Legal Business

A breath of fresh air

Over the course of the past decade renewable energy has become a mainstream part of the energy sector. With investment flooding into projects across Europe, domestic and international firms are connecting with a new revenue stream

In renewable energy the emphasis is on thinking big. From the chain of offshore wind farms forming around Britain’s coast, to the solar plants strung out across southern Spain, to an ambitious proposal to cover parts of the Sahara with solar panels, billions are being poured into myriad projects. As national governments scramble to meet the targets agreed by the EU — to produce 20% less carbon dioxide, improve energy efficiency by 20% and increase renewable energy to 20% of the energy mix — investors and their advisers are getting to grips with a rapidly evolving sector.

In its renewable energy report published in March 2009, PricewaterhouseCoopers calculated that generating 20% of the EU’s 27 member countries energy needs from renewable sources will require an investment of between $1.8trn to $22trn over the next decade. The range in cost is down to the type of renewable energy that countries invest in but, to put it into context, that equates to more than a million windmills or constructing enough solar panels to cover an area the size of Belgium. Currently, around 7% of the primary energy mix comes from renewable sources.

Renewable energy has grown from a cottage industry, where you would typically find the smaller regional law firms advising farmers putting a turbine on a hill or advising small developers and entrepreneurs, to an almost industrialised business featuring the likes of Spanish power company Iberdrola and Germany’s RWE and E.ON. Consequently, it’s the large City, Magic Circle and multinational firms – such as Allen & Overy, Norton Rose and Linklaters – that lead the way. The market also features more niche players like Watson, Farley & Williams and more domestic-focused practices such as Bond Pearce and Eversheds in the UK.

‘The flip-flopping among some governments on tariff structures is the most damaging thing.’
Evan Stergoulis, Watson, Farley & Williams

Crucial to the development of renewables projects are feed-in tariffs, set by national governments, which compensate for the fact that renewable energy is more expensive to produce than dirtier forms of power and which compel utility companies to buy a certain amount of energy from green sources.

‘If you are not at the forefront of the renewables sector, you are missing out on the largest slice of the electricity market,’ says Alex McLean, a partner at Arthur Cox in Dublin. ‘In the energy sector, renewables has rapidly become the most important game in town,’ he adds.

Winds of change

Most of the lawyers that now call themselves renewable energy specialists ended up in the sector through a mix of luck and judgement. Through acting for clients on relatively small-scale projects in the late 1990s and early 2000s, a mix of project finance partners, construction specialists, planning experts and regulatory lawyers formed in the sector.

John Deacon, a construction lawyer by training and now a partner in the energy and project finance department at Hunton & Williams in London, admits that he started doing renewables work at his former firm Hammonds, partly as a way of avoiding working on a PFI mandate.

‘At that time I was a partner at Hammonds which has always had a very strong planning team,’ he explains. ‘Through that team we were given an opportunity to pitch for the legal work on a wind farm that had been permitted, but not built. I agreed to take on the pitch, which we managed to win, and overnight I became the renewable energy projects expert.’

The multifaceted nature of the renewable energy sector means that it’s an important source of legal work. With the most significant projects at varying stages of development, there is a need for a great array of legal input from regulatory matters, planning and contracting, to financing arrangements, project structuring, supply agreements, and more. It follows then that the key lawyers come from a wide range of backgrounds.

As Charles July, a partner in Watson, Farley & Williams’ finance group, who recently joined from Freshfields Bruckhaus Deringer, explains: ‘The projects can range in size from a few tens of millions to hundreds of millions of euros and are often complex, involving multiple participants, including sponsors, infrastructure funds and financial institutions. A significant amount of specialist legal advice is required relating to regulatory matters, planning, contracting, supply agreements, financing arrangements and project structuring.’

