. Significant growth is expected in the coming years.

In Germany, Corporate PPAs are widely seen as the next “big thing” in the renewables market. The first PPAs for operational projects were concluded in mid2018, setting the scene for more PPAs to be entered into.

At the end of 2020, there will be a total of approximately 4.5 GW of onshore wind capacity (and thereafter, an average of 2.5 GW of onshore wind capacity per year) which will no longer be eligible under Germany’s support scheme. By 2026, this will apply to approximately 17 GW or one-third of the currently installed onshore wind capacity in Germany.

It is expected that the Corporate PPA development within the next years in Germany will be driven to a large extent by such operational projects phasing out of the support scheme. A good example to illustrate the possible use of PPAs in this context is a PPA deal concluded in Q3/Q4-2018 with a major German car manufacturer. As of 2021, it will source electricity from a clustered sleeved PPA of multiple operational wind parks to supply its manufacturing sites (46 MW, term of 3 to 5 years). These wind parks will all phase out of the support scheme by the end of 2020.

Furthermore, due to the recent major decline in levelized cost of energy (LCOE), the numbers of Corporate PPAs with greenfield projects will also pick up. This trend is demonstrated by the first long-term solar PPA concluded in 2019 (85 MW, term of 15 years).

The fact that Corporate PPAs have not been on the rise in Germany earlier can be attributed to the attractive support scheme for renewable energy that has been in place for a number of years. This support scheme used to pay a so-called “market premium” which was based on a statutory reference price for a 20-year subsidy period.

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Under this regime, it was financially more attractive for generators to make use of the German support scheme, since it granted a guaranteed price above market prices. On the other hand, corporates have generally chosen to enter into traditional (“brown”) electricity supply agreements that include certificates of origin of other renewable sources (e.g. Norwegian hydro). Using this, corporates have been able to buy “green energy” for a fixed price. In addition, German energy regulation does not allow to issue and sell certificates of origin for renewables benefitting from the support-scheme.

Consequently, to enter into PPAs with such projects has not been an option for corporates when sourcing green energy.

However, the scene is now rapidly changing.

Amendments to the Federal Renewable Energy Act in 2017 triggered a shift away from the statutory reference prices to reference prices that are set by competitive auctions for wind and solar generators. As in other countries, the auctions have resulted in lower reference prices being awarded.

Furthermore, the auctions have put pressure on the supply chain, leading to a major reduction of the LCOE. On the other hand, market prices are expected to rise within the next years. All of this will make long-term Corporate PPAs with a fixed price a far more attractive option for generators as well as for corporates, mostly due to price certainty for both parties and potential cost savings for the corporates.

There are a number of scenarios for how Corporate PPAs can be implemented into the German market: 1. renewable generators that currently receive the statutory or auction-based “market premium” enter into a Corporate PPA; 2.

Scenarios (1) and (2) apply to operational projects only, whereas scenario (3) is relevant to both operational and new build projects.

In scenario (1), the renewable generator would not be allowed to sell any certificates of origin that are associated with the renewable power to the corporate because it is not able to do this and claim the market premium in respect of the same electricity. However, it should be clarified that scenario (1) is, in all other aspects, legally permissible. Nonetheless, for most corporates, the lack of certificates of origin may eliminate the reputational benefit of entering into a Corporate PPA. However, a Corporate PPA could still be attractive for corporates that want to hedge their power price risks. Scenario (1) is only an option for off-site sleeved and synthetic Corporate PPAs, but not for on-site Corporate PPAs, as to receive the market premium, the electricity generated must be exported to the grid.

In scenarios (2) and (3), it is possible for renewable generators to enter into a Corporate PPA and to also sell any certificate of origin that are associated with the renewable power to the corporate. As set out above, in light of the reductions in the reference prices awarded to renewable generators at auction and the reduction to the LCOE, the conclusion of a Corporate PPA is expected to become a more attractive option for renewable generators financially. In addition, new build projects in scenario (3) may be more attractive due to the fact that they would be subject to fewer legal hurdles by not taking part in the auction process and not being bound by the statutory annual maximum capacity volumes. ›

renewable generators that are no longer eligible to benefit from the German support scheme (e.g. after the expiry of the 20-year subsid period) enter into a Corporate PPA; and

3. renewable generators voluntarily waive their right to participate in the German support scheme and conclude a Corporate PPA instead.

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Hungary The new renewables support scheme may result in an upswing in the application of Corporate PPAs in Hungary.

