21 August 2006
Renewable Energy as a defined sector is now truly global, so much so that what happens in one part of world can dramatically affect other jurisdictions. It is an interesting time for lawyers specialising in the sector, whether acting for funders or developers, as the way of doing business changes. Nowhere is this more apparent than with the extension of the US production tax credit (PTC) and its impact on wind farm developments in Europe.
US wind power
For many, news that the North American wind farm market is finally enjoying sustained growth, with record installations of wind power projects in 2005 and steady future growth predicted, is a welcome turn of events following a previous hesitancy in the sector. It is largely accepted that this growth is attributable to the extension of the PTC, which was introduced at the end of 2004 and extended to 2007.
And it does not stop there. Emerging energy research predicts that the US wind turbine market is expected to double, from $3bn (£1.58bn) in 2005 to around $7.5bn (£3.96bn) in 2010.
This growth has put significant pressure on the supply of wind turbines and their component parts, such as gearboxes and blades, to the extent that there is now a global shortage of turbines and other key pieces of equipment. The British Wind Energy Association (BWEA) has commented that the US tax-credit scheme is "sucking up supplies from all parts of the world".
It is also clear that the uncertainty surrounding a further extension of the PTC beyond 2007 is resulting in manufacturers staying with existing capacity rather than increasing it, which has somewhat predictably resulted in higher prices and reduced supply, not only for the UK, but for the rest of Europe.
Lawyers acting for developers have experienced a significant shift in the bargaining power of their clients. Understandably, when faced with a choice of supplying a 200mw project in the US or a myriad of 10mw-40mw projects in Europe, many manufacturers have gone for the big orders, agreeing only to supply existing commitments on varied and preferential terms.
And of course there is the knock-on effect on funding to consider. The bank may not be prepared to fund on the varied terms or may change the terms of its funding. For some the position has been far worse, with some projects collapsing due to the failure to secure turbine supply or a supply from a bankable manufacturer. Being up-to-speed with market conditions is key if the best outcome is to be secured.
Increased AIM activity
Conversely, the UK has benefited directly from changes in the US. The increased regulation of companies brought about by Sarbanes-Oxley, coupled with the favourable exchange rate, has led to a dramatic increase in the number of companies listed, and preparing for listing, on AIM.
While the AIM website lists a variety of reasons as to why it has been successful in attracting international companies (there are more than 250 overseas companies now) from liquidity and profile, it is the speedy and cost-effective process and flexible and regulatory-friendly system that are the real attractions for US companies. There are now more than 30 US companies quoted on AIM.
While this growth is not peculiar to the renewable sector, AIM is a firm favourite for renewable and cleantech businesses. There are almost 20 companies with a combined market value of £1.2bn.
Interestingly, the Energy Review does not appear to have had an impact on share price. As conventional energy prices continue to rise, notwithstanding the volatility in price experienced on some stocks, AIM is likely to remain the preferred option.
Of course there are those who liken the current renewable and cleantech boom to the dotcom boom and are watching closely for the potential flop. However, the consensus appears to be that the combination of global warming, political agendas and government incentives, together with increased oil and gas prices and the improved viability of the industry as a standalone sector, will protect it from the fate of the dotcoms.
This has clearly led to an increase in IPO work for lawyers, particularly those with sector expertise. Again, the key is understanding the sector and an appreciation of the US market and where the client sits within it.
Certain biomass (in particular non-wood) and biofuel technology is still new and requires careful explanation. While there are constants such as grid connection, the other component parts of the project will change depending on the technology. The funding structures, for example, will be significantly different (with additional income streams on certain biomass projects from gate-fee fuels and waste byproducts such as ash). The offtake arrangements and fuel supply agreements, if they are in place, will also vary, as will the cost of generation and the appetite of the funders and their approach.
In addition to understanding the documentation peculiar to the relevant technology, it is also important to grasp the differences between the US and UK approaches. While the commercial drivers will largely be the same, the project documents will not. In particular, consenting rules will be materially different.
It is clear that, as this sector continues to develop and grow, there will be an overlap of cause and effect between the US and the UK. This may be more contrived in the future, particularly if the proposed collaboration between the UK and California in the form of a combined carbon emissions trading scheme takes effect. The Schwarzenegger-Blair agreement covered a number of areas, including collaboration on technology research, enhanced linkages between UK and US scientific communities and a shared understanding of the economics of climate change. However, it is the proposed implementation of market-based mechanisms to spur innovation that presents the most interesting and challenging aspect of the agreement.
The California-UK scheme will look to go further than the current European trading programme, which currently does not extend to carbon from transportation, although the Energy Review and recent comments by Tony Blair indicate that this is only a matter of time. Tony Blair recently said: "A big step in the right direction would be to see aviation brought into the EU emissions trading scheme. During our EU presidency we will argue strongly for this."
An additional cross-border trading scheme raises some interesting questions, including the obvious one: how will it fit within, and operate in the context of, the EU scheme?
It will surely have to be recognised by the EU in order for UK companies to avoid penalties in the EU on the basis of Californian-purchased credits. In addition, how will the thresholds be set and aligned to existing EU thresholds? As it stands, the EU scheme has been criticised because certain governments have been overgenerous with their allocations of allowances.
On the other hand, the UK has set comparatively tougher targets and is likely to continue to do so. The Government announced that it would issue 3 per cent fewer credits to UK businesses in the second phase of the scheme. It is not at all clear how California will reconcile itself with the UK allowances, if at all.
There is scepticism, and it is too simplistic to say that the devil is in the detail. Notwithstanding this, there are countries that have set up trading schemes with the specific aim of joining the EU scheme, and the California-UK scheme, if it does proceed, is likely to be one of them.
Contrived or not, the US and UK renewable markets will clearly continue to influence and drive each other, causing legal work in the sector to be ever more cross-border in nature.