Due Diligence of Renewable Energy Projects: be Ready to Buy Half-Ready

Статья посвящена украинскому рынку возобновляемой энергии. В частности, автор обращает особое внимание на подготовку к заключению договоров купли-продажи проектов, которые реализуются на этом рынке и находятся в состоянии неполной готовности. Особенное внимание уделяется вопросам земельного права, “зеленого” тарифа, контрактов, связанных с реализаций проекта, например: договоров поставки биомассы и оборудования, страхования, а также лицензионным договорам и договорам о передаче ноу-хау. В публикации освещаются также некоторые вопросы корпоративного права, в том числе, отношения международного частного права, реализация которых позволит подчинить правоотношения английскому материальному праву.

The Ukrainian renew­able energy market is still at an early stage of development if com­pared to the countries of the European Union. However, the Green Tariff, granted for pro­duction of renewable energy has led to significant development of this sector. While first renew­able power projects have been started, more and more investors realize to benefits of investments to this fast-growing industry sec­tor. Now there is a growing trend for investors to pay attention to the secondary market, i.e. to those renewable projects, which are under development or shovel ready. In such a case due to the significant number of regulatory issues and market challenges, it is of utmost importance for a buyer to carry out legal review of such projects before making a final decision to buy.

This article highlights indus­try-specific legal issues, which need to be covered by legal due diligence of a half-ready renew­able energy project in Ukraine.

Land & construction issues

If the buyer tends towards buying a half-ready renewable energy project, the land issue will be the first issue on the list, which needs to be checked. Most renewable projects are devel­oped on land plots, which are in long-term use (lease, easement). With this fact in mind particu­lar attention should be paid to zoning the relevant land plots.

Land plots used for renewable project should have both proper main zoning (energy lands) and special zoning (e.g. construction, maintenance, and repair of al­ternative energy objects (solar power station). Failure to use land plot according to its zoning is a good reason for cancelling the right to lease land. Further, although the fact of registration of the land lease serves as suf­ficient evidence that land lease was properly executed, it still re­mains possible to challenge such a land lease if such land lease does not contain all the essential terms.

In those cases when a tar­get does not have direct access to the grid, the target should have at least the right to install power lines through neighbor­ing and other grid-related land plots. Usually this can be solved by properly executed easement agreements. In such a case the buyer should deal with vast num­ber of local people. Therefore, it is usually important to take into account personal attitude of lo­cal people both to the target and development of the renewable project in their region. Without considering this issue the access to the grid may become time and cost consuming procedure.

According to Ukrainian laws renewable project is likely to be qualified as object of IV or V level of complexity. The levei of complexity is defined both by de­signer and customer at the stage of preparation of the construc­tion project. The fact of IV or V level of complexity significantly affects the number of permits in construction, which needs to be obtained by the target and checked by the buyer.

Furthermore, without doubt it’s worth considering the issue regarding the status of rights to the construction project. Prop­er identification of copyright owner(s) of the construction project may considerably effect the further structuring of the transaction.

Green Tariff & regulatory issues

Although half-ready (not commissioned) projects are not yet awarded with the Green Tariff, the Green Tariff issue is of importance for due diligence of half-ready projects. Since the Green Tariff in Ukraine is awarded only after construction of the project is completed, it is necessary to review, whether the target may face potential problems with awarding the Green Tariff.

In particular, today the suc­cess in obtaining the Green Ta­riff is in most cases dependent on the compliance with local content requirements. Specifi­cally, the current local content requirement applies to those projects, construction of which was launched after 1 Janu­ary 2012. The fact of the start of construction will depend on the relevant construction per­mits. Depending on the time when the project is going to be commissioned the target will need to meet  15%/30%/50% of local content requirement. Therefore, the buyer should always consider both avail­able construction documents (e.g. schedule of construction under contractor agreement) as well as viable possibilities to meet the deadlines fixed in the construction schedule.