Corporate PPAs have not yet been widely adopted in Hungary. There are two principal reasons for this.

First, the former RES support scheme (the so-called “KÁT system”) required RES generators to sell electricity exclusively to the TSO, and since the KÁT system was quite favourable, nearly all RES generators opted to be included in the system.

Second, companies in Hungary have the option to purchase certificates of origin (whether from generators or from an electricity trader) which attest that the electricity purchased was generated from renewable sources. Companies with an agenda for sustainability and environmental responsibility therefore have the opportunity to purchase certificates of origin without necessarily having to conclude a Corporate PPA with a renewable generator. Renewable generators eligible for either the KÁT or the METÁR system (see below) are also not precluded from, at the same time, registering and selling certificates of origin. This has so far seemed to have had a negative effect on the conclusion of Corporate PPAs in Hungary.

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The regulatory landscape has significantly changed as of the beginning of January 2017 with the introduction of the new RES support scheme, METÁR. Support under the METÁR system is granted through a premium paid to renewable generators on top of the market price such generators achieve under PPAs concluded with offtakers. The introduction of the METÁR system will thus require new RES projects above 0.5 MW to go out to market and conclude PPAs with offtakers (or traders), which may in turn lead to a rise in the number of Corporate PPAs. (RES generators with a capacity below 0.5 MW may be eligible for a feedin-tariff based subsidy similar to the KÁT system.)

The support for RES generators that entered the KÁT system early on will expire in the near future.

Such generators will become exposed for the first time to the risk of price volatility and a long-term Corporate PPA may very well be an attractive solution to mitigate this risk.

New RES projects above 1 MW may only receive METÁR subsidies if they win a competitive tender.

Corporate PPAs may be an alternative for the bankability of RES projects that do not manage to, or would not want to, qualify for METÁR support.

France There is strong interest in Corporate PPAs in France.

Decreasing tender prices, projects leaving the support mechanisms and growing commitment to green power procurement will boost the market.

France has the second largest wind power potential in Europe and the French onshore wind market is one of the most active and attractive markets in Europe. Generation of electricity from renewable energy sources have initially been promoted since 2000 - through a legal “Feed-in Tariff” (FIT) mechanism. According to this mechanism, EDF has the obligation to buy the electricity produced by wind farms at a fixed price and for a duration determined by law. This support system has been modified for the respective energy sources during recent years to introduce a direct marketing scheme with Contracts for Difference. Already in place for solar projects, a tender procedure was also set up for onshore windfarms in 2017.

Despite the existing support scheme, low valuation of guarantees of origin and the relative strictness of the regulatory framework, there has not been much interest in PPAs in France in past years.

However currently there is a strong interest from all stakeholders in this new commercialization scheme.

After some first call for tenders such as Aéroports

de Paris procurement notice requesting expressions of interest in supplying electricity through Corporate PPAs from 2020, more and more PPAs are being concluded. Metro Cash and Carry France recently signed a first 3-year contract (wind energy) with Agregio (EDF) with a re-conduction clause.

Longer durations for PPA are now becoming more common, such as the 25-year contracts which Volitalia has signed with French Railways SNCF (solar energy) and Boulanger (solar energy).

Decreasing tender prices, promotion of corporate “renewable” PPAs through the clean energy package and the clear willingness of industrial corporates to secure their procurement on a renewable energy basis is pushing the market forward.

There is a peak to be expected for the period 2022- 2025, in particular with respect to repowering projects or projects entering the market which no longer benefit from the support mechanism. This should lead to an upsurge in interest in Corporate PPAs as a new business model for generators and investors seeking to secure investment in powerproducing installations, and to redesign the project finance modelling. ›

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Ireland Following recent developments, the Irish Corporate PPA sector has been the subject of significant interest from both public and private actors in the Irish market.

Whilst we don’t have Bird & Bird offices in Ireland, we work closely with leading law firm Matheson on renewable energy projects in Ireland. Matheson have the market leading and largest dedicated Energy practice in Ireland and have excellent experience on Corporate PPAs and set out here for us some commentary on the Corporate PPA market in Ireland.

Renewable energy generators in Ireland have historically benefitted from a generous feed-in tariff scheme from the Irish government – the Renewable Energy Feed-in Tariff (REFIT). The availability of REFIT has offered very little incentive for generators to consider Corporate PPAs. Nonetheless, the first Corporate PPA to complete in the Irish market was in fact a ‘REFIT-supported’ Corporate PPA between GE and Microsoft in October 2017. This Corporate PPA allowed Microsoft to purchase the energy produced at a 37 MW wind farm in County Kerry.

