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Bankability issues with Solar PV leases in emerging markets

In any solar PV development in emerging markets (whether in Africa, Latin America or elsewhere) attention is immediately drawn to project revenues. Government or utility tender packages focus on mark-ups to power purchase agreements with the offtaker, the strength of any government support agreement, and the terms of any other credit support. It is not uncommon for a project to be well advanced before the developer turns to the “less exciting” project agreements, with land rights frequently one of the most problematic. The site may be split over dozens of parcels of land (many of which are either stuck in probate or not properly registered), the model form of lease may be unintelligible, or the land sporadically crossed by grazing animals.

Most project stakeholders are either invested and actively interested in the success of the project (e.g. the offtaker), or experienced and sophisticated counterparties (e.g. EPC contractors) – the lessor(s) of land rights may be less equipped to quickly agree the required documents.

Recently we have been working on a number of solar PV projects across Africa in jurisdictions with a limited track record of international project finance. Key areas in which we often find that a landowner’s model form of lease does not provide sufficient protection for the project are listed below. Although we have used terminology that will be familiar to lawyers used to common law systems, the same issues arise – and should ultimately be capable of being resolved – in any legal system.

Term 

The term of the lease should be sufficient to cover the asset life of the project, the term of key approvals (e.g. the generation licence, planning permission) and any decommissioning period (whether after an early termination or expiry of the term).  If asset life is extended then ideally the lessee will also have the option to extend the term of the lease.

Pre-conditions/early obligations 

The lease rental payments are ideally structured in such a manner that they are not payable until all government authorisations and permits and third party consents required for the development and operation of the project have been obtained. If early works are required (e.g. an environmental impact assessment) in order to be granted the necessary permits then the lease will need to cater for this or such works will need to be authorised under a separate lease, lease option or licence.

Easements  

If the route of the cable connecting the project to the grid is not included in the site and the Lessor has rights over the relevant land, the Lessor should grant the Lessee and any third party nominated by it easements over the land as required for the connection of the solar PV plant to the relevant electricity transmission lines. Similar rights may also be needed to allow a route from the site to the public highway for construction and maintenance. For these purposes it is critical to confirm that all local land which may be required for an easement is in the control of the Lessor.

Permitted Use  

The Lessee should be allowed to carry out activities related to, in connection with, or for the purpose of, the design (including site appraisal), construction, operation (including export of power), maintenance and decommissioning (and handover, if applicable) of the solar PV plant.

The site subject to the lease should also be sufficient for project use, i.e. it should cover the solar PV panels, ancillary equipment (including e.g. inverters, CCTV and substations).

Lessor’s covenant  

The Lessor should not do or permit to be done any act which has or may have the effect of reducing or interfering with the capability of the power station to generate its maximum potential of electricity. This may extend to limiting rights to cross the site, including prohibiting the grazing of livestock (to the extent not needed by the Lessee to avoid grass cutting), and providing assurances that neighboring land will not shadow the site (e.g. with new buildings or trees).

To the extent that the Lessor is a government agency it may also be reasonable for it to provide assurances that third parties (e.g. local farmers) will not attempt to access the site, possibly alongside local content and/or community benefit provision to ensure local support.

Pre-existing liabilities 

The Lessor should be liable for, and should indemnify the Lessee against, any pre-existing liabilities associated with the site (e.g. environment liabilities). Where possible the Lessor may also need to do its own property searches and title checks (e.g. to check there is no compulsory purchase order affecting the site).

Termination 

Ideally the Lessor shall either have no right to terminate the lease, or its termination rights should be restricted to failure to pay rents (if not cured within a reasonable period upon notice) – remedies for other breaches by the Lessee should be compensation rather than termination.

Direct Agreement

The Lessor will need to covenant that it will at the request and reasonable cost of the Lessee enter into a direct agreement with any lender providing financing for the project such that the lender has a right to step in and novate before the Lessor exercises its rights under the lease, including any right to terminate the lease (if any) or re-enter the site.

The authors are grateful to Gillian Goldsworthy, Senior Associate in the Real Estate team of Dentons’ London office, for her assistance with this piece

 

 

 

 

 

 

 

 

Bankability issues with Solar PV leases in emerging markets

Biomethane RHI Consultation

1.            Introduction to the RHI

The Renewable Heat Incentive (RHI) is a long-term financial support programme for renewable heat designed to increase the uptake of renewable heat technologies and reduce carbon emissions.

The scheme provides a subsidy per kWhth  of eligible renewable heat generated from accredited installations and a subsidy payable to producers of biomethane for injection into the grid.

It was launched in November 2011 through the Renewable Heat Incentive Scheme Regulations 2011 (RHI Regulation) with a scheme for the non-domestic sector that provides payments to industry, business and public sector organisations.

The following renewable heat technologies are currently supported:

  • solid biomass;
  • ground and water source heat pumps (GSHP);
  • geothermal;
  • solar collector / solar thermal (at capacities of less than 200 kWth);
  • small scale biogas combustion (at capacities of less than 200 kWth); and
  • biomethane injection.

2.            Biomethane

Biomethane injection involves the production of biogas through anaerobic digestion of waste, crop, slurries or sewage feedstock. The biogas is then ‘upgraded’ to remove the carbon dioxide and other impurities in a process know as scrubbing, and propane is added to ensure the calorific value, or energy content, closely matches that of natural gas in the network. The resulting gas can then be odorised and compressed, and the processed biomethane injected into the gas grid.

RHI Payments for biomethane producers are based on the eligible volume of biomethane produced for injection.

3.            Consultation

When the Government first introduced the ‘one size fits all’ biomethane to grid tariff in November 2011 there were no full scale biomethane to grid plants in operation. The tariff was based on a 1MW waste feedstock plant.

The RHI has kick-started the market for biomethane to grid as there are currently three plants registered to the RHI and it is understood many plants of much higher capacities are planned or in the pipeline.

DECC is now concerned that larger biomethane plants will benefit from economies of scale which may not justify RHI support at current levels, i.e. that at current levels large biomethane would be overcompensated.

As a result of DECC’s concerns, on 30 May 2014, DECC published a consultation seeking views from industry on proposed adjustment to the biomethane to grid tariff. The consultation closed on 27 June 2014 and DECC plan to lay any amended regulations as soon as possible after Parliament returns from Recess in Autumn 2014.

The consultation presents two tariff structures: banding and tiering.

Tiering operates by paying a higher tariff for the first designated amount of kilowatt hours of biomethane injected into the grid (the “tier 1” tariff), and a lower tariff for any subsequent biomethane injected (the “tier 2” tariff), over a period of 12 months. All installations would receive the higher tier 1 tariff payments for a set volume of biomethane injected into the grid, regardless of size of plant. This is a ‘2-tier’ tariff structure – tariff structures with higher numbers of tiers could be developed following the same approach.

Tiering provides for a gradual reduction in the average tariff earned as capacity increases – unlike banding where the average tariff falls in large steps. This reduces the likelihood of operators sizing plant for maximum financial benefit.

Banding works by defining capacity bands for the technology and paying an appropriate tariff for each band. In this case, DECC are proposing higher tariffs for the lower capacity bands and lower tariffs for higher capacity bands.

The biomethane industry cannot be overly surprised at the proposed introduction of banding or tiering as these have been implemented for other developing RHI technologies such as biomass and, indeed, in other renewable schemes such as the Feed in Tariff. As ever with tariff reviews, a fine balance needs to be reached between providing value for money for the tax payer while continuing to promote a relatively immature and growing industry.

Biomethane RHI Consultation