Like so many other parts of the economy, Scotland’s renewable and alternative energy sector has not avoided the impact of the global pandemic. The recent UK Budget set out a variety of key climate and environment measures that, alongside other political and market developments, may re-energise the sector following the recent difficulties.
Reflecting on the last year, Covid-19 created some (now well-recognised) novel contracting issues and affected bankability of some projects. We have seen investors and developers inspecting force majeure and change in law clauses much more closely, to check where liability lies for delays in developments brought on by the regularly changing restrictions. Coupled with this have been developments in the drafting of such provisions with the aim of capturing government guidance (as well as actual law), and seeing counterparties look to agree upfront contractual processes to specifically address potential pandemic delays and costs.
The various lockdowns impacted timescales of construction and supply chain players, unable to work on sites for prolonged periods, leading to many developers seeking waivers from their lenders for breaches of their finance documents. Frequently, we have also seen developers seek additional breathing space in these waivers to cover any potential future restrictions.
Despite these challenges, recent developments suggest a bright future lies ahead for the sector. Not least that the recent Budget provided an array of encouraging proposals, including the first Sovereign Green Bond to be issued in June (with more to follow), the Monetary Policy Committee of the Bank of England being updated to reflect the transition to net zero and environmental sustainability, alongside a new programme to support development of floating offshore wind technology and upgrading of existing port infrastructure for the next generation of offshore wind.
We also have the upcoming 26th UN Climate Change Conference (COP 26) taking place in November in Glasgow, which will be the first time since COP21 that parties are expected to commit to enhanced carbon reduction targets, where the UK has already indicated commitment to a 68% reduction in emissions by 2030.
Alongside the political developments, we have also seen an increased appetite from lenders to the sector for first-of-a-kind financings of novel technologies. There has been a significant increase in knowledge-sharing of new technologies, including hydrogen, biofuels, energy storage, tidal, wave, renewable heat and floating offshore wind. A number of innovative project finance options are also being devised for developers implementing such technologies. There has also been a surge in interest for the financing of electric vehicle charging points.
In the post-subsidy world, there is lender interest in new unsubsidised solar and onshore wind projects, made viable through different working models. Corporate power purchase agreements, where a business purchases its electricity directly from an energy generator, can provide security of income stream for developers, consequently making financing of such projects more attractive.
Some renewable projects can also now benefit from Capacity Market payments, alongside baseload plants, albeit to a limited extent. The Capacity Market is part of the UK government’s drive for security of supply, through a measure of government-backed income. Developers (and lenders) must however be comfortable with risks involved in fulfilling Capacity Market contract obligations.
Many developers are also finding ways to cut costs and achieve efficiencies, including diversifying capacity by adding mixed technologies or repowering existing sites with more efficient equipment, making them viable without subsidy support.
We have also seen in the last year or so many welcome developments within the sustainable finance movement to support renewable and alternative energy financings, coupled with the increasing applicability of mandatory ESG targets and reporting obligations for UK companies. The Loan Market Association (LMA) has developed and issued guidance on their (recently updated again) green loan principles and sustainability linked loan principles, to address key questions for lenders about financing applicable projects. This appears to be increasing lender confidence and qualifying deal flow, which is essential in driving forward a green recovery post-Covid.
As we continue to weather the economic storm of Covid-19, the renewable/alternative energy sector is finding itself in a strong position, supported by innovative finance options as well as the background legislative and policy developments. This bodes well, both for project developers and investors, as we increasingly look to them to drive forward the green recovery.
Jenny Allan, Partner and Kirsty Nurse, Senior Associate, renewable/alternative energy specialists at law firm CMS