It is clear that this Corporate PPA helped to catalyse interest in the Irish Corporate PPA market. In particular with REFIT now closed to new applicants, generators are increasingly looking for alternative routes to market such as Corporate PPAs. A significant milestone was achieved in April 2019 with the announcement of the first unsubsidised Corporate PPA in the Irish market between Amazon and an independent renewable developer in relation to a proposed 91MW wind farm in County Donegal. This was closely followed by an announcement by Amazon in early August that it has entered into a further unsubsidised Corporate PPA in relation to a proposed 23MW wind farm in County Cork.

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As expected, the Corporate PPA market in Ireland has to date adopted the “supplier-lite” model (successfully used in Ireland for over ten years on REFIT projects). This model involves a corporate setting up a licensed supply company. Under a supplier-lite Corporate PPA, the generator sells the power (and transfers the renewable accreditations – GOOs) to the corporate supply company who in turn sells it to the end-user corporate under an electricity supply agreement. In this structure, the corporate is likely to outsource the balancing and trading functions to a third party service provider.

Recently, we have also seen interest in other Corporate PPA structures – including: “Sleeved PPA” structures where power is sold by the generator to the corporate consumer via PPAs entered into by both parties with a third party “utility”; and“Synthetic PPA” structures where the generator and corporate enter into a contract for difference (CfD) under which the parties lock in the fixed strike price for the sale/purchase of power.

Looking forward, it remains to be seen what impact the upcoming Renewable Electricity Support Scheme (RESS) will have on the Irish Corporate PPA market. The first RESS auctions are anticipated to take place in 2020.

It is very significant we think that the Irish Government’s recently published “Climate Action Plan” sets a target of 15% of all electricity demand being met by Corporate PPAs by 2030. The Government will have to consider and implement policies to achieve this ambitious target and it will be interesting to see what form these policies take.

Poland The topic of corporate PPAs is becoming increasingly popular among RES companies. It also seems that corporate PPAs are inevitably the future direction of RES sector development in Poland.

The current support regime for renewables in Poland contains certain fundamental elements that in principle allow for the implementation of corporate PPAs. At the same time, however, there are uncertainties regarding the actual usability of such corporate PPA structures on the Polish market.

Despite these uncertainties, first corporate PPAs have been already executed in Poland.

Considering the fact that the contract for difference support system for RES is likely to be eventually discontinued within the next couple or few years, corporate PPAs seem like a favorable alternative for RES producers. What is important is that corporate off-takers are increasingly interested in such PPAs too, so if structured in a proper manner, all interested parties could benefit from the rise of corporate PPAs in Poland.

It should be noted that the unclear provisions of the law imposing the obligation to sell 100% of energy produced in renewable installations on the power exchange have been repealed by an amendment of the Renewable Energy Sources Act, which also leaves an open gate to future growth of corporate PPA structures in Poland.

Still, it needs to be emphasized that Poland is yet to actually establish mature corporate PPA structures and concepts of such structures are being evaluated by various market participants. This includes the banking sector, which quite evidently is in the process of contemplating which variation of corporate PPAs may be deemed bankable in Poland. To that end, it seems that the biggest problem faced by both energy producers and financing institutions will be the exact method of determining the price formula in such long- term corporate PPA structures. ›

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Czech Republic Corporate PPAs are an opportunity for existing and new generators in the context of an ever more stringent and less favourable subsidy policy.

The subsidy scheme in the Czech Republic for electricity generators from renewable energy sources is built on two main types of subsidies: (1) the one-off investment subsidy and (2) the operating subsidy.

Operating subsidies are either in the form of green bonuses or the feed-in tariff. Generators can only opt for one from of operating subsidy, they cannot be combined. In the case of green bonuses the generator collects a fixed green bonus from the market operator (OTE, a.s.) as well as the amount received from on- selling its produced electricity at market price. In the case of the feed-in tariff, the generator earns the feed- in tariff from the “mandatory” buyer.

