Due Diligence For Bankable Solar PV Projects

Dentons
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[co-authors: Andrew Meaden, Melanie Blanchard]

Sharp reductions in the price of solar PV technology, dramatic technological advancement and (until recently) generous subsidies for solar PV generation have enabled developers to project reliable and attractive revenues over the lifetime of a solar PV project (up to 35 -40 years). As such, in recent years, solar PV has become an increasingly appealing proposition to funders and has gained acceptance as a “bankable” technology.

Nevertheless, irrespective of the financing structure or size of the project, there are risks associated with the development of solar PV projects on which a funder will require comfort during its due diligence process. Therefore, it is essential that the developer works closely with the funder and provides access to a comprehensive suite of documentation and information.

This article provides an overview on the legal due diligence that, from a UK perspective, is a pre-requisite to the successful development of a financeable ground-mounted solar PV project and focuses on the real estate, planning, grid connection and corporate aspects of the due diligence process.

Property

Once a technically suitable site has been located property due diligence is required to establish whether development of the site is feasible from a legal perspective. In general, property due diligence investigations for a solar PV project will not be substantively different from those carried out for any major acquisition or pre-funding title investigation.

Searches

The first steps of a property due diligence exercise is to carry out searches at the Land Registry to ensure that all titles affecting the site are reported on. A funder will also expect local authority enquiries, an environmental search and standard utility enquiries to be raised. Highway Authority enquiries should also be conducted to ensure that the project has vehicular access to a public highway and (if there is an extended cable route) to identify where the cable crosses a highway, or is laid within it, so that it can be established whether the necessary consent has been obtained from the Highway Authority.

Some of the more interesting results of past property searches have included, unexploded ordinance, obsolete pipelines, incapacitated landowners, rights held by minors and sites subject to environmental risks such as flood risk and even nuclear contamination.

Third party rights

Ideally, the site on which the project is located should be free of encumbrances (such as the rights of utility operators to lay and operate their equipment). If encumbrances do exist, it will be necessary to ensure that the project is designed around them and that consents to the works have been obtained (if required).

If the site is affected by restrictive covenants which preclude solar PV (limitation to solely agricultural use can sometimes affect rural properties) then either a release needs be negotiated with the beneficiary of the covenant (if the beneficiary can be located), or defective title insurance must be put in place at a level which would fully compensate the project company for wasted capital costs and loss of future income arising from the project being decommissioned earlier than anticipated. The funder will also want to see that insurance is in place where a site is affected by rights to run service media in unidentified locations, or where mineral rights are excepted from the title.

Access

The site will also need to connect (directly or indirectly) to a public highway in order to ensure the right of vehicular access. Whilst direct access is preferable, a right of way over private land would also be acceptable to a funder, provided that there are no “gaps” in title between the highway and the site. If “gaps” do exist, then a funder will require insurance to be in place.

Right to connect to grid

In most cases, solar PV projects require the right to connect to the grid. Therefore a key part of the property due diligence is to check that both the site and project company have the rights to lay a cable to the point of connection to the grid. The point of connection may be on the site, in which case no separate investigations are needed. However, it is not unusual for the point of connection to be several kilometres away from the site. An essential first step is to find out if the cable/cable works have been adopted by the distribution network operator (DNO) (adoption usually occurs after the project has been commissioned). If the cable has been adopted by the DNO then a funder would not expect further cable route due diligence (other than reviewing the adoption arrangements). However, if the cable has not been adopted then full due diligence on it would be required, with the same title investigations, searches and planning due diligence as carried out for the site itself.

Lease

The operational life of a solar PV project can range between 25 and 40 years, depending on the technology used, the underlying rights held by the project and the project’s economics. It is normal for a 25 year lease to be granted, often with an option to renew for a further period of time if the project remains operational. In addition to standard commercial lease provisions, solar leases should require the landlord to grant any necessary easements or leases to the DNO and should permit the project company to share occupation of, or grant a substation lease to a DNO. The landlord should also covenant not to do anything which would obstruct sunlight from reaching the PV panels. Full rights to lay cables and access rights should be included and repair and restoration obligations should be relatively light. A funder will also require a direct agreement from the landlord to facilitate step-in where there is a project company in default. The lease should therefore also contain an express obligation upon the landlord to enter into a direct agreement where a funder requires one.

Planning

Planning can often be a sticking point at various stages of the development of a solar PV project, as the timing of planning decisions can be as unpredictable as the decision itself. From our experience, advanced preparation, transparency and openness with the local planning authority will often ensure a smoother process to a successful and financeable project.

In respect to planning, funders will require:

  • planning permission in respect of the PV plant which is clear from the risk of judicial review;
  • planning permission in respect of the cable route works which is clear from the risk of judicial review; and
  • all relevant conditions imposed on the permissions (in particular those required to be discharged prior to commencing works on site) to have been discharged.

Any proposed amendments to the scheme as approved by the planning permission should, if possible, be kept to a minimum and, in any case, the developer should apply for and obtain the consent of the local planning authority before any amendments on-site are undertaken. If the proposed amendment is non-material, as an alternative to the amendment process established under Section 73 of the Town and Country Planning Act 1990 which is used for material changes, the developer should seek to obtain a non-material amendment (NMA) of the planning permission, as the NMA process is usually simpler and quicker than under the Section 73.

Funders will want to see evidence that no enforcement action has been taken in relation to the project, and that the project has been constructed in accordance with the approved plans and conditions imposed on the permission.

