There is widespread agreement that, at least in the short-term, the COVID-19 pandemic will pose significant challenges for the clean energy sector. The research organization Bloomberg NEF cut its 2020 growth projection for global solar from 152GW to 143GW and suggested that the wind sector faces “considerable downside risk”. The analysts Rystad Energy are even more pessimistic, predicting that growth in newly commissioned renewables projects for 2020 will be entirely “wiped out”.
At a time of such profound uncertainty, how can corporate counsel help their businesses plan and achieve their energy sustainability goals for the future? What risks should corporate counsel be looking out for, and how should they seek to manage them? This article suggests some answers.
Engage with relevant stakeholders
Some projects are going to be put on hold, delayed and even cancelled. Statkraft, for example, recently announced that it temporarily suspended three construction projects due to the pandemic,[1] while Ørsted said that it envisages delays in the supply of critical components, which may hinder construction.[2]
In some instances, this will cause commercial conflicts between, among others, developers, suppliers, customers and lenders. Prudent companies will have identified risks early and entered into proactive discussions with contractual counterparties based on a clear understanding of the strength of their contractual protections. Ideally, the contracts will have been appropriately aligned from the get-go, including in respect of force majeure, change in law and material adverse change clauses. Otherwise, an audit of key contractual provisions will be required, which may cover (in addition to the foregoing provisions) consideration of common law doctrines such as frustration and civil law counterparts like impossibility. Where significant liabilities are identified, refinancing and restructuring activities may also be required.
For international and cross-border projects, companies should also consider engaging with the relevant authorities of the host States in which their investments are located. Several European governments have already extended deadlines for renewables projects or provided flexibility in existing incentives. For example, a number of countries have postponed existing auctions for wind and solar power to allow developers more time.[3] In the U.S., Vineyard Wind has been granted additional time to negotiate off-take contracts with Connecticut utilities for electricity from the 804MW Park City Wind offshore development because of the negative impact of COVID-19.[4] For many this relief will be welcome, and where this approach has not been adopted, companies may wish to lobby the relevant authorities accordingly. However, such measures may also cause prejudice to some, allowing competitors more time to prepare bids. In such instances, companies should consider whether to seek reassurances from the State or State entity as to how their existing rights will be preserved.
Plan routes to international recourse
Inevitably, at some point, stakeholder engagement will fall short of its intended goals. Even at a time when there may be downward pressure on legal spend, it therefore makes sense to map out the available routes to both domestic and international recourse.
In many cases, this will be limited to an audit of contractual dispute resolution provisions together with a consideration of the enforcement risk posed by the relevant counterparties. Where, however, there is exposure to sovereign risk, further considerations become relevant. Even before the COVID-19 pandemic, some 30 countries had witnessed a significant increase in resource nationalism risk over the last year.[5] With such significant pressures on State budgets there is reason to expect that risk to increase. For some companies it may therefore make sense to assess (or re-assess) the investment treaty coverage available to their projects and investments, as well as to undertake a detailed review of any contracts with States or State-owned entities. In doing so, it is worth remembering that the legal claims funding market may provide a way to manage any anticipated issues in terms of cash-flow and on balance sheet liabilities.
Look for the future
Even when normality begins to reassert itself, we may find ourselves in a world where a low oil price and decreased electricity demand continue to put downward pressure on renewables investment. Industry players may need to show governments how, in such circumstances, they can best continue to support the growth of green energy. One option would be to make greater use of carbon-pricing, but it may be unattractive to governments to pile the pressure on the oil and gas industry at a time when their operating margins are already squeezed. Alternatively, governments could take measures to de-risk renewables, for example by way of a non-subsidized price-stabilization or contract for difference mechanism to reduce the uncertainty and volatility associated with electricity pricing. In addition, import-export banks and similar government-backed funding sources could offer competitively priced debt and credit-enhancement products to support the financing of renewable projects.
In this regard it is notable that a number of governments have highlighted the need to ensure that economic recovery is aligned with environmental considerations. The EU appears to have heeded the International Energy Agency’s call to ensure that government stimulus packages directly encourage the energy transition, with the 27 EU leaders announcing that the bloc's coronavirus-related economic recovery plan must be consistent with the “green transition”.[6] In Asia, Japan’s Environment Minister has cautioned that to give “priority unconditionally to economic recovery, while neglecting the environment” would “virtually mean the death of the Paris [climate] accord”.[7]
Further, only a matter of weeks into widespread lockdown in Europe and the U.S., there are already tentative signs that the international oil companies previously leading the way on net-zero may be recommitting to those ambitions. BP has announced that it will move ahead with plans next year to vote on a shareholder resolution that will enshrine its pledge to reach net-zero by 2050,[8] a goal that has recently been matched by Shell,[9] while Equinor has appointed the head of its New Energy Solutions business to lead its response to COVID-19.[10] Where stable, long-term cash-flows are available, typically under long-term power purchase agreements, renewables could act as a hedge against a low and volatile oil price.
[1] Statkraft, “Update on COVID-19 Situation”, March 26, 2020, https://www.statkraft.com/media/news/2020/covid-19-update-march-26/ (last accessed April 21, 2020).
[2] Windpower Monthly, “Ørsted keeping tabs on Covid-19 impact”, March 25, 2020, https://www.windpowermonthly.com/article/1678224/orsted-keeping-tabs-covid-19-impact (last accessed April 21, 2020).
[3] Greentech Media, “European Countries Postpone Renewable Auctions, Project Deadlines for Coronavirus”, April 1, 2020, https://www.greentechmedia.com/articles/read/european-governments-cut-renewable-developers-coronavirus-slack (last accessed April 21, 2020).
[4] renews.biz, “COVID-19: Park City Wind granted PPA submission extension”, March 27, 2020, https://renews.biz/59366/covid-19-park-city-wind-granted-ppa-submission-extension/ (last accessed April 21, 2020).
[5] Verisk Maplecroft, “Resource nationalism rises in 30 countries”, March 21, 2019, https://www.maplecroft.com/insights/analysis/resource-nationalism-rises-30-countries/ (last accessed April 21, 2020).
[6] S&P Global Market Intelligence, “EU leaders commit to climate considerations in coronavirus recovery, March 27, 2020, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/eu-leaders-commit-to-climate-considerations-in-coronavirus-recovery-57793181 (last accessed April 21, 2020).
[7] Reuters, “Japan minister: Paris accord under threat if coronavirus trumps climate change”, April 13, 2020, https://www.reuters.com/article/us-climate-change-japan/japan-minister-paris-accord-under-threat-if-coronavirus-trumps-climate-change-idUSKCN21V13T (last accessed April 21, 2020).
[8] BP, “BP and Follow This agree to work towards climate resolution for BP’s 2021 AGM”, March 27, 2020, https://www.bp.com/en/global/corporate/news-and-insights/press-releases/bp-and-follow-this-agree-to-work-towards-climate-resolution-for-bps-2021-agm.html (last accessed April 21, 2020).
[9] Shell, “Shell’s ambition to be a net-zero emissions energy business”, undated, https://www.shell.com/energy-and-innovation/the-energy-future/shells-ambition-to-be-a-net-zero-emissions-energy-business.html (last accessed April 21, 2020).
[10] Offshore, “Eitrheim to lead Equinor’s coronavirus response”, March 17, 2020, https://www.offshore-mag.com/business-briefs/coronavirus/article/14169921/eitrheim-to-lead-equinors-coronavirus-response (last accessed April 21, 2020).