Now, we are about to see material changes of the Czech subsidy system. The Ministry of Industry and Trade of the Czech Republic has prepared a draft of an amendment to the Act no. 165/2012 Coll., on supported energy resources (“Amendment”). The Amendment introduces auctions as a new type of renewables support mechanism which is a market orientated principle of subsidy. The main advantage of such a support mechanism is the possibility to set the upper limit of the capacity and to define the available amount of subsidy. Furthermore, given the competitive nature of auctions, this mechanism is considered to be a cost-effective way of promoting renewable energy resources and further eliminates overcompensation. On the other hand, auctions impose certain costs and risks for bidders, which in turn may lead (and will most probably lead) to a lower level of participation in auctions and subsequently may result in more expensive offers. The proposed auctionbased regime corresponds to the current integrated national energy and climate plan (“National Plan”) in the field of renewable energy resources, under which the government seeks to cut the subsidies currently flowing into renewable energy resources and further to promote the development of the renewable technologies independent of government funding.

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In the context of potential significant cuts to subsidy policies and the rising electricity prices, Corporate PPAs represent new business opportunities for both existing and new energy generators. As regards to new generators using e.g. solar energy, they can play a crucial role if the projects are to be viable and “bankable”. For the existing generators, Corporate PPAs may represent an extra source of revenue. In turn, the interest in Corporate PPAs from corporate end-users is often driven by economic and environmental considerations. Provided that the Corporate PPAs have the right pricing structure, corporates are able to reduce their exposure to rising electricity costs. As regard the environmental consideration, Corporate PPAs assist corporates to deliver their sustainability commitments.

Despite the presence of relevant market stakeholders on energy market who may clearly benefit from the scheme, Corporate PPAs have not yet been widely used in the Czech Republic.

At present, the draft of the National Plan does not specifically address any regulatory issues of Corporate PPAs, despite the fact that the inclusion of the Corporate PPAs in the National Plan would encourage the use of Corporate PPAs in the Czech Republic. However, especially in the context of rising electricity prices and uncertainty surrounding future development in the subsidy policy, it can be expected that Corporate PPAs may find wider application on the Czech energy market in the future.

Since 2009, the electricity from renewable energy sources (RES) in Slovakia has been promoted to RES producers through a system of feed-in tariff (“FIT”) state subsidy. The FIT consisted of two parts: (1) fixed tariff for electricity and (2) surcharge. The fixed tariff for electricity has been stipulated on an annual basis by the Slovak Regulatory Office and the level of surcharge has been stipulated by means of Price decision for the each specific RES producer according to a Decree of Slovak Regulatory Office.

For several years, Slovak RES producers have been selling the electricity to the distribution system operator, and the option of direct sell to the specific electricity buyer using a Corporate PPA

has not been widely used in practice. However, new legislative changes are expected in future.

Recently, there have been some legislative changes to the Act on RES in January 2019. This did not cover Corporate PPAs specifically, but has been considered a positive change to the strictly regulated RES environment in Slovakia aiming to make it more free-market oriented.

Beside shifting more powers from local distribution system operator to one centralised Short-term Electricity Market Operator - OKTE, a.s. in the course of providing the FIT to RES producers, the major advance of the amendment for larger renewable sources is the change of sale of electricity from the system of feed-in tariff (FIT) to a feed-in premium (FIP) upon a success in an auction. This way, the state would principally provide the FIP subsidy to those RES producers which were chosen in the new auction system, i.e. these producers would receive a premium on top of the market price of their electricity production. The smaller RES producers under 500kw would be still receiving subsidy under the previous system of FIT.

Generators can only opt for one from of operating subsidy, they cannot be combined.

Additionally, the amendment to the RES Act promises to establish a new option for businesses to operate their own “local RES” under 500kw for their own use, which would be free of (often demanding) fees, e.g. fee for the grid connection, etc. The system of non-subsidy RES projects and the Corporate PPA option itself is not a widely discussed topic in Slovakia at the moment.

However, liberalisation and general support of more free market mechanisms have been declared to be a clear path for the RES in Slovakia. Therefore, we are of the view that Corporate PPAs will be very likely supported and legally implemented in the next couple of years. ›

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Australia The Corporate PPA market in Australia is maturing with a good number of deals transacted. A disrupted energy market forecast for years to come presents significant opportunity for corporate buyers.

Investment in Australia’s renewable and storage industry has boomed in recent years, achieving $20bn in 2018, largely driven by the Renewable Energy Target (“RET”). The RET is the Commonwealth Government scheme to increase the proportion of electricity generated from renewable sources and reduce greenhouse gas emissions from electricity generation. The RET legislated for large-scale generation of 33,000 GWh by 2020, meaning that by 2020 approximately 20% of Australia’s electricity generation will be from renewable sources. It incentivised participants, particularly retailers, to enter into PPAs to receive green benefits known as LGCs (or large-scale generation certificates).