Community benefit funding is often offered to community bodies to allow a share of benefits from the projects within the community. All offers should be charitable, open and transparent and in compliance with the applicable anti-bribery legislation (Bribery Act 2010). This is often evidenced by the local/parish council reporting all offers and payments made to their public meetings. One-off payments are, of course, easier for a developer to manage, but more often annual payments are agreed, whereby yearly payments for the life of the project are paid to the community body.  A funder will want to review these arrangements carefully to ensure that all arrangements are compliant with the Bribery Act 2010.

Grid connection

The basic aim of a solar PV project is to generate electricity in order to generate revenues from the sale of such electricity (in addition to any subsidies available for generation). Therefore, the ability to export electricity from the project to the power purchaser is crucial to the viability of the project.

The majority of solar PV projects are connected to the grid via an electricity distribution network operated by a DNO. The two key contracts between the project company and the DNO, which together govern the establishment and on-going connection to the DNO’s electricity distribution network, are the connection offer and, following connection of the project to the grid, the connection agreement.

Connection Offer

The main document relating to the establishment of the connection of the solar plant to the grid is the connection offer. Pursuant to Sections 16 and 17 of the Electricity Act 1989 (Act), DNOs are obliged to make an offer of connection to a “premises” (which includes a PV plant) when requested to do so by the “owner, occupier or a party acting on their behalf” (which includes a developer of a solar PV project).

Each connection offer will include information in relation to the connection including:

  • The export/import capacity offered.
  • The location of the point of connection.
  • A list of connection works which the DNO is obliged to carry out itself (known as non-contestable works).
  • A list of connection works that the DNO would be willing (but is not obliged) to carry out (known as contestable works). (The developer is free to arrange for an Independent Connection Provider to carry out these contestable works).
  • The cost of connection works.
  • The estimated connection date of the project.
  • Any assumptions that the connection offer is based on, including meeting certain construction milestones and obtaining all necessary third party consents within specified timeframes.

When reviewing the connection offer, the funder will require comfort on issues such as:

  • Whether the connection offer has been validly accepted within the required timeframe.
  • Whether the export/import capacity is sufficient for the project’s planned generation output.
  • Whether all of the connection costs due under the connection offer have been paid.
  • Whether the estimated date of connection is compatible with the project’s eligibility for accreditation under a particular subsidy regime and the revenue impact of missing the estimated date. This is a key issue, particularly in light of the recent significant curtailing of government support available under both the Renewable Obligation and Feed-in Tariff regimes. In such an environment, developers require expert regulatory support in order to navigate an ever-changing legal framework and to assess their eligibility for certain “grace periods”, which may allow the project to benefit from subsidy support after the subsidy has been formally closed.
  • What are the circumstances in which the DNO may unilaterally terminate the connection offer.
  • Are there any other bespoke or onerous features of the connection offer, including the offer being interactive with other connection offers, constraints in the distribution network, the requirement for the DNO to apply for Statement of Works with National Grid, or the obligation for the project company to provide security to the DNO?

Connection Agreement

Once a solar PV project has been commissioned (and thus connected to the grid), the connection offer largely falls away and is superseded by the connection agreement which governs the rights and obligations of the on-going grid connection. The connection agreement will usually incorporate the National Terms of Connection which are the standard terms and conditions setting out the basis on which the DNO will maintain the grid connection. Given the standard form nature of this document, the connection agreement will not generally be the subject of negotiation. However, the funder will be concerned to ensure that the connection agreement is in place for the duration of the financing and, in certain circumstances, will require the DNO to enter into a direct agreement in respect of the connection agreement or to take security over the connection agreement (which will require the consent of the DNO). Any departures from the National Terms of Connection will need to be explained and justified to the funder.

Corporate

The project company will be party to the lease, connection offer, connection agreement and other project documents (such as a power purchase agreement (PPA) and an Engineering, Procurement, and Construction contract (EPC)). It is also the entity to which the funder will lend (either directly or indirectly via a parent company). Therefore, the ownership, constitution and liabilities of the project company are of key concern to the funder. The principal areas of interest to the funder are:

  • Ownership of the project company’s share capital within the borrower group.
  • Encumbrances over the project company’s share capital (which may need to be removed as pre-condition to financing).
  • Encumbrances over the project company’s business and assets (which may need to be removed as a pre-condition to financing or financing).
  • Inter-company debt owed by the project company’s to the borrower group (which may need to be subordinated to the financing or financing debt).
  • The articles of association of the project company (which may need to be amended to remove any restriction on registration of transfer of shares on an enforcement of security, if the lender is take security over the project company’s share capital).
  • To ascertain if the project company’s has any liabilities (or assets) other than in connection with its solar project.
  • In addition, if there is to be a reorganisation of the project company’s share capital or an intra-group transfer of the project company in connection with the financing, corporate due diligence will cover a review of the relevant documentation and advise on the reorganisation.

Conclusion

This article has provided an overview of the real estate, planning, grid connection and corporate due diligence that funders will require. Legal advisors with experience in finding solutions to the issues unearthed by due diligence and who are able to anticipate funders’ requirements as well as to address their concerns are an integral part of the efficient development of a “bankable” solar PV project. It is important to note that the due diligence described in the article forms only part of the overall legal input, which will include the negotiation of “bankable” project contracts such as the PPA and EPC and advice in relation to the funder’s loan documentation.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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