For those projects where the Green Tariff has been already awarded it is essential to check whether there are good reasons for cancellation. In such a case although it does not look logical at first glance it is necessary to review the package of licenses obtained by the target for the purpose of project development and the risk of their cancellation. It should be noted that the fact of cancellation of the relevant qual­ified license is one good reason for cancelling the Green Tariff.

In any case, the amount of licenses should be sufficient to generate electricity and sell it on the wholesale energy market. Additionally, it should be noted that the license issue is always sensitive in terms of compliance with the relevant license terms. Therefore, it is always good to consider on employment issue with regard to the existing engi­neering and other related staff of the target as well as compliance with the technical aspects of li­cense terms.

Agreements with key accounts, material contracts

Agreements with key ac­counts and material contracts should also be of particular focus within due diligence of renew­able projects. Such agreements vary from project to project. In principal, it covers general contractor/subcontract agree­ments, supply agreements (equipment, biomass), insurance agreement (if any), license agree­ments to use certain technology/ know how or to manufacture some equipment. Particular at­tention should be paid to change of control provisions and legal assessment of the negative legal consequences. Separately, pay­ment terms and penalty clauses should be carefully reviewed.

Extended review of key ac­counts and material contracts may include the review of risk regarding possible insolvency of key account/counterparty (e.g. general contractor) as well as possible breach of contract. The risk of breach of the relevant contract should be of particular focus when the relations be­tween the target (in particular, when the target is indentified with certain individual) and key accounts (e.g. local agricultural farms for supply of biomass) are based on personal attitude and are sensitive to change of owner.

Corporate issues: share deal vs. asset deal

The Ukrainian market does not have one approach to imple­mentation of renewable energy projects and, to a certain extent, differs from the EU renewable energy market, having its own specifics and peculiarities. Those foreign entities which want to develop Green projects in Ukraine find it reasonable to cooperate with a Ukrainian partner, partic­ularly through establishment of a joint venture (SVP) company in Ukraine. The results of review of the SPV structure (e.g. exit claus­es of SPV agreement, change of control issues) will require the relevant structuring of the trans­action for the buyer.

Some renewable projects have a cross-border corpo­rate structure. This can be also done by establishing one SPV for some part of the project (e.g. 5 MW of energy generating facilities per SPV).

Due to strong regulatory issue , (titles, permits, licenses, Green Tariff) and to benefit from tax exemptions granted to the target, today it is more preferable for the buyer to opt for a share deal structure. For a number of rea­sons (e.g. local SPV is corporately held by a foreign SPV company; opportunity to apply English law) it may be legally efficient for the buyer to structure a share deal through a foreign jurisdiction. In such a case due diligence should cover issues regarding the change of the management of the local SPV company (-ies) (reasons for termination of labor contracts, exit payments).

Moreover, in case of a share deal particular attention within due diligence should be paid to review of the projects financing documents, as most renewable projects are developed using debt financing. Therefore, it is always important to check the avail­ability of encumbrances to both movable and immovable prop­erty related to the target and check the financial terms of the relevant financing agreements.

Irrespective of the fact of whether the sale of a renewable project is structured through an asset deal or share deal it is al­ways important to check require­ments of antimonopoly regula­tion. A share deal is always more sensitive to the needs of filing with the Antimonopoly Commit­tee of Ukraine. In the case of an asset deal it worth considering whether an asset deal is quali­fied as a business acquisition and thus, whether merger clear­ance will be required.

In this article we have out­lined the main legal issues, which should be considered dur­ing legal due diligence. However, also there is sufficient number of other peculiarities, which should be considered within the given process (e.g. litigation issues). Le­gal due diligence is usually part of more complex due diligence, which covers both technical and environmental due diligence. The consolidated result becomes the basis for efficient structuring.

Автор: Oleg A. KLYMCHUK

Источник: Ukrainian Journal of Business Law. – 2013. – № 3. – Р. 28 – 29.

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