Although the RET has largely been achieved, it is important to highlight that in the absence of an extension of the RET (or similar national climate or energy policy), State governments have been active in setting increased targets for renewable energy generation to drive investment in the sector, drive down power costs and achieve a greater reduction of emissions.

Market participants in the energy sector will need to remain cognisant of the transformation taking place in relation to the way in which Australia generates and distributes energy. With the number of renewable energy assets increasing at a substantial rate, together with the proposed closure of a significant number of coal fired power stations, the natural consequence is a move towards a decentralised market with energy production and consumption being accessed on a local level rather than from large utilities. This shift may encourage corporate energy consumers to procure energy directly from local renewable energy assets through the mechanism of a Corporate PPA.

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In Australia, there are compelling reasons for corporates to consider procuring energy directly from clean and renewable energy assets. The first and most persuasive being the falling cost of energy production from renewable energy assets when compared to the cost of energy procured from more customary sources, a gap that is projected to increase in Australia due to Australia’s ageing coal-power infrastructure. From a corporate energy consumer perspective, Corporate PPAs allow for price certainty, management of price fluctuations, reduced energy bills and emissions, and have corporate social responsibility and public relations benefits.

Secondly, with Australian generators and investors finding it challenging to find medium to long term PPAs from a “retailer” or state government backed reverse auctions or schemes, there is a gap in the market that corporates can help to address. If such corporates enter into Corporate PPAs directly with renewable energy generating projects, it provides these projects with contractual price certainty on the price of both the electricity they intend to export and the value of the associated large scale renewable energy certificates. This will assist projects in meeting bankability requirements, allow them to gain access to different types of senior debt and stimulate further investment in the sector as institutional investors see key project risks around pricing being alleviated.

It is key to acknowledge that the US and European experiences in relation to Corporate PPAs have allowed the Australian market to develop from a rather unique standpoint. Australian corporates can take comfort from such international experience and seek to adopt a best practice approach to selecting which contractual models it will deploy in the market.

There are a good number of examples of Corporate PPA style transactions that have either reached financial close or are currently being procured in Australia:

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University of NSW, 93 GWh p.a. 10 year PPA;

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Telstra, 70 MW, 8 year PPA;

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Nectar Farms, 196 MW, undisclosed term;

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Melbourne Renewable Energy Buying Group, 88 GWh, 10 year PPA;

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Sun Metals, 116 MW, undisclosed term;

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Coles, up to 250 GWh, 7-13 year PPA;

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Kleenheat, 30 MW, 10 year PPA;

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Mars, undisclosed MW, 20 year PPA;

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AB InDev / Carlton & United Breweries, 80 GWh p.a. 10-15 year PPA;

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Sydney Airport, undisclosed MW, 8 year PPA;

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University of Technology, 27 GWh p.a. 10-1 years PPA; and

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Westpac, undisclosed MW, 10 year PPA.

The majority of the Corporate PPAs listed above are either behind-the-meter PPAs or “synthetic” PPAs (i.e. financial hedges or contracts for difference). ›

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Singapore Being situated near the equator, Singapore receives a healthy dose of sunshine, so it is not surprising that most of the Corporate PPAs in Singapore involve solar energy.

Solar-leasing is the predominant PPA model adopted by solar energy solutions providers based in Singapore. There are mainly two types of solarleasing: on-site and off-site.

On-site PPA solar-leasing involves the installation of solar PV systems on the rooftop of the consumer’s building. The consumer is only required to pay for the solar energy generated and consumed at a fixed agreed price or a variable rate based on a fixed discount to prevailing electricity prices. Solar PPAs typically last for a period ranging from 20 to 25 years. Such a model is especially suitable in dense urban cities like Singapore, as it requires minimal land use.

The Housing and Development Board (“HDB”) entered into a solar leasing contract with Sembcorp Solar Singapore, under which Sembcorp Solar Singapore will install solar PV panels on the rooftops of 848 HDB blocks in West Coast and Choa Chu Kang, and 27 government sites by the second quarter of 2020.

Other notable projects include Sunseap Group’s floating PV system and Jurong Town Corporation’s (“JTC”) SolarRoof project.

