Renewables in the Time of Coronavirus26 March 2020

PRACTICAL CONSIDERATIONS

European renewables projects face a mix of potential practical and legal issues linked to the coronavirus. The core practical issues affect numerous sectors and have been widely reported. Those same issues give rise to a number of key considerations for European renewables projects.

Long-term prospects
First, some good news. It is true that the current atmosphere of uncertainty is affecting the ability of sector participants to project long-term trends, in some cases making it challenging to reach agreements based on the expected life of relevant projects. However, while declines in the use of infrastructure such as toll roads and airports are having severe immediate impacts on cashflows for related infrastructure projects, positively for the power sector, markets do not at present appear to be forecasting similarly severe declines in power demand (recent modelling suggests that measures aimed at slowing the spread of coronavirus may lead to an aggregate decline in power demand across Europe of 6% in 2020, with an associated (average) decline in power price of 9% for the year[1]). Meanwhile, it is reasonable to assume that most of that demand will be restored once coronavirus-related restrictions are limited.

The general trend in Europe of renewables becoming less and less reliant for their viability on government subsidies is also helpful. Such reduced reliance on subsidies lessens the likelihood of the European renewables industry finding itself in intense competition with other industries for the provision of coronavirus-related financial support by already stretched governments. The relatively positive outlook on demand for power, coupled with European governments’ ongoing environmental commitments and the reduced reliance by European renewables on government subsidies, suggests that the European renewables sector remains underpinned by fundamentally positive long-term prospects, even should coronavirus present immediate challenges to certain projects.

Construction timelines
Projected construction timelines are, in some cases, facing reassessment given, most obviously, personnel and supply-chain issues for project contractors. Supply chain issues are causing some difficulties in sourcing goods. Restrictions on the movement and meeting of individuals meanwhile are presenting challenges with respect to the continued deployment of workers on site, and also the carrying out of physical meetings and site inspections. Similarly, reduced ‘in office’ staffing at some government agencies has reportedly caused delays to the issuance of permits, while planning processes are, in some instances, being delayed in the interests of avoiding physical meetings. In some jurisdictions, administrative deadlines have been suspended to allow relevant parties to proceed at a pace appropriate to the developing situation, which may further affect construction timelines.

Financing timelines
Projects in the development phase seeking debt financing may face delays in achieving financial close in the current climate. Financiers are revisiting and focussing closely on base case assumptions and projections, and more generally reassessing their risk appetites (including their appetite to underwrite debt for greenfield developments). The volatile immediate debt pricing environment is meanwhile not an attractive one in which to lock-in long term debt pricing. More mundane issues may also threaten delays: due diligence processes requiring site visits may be vulnerable to postponement and financial closings themselves face challenges in an increasingly remote working environment. Those challenges range from the adequacy of available printing and scanning facilities to difficulties with witnessing and notarisation requirements associated with document execution. Delays associated with permitting and administrative matters (noted above) may similarly impact financing timelines.

While these challenges are undoubtedly present, for perspective it is worth noting that we are currently seeing a number of transactions in the sector nevertheless continue to drive towards an imminent financial close.

Force Majeure
A number of European renewables projects under construction are considering the validity of claims by their contractors for force majeure relief (e.g. under their EPC Contracts) and the potential for the project itself to claim force majeure under its relevant contracts (e.g. power purchase agreements, or EPC contracts where projects are providing components as free issued equipment) if ultimately required. (As a generalisation, force majeure provisions provide for contracting parties being relieved to some degree from performance of their obligations where an event occurs that is beyond the parties’ control).

Wherever relevant contracts include express force majeure provisions, careful analysis of the specific wording of the relevant contracts will be required to establish whether relief is available. Contractual force majeure provisions tend to require that multiple levels of tests be satisfied for relief to apply, while relief is often only available where contractually specified procedures (e.g. around notification and mitigation) are followed by the affected party. Such provisions also tend to provide relief from the performance only of directly affected obligations, and only for so long as those obligations are actually affected. Where projects are looking to claim force majeure relief on the basis of one of its contractors claiming force majeure against the project, particularly careful analysis will be required to ensure that force majeure relief flows through the contractual chain as required. Where underlying contracts are subject to civil law systems, careful analysis of relevant legislation will also be required.

Projects should also consider the extent to which any force majeure events may have given rise to (or may in future give rise to) termination rights under their project contracts or may have delayed the occurrence of milestones that have been backed-off under other relevant agreements. In all events, financed projects should not forget to ensure that in managing force majeure claims they comply with the requirements of their finance documents, nor forget to establish what consequences (e.g. a drawstop or default) may flow under the finance documents from the occurrence of force majeure under their project contracts.

Frustration
Outside of force majeure relief, the (English law) legal doctrine of frustration[2], and its civil law equivalents (e.g. the doctrine of rebus sic stantibus[3]), are also worth considering. While case by case legal analysis will invariably be required, at present frustration (and rebus sic stantibus) appear significantly less likely than force majeure to apply in the European context, and it is worth noting that (in the case of English law) successful claims for frustration have historically been few and far between.

Material Adverse Effect
Where projects have financings in place, care should be taken to consider whether, aside from any specific default triggers (e.g. around project timelines), any more general triggers for the occurrence of a default under the relevant finance documents have been or may presently be tripped. The most likely general trigger is that of the occurrence of a “Material Adverse Effect” (“MAE”), or similar, a term which is frequently drafted broadly. While the specific wording of the term will require case by case consideration, particular points to consider are the degree to which the contract provides financiers with the discretion to determine whether or not a MAE has occurred and the degree to which a MAE may be declared in light of anticipated future developments. Positively for developers and sponsors, financiers are generally reluctant to declare events of default based solely on the occurrence of a MAE (given the scope for disagreement as to how to interpret the typically broad language of its definition), although financiers may not be so reluctant to declare a drawstop on the basis of a MAE.

While it is too early to make judgments of trends, and this is an area that will merit ongoing monitoring, as above we are currently working on a number of transactions that are continuing to drive towards financial close and utilisation notwithstanding the current situation. We are not currently aware of MAE having been declared under any live financings for European renewables projects.

MAC and “finance-out” clauses in M&A
A number of M&A transactions in the European renewables sector are currently between deal signing and completion. In such cases, a close review of the closing conditions under the relevant transactional documents is recommended. Although slightly less common in the sellers’ market prevailing immediately before the outbreak of coronavirus, some M&A transactions will include MAC (material adverse change) or “finance-out” clauses. Under the former, the parties to an M&A transaction seek to prevent or ultimately forego completion of the transaction in case of a material adverse change in market conditions relevant to the transaction, while under the latter the same is sought to occur conditional upon related debt financing for the transaction being available. In each case, careful analysis of the specific language used in the underlying transaction documents will be key in determining the parties’ rights under such clauses in the individual case.

More generally, it is still too early to predict the medium and long-term effects of the coronavirus on M&A activity in the European renewables sector. However, long-term drivers for equity investments in the sector noted above, such as government support for the energy transition, pension fund liquidity and a low interest rate environment, allow for a cautiously positive long-term outlook.

Insurance
Another potential consideration is that of insurance and whether or not any delays associated with coronavirus may be subject to claims under project insurance policies. As a rule, any analysis here will be centred on delay in start-up and business interruption policies. While such policies tend only to insure against risks associated with physical damage rather than delay, the wording of relevant individual policies will need to be interpreted to determine the extent to which those policies may respond. As always with insurance, projects will need to be careful to ensure that they comply with the letter of their insurance policies to maximise the probability of payout.