For July’s new firm, it was an obvious step to move into the sector leveraging off its maritime expertise. ‘For us, it was not much of a jump from dealing with large transportation assets to large renewables assets like offshore wind,’ says Evan Stergoulis, head of Watson Farley’s international project and structured finance group. The firm’s renewable experts also come from construction, finance and traditional power backgrounds.

‘Twelve years ago it was a sector with very little activity. Now we have almost 40 people advising on renewable energy.’
José Guardo, Garrigues

Swapping oil rigs and coal-fired power stations for wind turbines is a familiar story.

‘I’ve come into renewables because I’ve been involved in energy for 16 years,’ says Norton Rose energy partner John Wood. ‘Most people in the sector were historically involved in traditional energy.’ Wood joined Norton Rose in 2001 after spending seven years in-house at TXU Europe. While he provides much of the regulatory expertise to the practice, his colleague and head of the firm’s energy practice Simon Currie, who is regularly picked out as one of the leading lights in the practice, has a background in project finance.

Together they’ve been part of the team advising the Crown Estate on the largest renewables project currently in the UK – the development of the Round 3 offshore wind farms.

Eversheds, meanwhile, has developed its renewables practice largely out of its corporate finance and planning experience under partners Marcus Trinick QC and Michelle Thomas. Trinick joined in 2008 from Bond Pearce having advised on numerous projects over the past 20 years. ‘I’ve been involved in renewables since 1988 when I advised on the UK’s first wind farm,’ he says. ‘Since then I’ve advised on about 350 projects.’

Trinick’s move to Eversheds reflects the greater interest that the largest firms have shown in building their renewable energy teams. US practice McDermott Will & Emery has taken similar steps to expand its expertise, hiring Stefan Schmitz as a partner from Squire, Sanders & Dempsey in 2008. Schmitz, who qualified as a project finance lawyer and divides his time between London and Frankfurt, was encouraged by his former firm a decade ago to target work in Europe’s fledgling renewables sector.

‘We mostly went over to the continent – in Germany, Spain and Denmark where it all started – and talked to everybody and anybody in the business,’ Schmitz recalls. ‘We got to know people from the banks to small companies and then the market took off four or five years ago.’

As the sector has matured, major energy companies and international banks have pulled in the Magic Circle and other international practices to advise alongside a pool of local players. The story is similar on the continent.

José Guardo, a partner at Spanish giant Garrigues, describes how his firm’s renewables practice has been transformed in recent years: ‘Twelve years ago there was a very little cell of two or three guys at the firm, it was a sector with very little activity. Now we have almost 40 people advising on a majority of renewable energy projects, closing between 30 and 40 transactions a year in the past few years.’

As governments and investors increase their commitment to the sector, the pace of change has accelerated in many markets. ‘The first wind farm project we advised on was around five or six years ago and we’ve done a relatively large number – more than ten – over the past four years,’ comments Filipe Lowndes Marques, a partner at Portugual’s Morais Leitão, Galvão Teles, Soares da Silva.

Seconds out, round 3

For UK advisers and investors, the main focus of renewables investment is offshore wind projects. While other markets, such as Spain and Germany, have invested much more into onshore wind and solar projects, the difficulties in gaining planning permission for onshore wind parks in the UK has shifted focus offshore.

As a result, almost half of the offshore capacity currently under construction in Europe is in British waters. The overwhelming focus currently is on the Round 3 wind farm project, which involves the construction of a series of wind parks across nine zones around the coast. The cost of construction for each individual park is predicted to be between £3bn and £4bn, meaning that total investment could be up to £100bn. Consequently, business is booming for firms. Construction on Round 3 is due to start in 2014 and the project aims to be generating power by the early 2020s.

With an expected capacity of up to 32 gigawatts (GW), Round 3 will dwarf the UK’s biggest current offshore wind farm, the 1,000 megawatts (MW) London Array project, which is a joint venture between E.ON, Denmark’s Dong Energy and Abu Dhabi’s Masdar. Along with the permissions already issued in Rounds 1 and 2, Round 3 brings the total capacity of offshore wind licensed for development in UK waters to around 40GW.

