Power may be a growing sector, but the industry would be wise not to get carried away before doing due diligence. James Flynn of law firm Heatons explains
The legal issues involved in the construction of a new energy plant are varied and complicated. Any developer may require legal input on planning, funding, construction, testing and commissioning, grid connection and adoption agreements and the sale of the energy produced. A long list, of which each area is worthy of a great deal of attention in its own right, although you should normally be able to use one law firm to act on your behalf in all these areas.
Getting planning consents for a new energy plant is particularly difficult, notwithstanding the many benefits that renewable energy schemes in particular bring to the country as a whole.
Energy plants are likely to produce a combination of heavy traffic, noise, fumes and light, and the sheer scale and mass of most plants will mean that their construction in a particular area is often contentious.
But there is a will at central government level to ensure that schemes get built and this should play into the hands of the developer. Nevertheless, to aid the process, consultation with all interested parties from an early stage is crucial in any contentious planning application and energy schemes are no exception.
A developer will not get past first base with any funder without a properly drafted set of documents
Funding an energy plant is difficult, and never more so than in the current financial crisis, and with the banks reluctant to lend. The few funders seriously involved in the sector will require an element of equity to be invested alongside the debt (usually a minimum of 20% of the project value). The level of due diligence required by the banks will mean that a developer will not generally get past first base with any funder without a properly drafted set of documents covering all the areas noted above, and a robust financial model.
Even then, credit approval can be a time consuming and uncertain process. Good advisers who understand and then minimise the risks for any funder are essential.
Testing and commissioning
The testing and commissioning regime for any energy plant is something that is imperative, and it has to be right. The regime will need to be drawn up before entering into the construction contract and the right technical advice at that stage is essential to ensure that everybody is aware of what must be achieved in order for the project to be deemed “complete”.
Depending upon the size of the plant, a commissioning regime can be an extremely lengthy and detailed document in its own right.
A solid contract to deal with the construction of the plant needs to be in place. There are various industry standard forms (notably NEC, IChemE and FIDIC) that are used on projects of this nature. However, most of the forms will require fairly substantial amendments to satisfy not only project funders but also the requirements of the developer and, quite often, the contractor.
Ideally for the developer, the contract needs to allow little room for increases in the cost of the project or delays to the completion date, although there tends to be a more even risk allocation than in standard commercial development projects.
A developer will also need to ensure that the documentation governing the plant’s connection to the National Grid is put in place.
Normally, this will involve an agreement by an electricity company to allow the energy plant to connect into the grid and a separate agreement dealing with the operation of that connection.
Much of this documentation is in a standard form, but if attention is not paid, the whole project could be in jeopardy. Without a functioning grid connection, even the most well-built plant will not produce an income.
Selling the energy
Finally, any energy company will wish to sell the energy produced by the plant. For renewable schemes there is often a premium attached to the energy that is produced, and companies who wish to be seen to purchase “green” energy, may enter into a price guarantee agreement for the power produced.
Also with renewable schemes, the feed-in tariff allows energy companies to obtain a fixed price for the energy they produce and this is normally governed by a power purchase agreement entered into with one of the national electricity companies.
Our advice would always be to retain good advisers at an early stage. It is important that people with the requisite experience and knowledge are brought on board quickly. There is, of course, a dilemma faced by many developers in that they do not wish to incur significant fees until they are sure that the project is proceeding. Most advisers will come to an arrangement to protect both parties in this situation.