Other notable on-site PPA projects include Sunseap securing a $50 million loan to fund a 50MW portfolio of rooftop solar projects across Singapore.

Such rooftop projects will range from about 100 kilowatts to 5 MW in size and will benefit from long term power purchase agreements with more than 20 companies.

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On the other hand, off-site solar-leasing does not involve the installation of solar PV systems on the rooftops of the consumer’s buildings. Instead, solar energy is harnessed from rooftop farms that the energy provider owns in other parts of Singapore or from floating solar panel systems in ponds, lakes or reservoirs. An off-site solar-leasing arrangement is suitable for consumers who are unwilling or unable to install solar systems on their own rooftops.

Sembcorp Industries entered into a 20 year contract to support Facebook’s 170, 000 sq m data centre in Singapore by installing close to 900 offsite solar panels in Singapore between 2018 to 2020. This project will generate 50 MWp of renewable energy and will enable Facebook’s data centre and local offices to use 100% renewable energy.

Other notable projects include Sunseap Group’s floating PV system and Jurong Town Corporation’s (“JTC”) SolarRoof project. Sunseap Group’s floating PV system is of about 5 hectres on the sea near Singapore’s northern shores and it is anticipated that it will generate 6,388 MWh of renewable energy annually. JTC entered into the SolarRoof contract with Sun Electric in 2017 to supply, install and maintain solar panels on the rooftops of JTC’s buildings. The SolarRoof project enables the direct export of solar energy that is generated from the rooftops of JTC buildings to the national grid.

Electricity that is generated by such solar panels is currently available for purchase by commercial entities. ›

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South East Asia Elsewhere in South East Asia, the majority of PPAs involve off-takers (purchasers of energy) that are state-owned energy utilities. Corporate off- takers are few and far between.

The few Corporate PPAs that are executed in SouthEast Asia are concentrated within Vietnam and the Malaysian State of Sarawak, more recently, in Merchang, Jasin, Gurun and Pahang. State government initiatives have resulted in an increased inflow of investments and projects in Sarawak, which has in turn driven up the demand for energy. As such, Sarawak Energy (“SE”), an electrical utility wholly-owned by the State of Sarawak, has been entering into PPAs with various corporations for the supply of renewable energy.

In April 2018, Tenaga Nasional Bhd, the Malaysian electricity utility, signed a power purchase agreement for a period of 21 years for a 30 MW solar project in Mukim Bebar, Daerah Pekan, Pahang.

In April 2019, Ayala-led AC Energy, Inc. launched a 330-MW solar power plant in Vietnam in partnership with Vietnam’s BIM Group and its site is exceeds 300 hectares of land. It is anticipated that this project will generate more than 545 million kilowatthours of renewable energy annually.

Other deals involving SE include the supply and sale of 140MW of power to Tokuyama Corporation, a Japanese manufacturer of chemicals, over a period of 10 years. Also, SE concluded a Corporate PPA in 2014 with Press Metal Bhd, a Malaysianbased aluminium company, to provide 500MW of electricity over 25 years. —

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OUR ENERGY & UTILITIES GROUP Bird & Bird LLP is an international law firm. We combine exceptional legal expertise with deep industry knowledge and refreshingly creative thinking. We have over 1300 lawyers in 30 offices across Europe, the Middle East and Asia-Pac, as well as close ties with firms in other parts of the world.

Our Energy and Utilities team of over 150 lawyers spread across our network advise on energy and utilities matters across all of our practice areas. As an international team, our sector approach is not broken down by offices but into sub-groups that focus around particular aspects of the Energy and Utilities sector. A key focus area for us is renewable energy, covering solar, wind, biomass, anaerobic digestion, energy from waste and energy efficiency.

We believe we have one of the leading international renewable energy practices in the world, and have been ranked as the most active legal advisers on renewable energy M&A deals globally, second year in a row.

We are a cohesive and expert team who understand how to work together to complete renewables projects to international investor standards.

This industry experience has meant we have closely tracked the emergence of Corporate PPAs, where global multinational corporations are buying electricity directly from wind and solar generators.

This completely revolutionises the market for renewable power from subsidy and utility driven to market demand driven. We consider we are at the forefront of this market, having developed and negotiated innovative contract and business PPA structures, from physical PPAs to synthetic/virtual PPAs. —

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ACADEMIE voor de RECHTSPRAKTIJK

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If we run

To look in the back room Where we hide

All of our feelings I just close my eyes as you walk out

Tom Smith

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