‘Biomass will be an important component in plugging the gaps left by other renewables.’
Ross Fairley, Burges Salmon

Norton Rose is at the core of Round 3, advising the Crown Estate on the award of licences to cover the nine zones where the wind turbines will be constructed. The successful bidders were announced in January and the consenting regime is now under way.

Of the nine sites, Eversheds has been appointed to advise on three. The firm is acting for the Forewind consortium, which is developing the largest site at Dogger Bank; for RWE nPower renewables in the Bristol Channel zone; and Eneco, which is responsible for the west Isle of Wight zone.

Other firms include DLA Piper, which is advising Moray Offshore Renewables, a joint venture between EDP Renováveis and SeaEnergy Renewables on the development of a site in the Moray Firth in Scotland. McGrigors is advising East Anglia Offshore Wind, a joint venture between ScottishPower Renewables and Vattenfall Vindkraft. Its Scottish rival Shepherd and Wedderburn also has a role advising on the Hornsea zone, which is being developed by Siemens Project Ventures, Mainstream Renewable Power and Hochtief Construction, and Bond Pearce, which is advising Centrica Renewable Energy and renewable energy developer RES on the Irish Sea development.

‘The establishment of Round 3 is now complete,’ says Wood. ‘We’re now focusing on work for the developers on the project. Construction will start in a year or two so we need to be well positioned for that. M&A is also big at moment and there is still a lot of portfolio financing to do.’

As to the development of other renewables in the UK, solar is an up-and-coming area of focus. Perhaps not surprisingly, the UK has lagged behind the European leaders in solar, but is steadily picking up the pace. Bond Pearce’s energy head Luke Gabb thinks solar could prove to be a fruitful area for lawyers; his firm is already working for several developers who are negotiating or have signed up sites. ‘Solar is a very interesting area,’ says Gabb. ‘The change to the feed-in tariff from 1 April has given a stimulus to that part of the industry and now a lot of developers are looking to sign up sites for ground-mounted photovoltaic equipment.’

Wave power is also developing, but is still at an embryonic stage. In biomass, although the projects tend to be smaller, according to Ross Fairley, head of environment and planning at Burges Salmon, it is an area that is ripe for development. The Bristol-based firm, as part of its wider energy practice, has been involved in several biomass projects, for example wood chip plants that are at various stages of development. ‘Biomass will be an important component in plugging the gaps left by other renewables,’ Fairley predicts.

Continental questions

For all the money that continues to pour into projects, such as the UK’s Round 3, driving greater scale and efficiencies, the renewables market remains dependent on government support. Fostering the kind of regulatory structure that encourages development has been crucial to the construction of projects worldwide. However, the global economic crisis and an unsustainable boom in development has forced some countries to scale back their feed-in tariff regimes.

In Spain, a particularly generous tariff for solar projects introduced in 2007 prompted a string of developments across the country that ultimately led to a crash in the solar energy market. The Spanish government had predicted that by 2010 there would be 400MW of solar energy capacity in the country but by the end of 2007 there were already 350MW in place.

Subsequent changes to the tariff regime designed to scale back development have affected the investment climate. As Guardo, points out, a stable regulatory environment is crucial for investors in the sector. Further reductions to the tariff regime, spurred by the economic downturn in Spain have prompted further feats. ‘The government has led investors to think that it might not be so stable and that’s not good for the market,’ Guardo explains.

‘As the development of renewables is expected to continue, the sector is a favourable practice area to get into.’
Bernd Rajal, Schoenherr

Of course, a change to the regulatory regime doesn’t necessarily mean a wholesale reduction in lawyers’ workloads as clients turn to their advisers for guidance on the new regime. But it poses significant questions over the prospects for the sector. ‘Government plans to overhaul the tariffs system, meaning a substantial cut and revision of tariffs, has led to the entire industry coming to a halt,’ explains Juan Ignacio González Ruiz, a partner at Uría Menéndez.

Some relief is provided by the fact that Spanish companies have become leaders in the development of renewables technologies and overseas projects. Companies like energy giant Iberdrola – which is involved in the UK’s Round 3 – and Acciona and Gamesa have become international players, and have taken their advisers like Garrigues with them. The Spanish banks have also become valuable sources of finance. ‘One of the reasons for the success of the Spanish renewables market has been the availability of funds from the leading Spanish banks like Santander, BBVA and Banesto,’ says Ruiz. ‘Now they’re leading the charge in funding projects overseas, developed by both Spanish and foreign investors.’

Tariff reductions in Germany’s solar market have raised similar concerns over the future of the renewables sector in Europe’s largest and most developed market. The government’s recent announcement that it wants to prolong the time period for existing nuclear power plants by an average of 12 years, ensuring significant competition in the power market, has raised further questions over the sector. ‘I think these developments will impact on the German renewables market,’ says Christian Hullman a partner at K&L Gates Berlin. ‘We still have a strong market, but we are facing a new scenario with greater uncertainty in the industry.’

As Stergoulis points out, dramatic and unexpected changes to the tariff regime have a significant effect on the renewables market. ‘The flip-flopping among some governments on tariff structures is the most damaging thing,’ he says. ‘People don’t mind changes in two or three years as long as there’s visibility and grandfathering of existing projects.’

In central and eastern Europe (CEE) there is a greater degree of optimism, but the market remains delicately balanced. In Austria, the aim of increasing renewables to 34% of the energy market (up from the current level below 30%) by 2020 and a new national energy strategy issued by the government have highlighted the renewable sector’s good prospects. An increase in the tariff for energy from wind power in February this year has already attracted interest from investors. ‘The need for legal advice in the renewables sector is constantly increasing, in particular in regulatory law,’ enthuses Bernd Rajal, a partner at Schoenherr. ‘As the development of the renewables market is expected to continue throughout the next ten years, the sector is clearly a favourable practice area to get into.’

Advisers in CEE markets point to concerns over connecting new projects to national grids and commitments to proposed projects. ‘Feed-in tariff schemes are constantly revisited by governments in Europe’s emerging markets, leading to unpredictability and regulatory insecurity for the investors and their financiers,’ explains Kristóf Ferenczi, a partner at CEE firm Kinstellar. ‘For example, withdrawing Hungary’s first wind power park capacity tender, just before the bid evaluation, indicated a shift in government priorities.’

A drop in the ocean

Across Europe the renewables sector has gone from small-scale projects that couldn’t catch the attention of the largest investors and their advisers to big business, featuring the likes of RWE, Centrica and Iberdrola. The growing group of genuine and self-proclaimed renewables specialists in most major firms reflects the new-found appetite for energy derived from the likes of wind, solar and biomass.

Such is the scale of investment needed for the EU members’ to reach their renewable energy targets, that green energy is set to remain a vital part of law firms’ energy offering. It’s inevitable, however, that advice will become commoditised, much like the lifecycle of any practice area.

‘There is a lot of unpredictability and regulatory insecurity for the investors and their financiers.’
Kristóf Ferenczi, Kinstellar

In the UK and other European markets, governments are rekindling support for nuclear energy by forging plans for a new generation of nuclear power stations, attracting private and public sector investment. ‘Renewables will become more commoditised, while nuclear will be more bespoke and that’s what will generate the biggest fees,’ insists Hamish Lal, a partner at Jones Day in London.

At some point, building a series of wind power projects around the UK coast, which in many ways is akin to the development of North Sea oil in the 1970s, will seem like a drop in the ocean. But there’s enough investment and technological advances for the band of renewables specialists at the likes of A&O, Norton Rose, Eversheds and Watson Farley to move onto the next ambitious project. There’s no need to scale back just yet. LB