Renewable energy is big business for European law firms. Picture the development of a typical wind or solar farm and you can see why. It involves a series of steps that need specialist legal advice from nearly every practice area.
At the outset, securing land rights and planning permission for a project requires real estate lawyers. The structuring of power purchase agreements and construction contracts then requires external commercial lawyers. Most projects are financed using bank debt, so corporate lawyers are then called on to advise on financing packages. This is all before construction of the project has even started.
Once operating, a huge number of renewables projects are then sold by their original developers to long-term financial investors. These deals also require corporate lawyers.
And because renewable energy projects still require subsidies, the prospects for the entire industry are intrinsically linked with the latest energy regulatory and subsidy frameworks. As a result, renewable energy companies frequently need the expertise of regulatory lawyers.
Even dispute resolution teams are finding work in renewables: it is not unusual to read about planned wind farms that face opposition from local communities or planning authorities. In addition, external counsel is needed when project owners want to start proceedings should they find faults with the wind turbines or solar panels they have bought, or take issue with construction work.
There is plenty of work to go around. According to Clean Energy Pipeline, a staggering £45bn was invested in European renewable energy projects in 2015, a 10 per cent increase on the £41bn invested in 2014 and a 61 per cent increase on the £28bn invested in 2013.
These figures don’t even include M&A activity. Some 361 renewable energy projects totalling at £16.4bn were acquired in Europe in 2015.
These are not small deals. When the first renewable energy projects were built 10 years ago they were primarily small-scale and developed by small developers typically on farm land. But today some of the world’s largest financial investors are investing sometimes billions of pounds in renewable energy projects in single transactions.
The strategic importance of renewables
In short, this all means that firms can earn huge fees in renewables. Take the example of Watson Farley & Williams. The firm generated a staggering 24 per cent of its global revenues from work related to renewable energy in 2015. It achieved this by advising on 34 European renewable energy project finance transactions totalling £5bn and nine European M&A transactions worth £1.6bn.
True, Watson Farley & Williams is an exception. With revenues of £125m in the 2015 financial year, it is the UK’s 33rd largest firm. Yet it excelled in renewable energy last year and is considered a tier one renewables firm by its peers.
Illustrating its strength in this sector, the firm was ranked third by the value of European renewables project finance deals and fourth by the value of European renewable M&A transactions advised on in 2015.
“Just under a quarter of our global revenue comes from renewables and this percentage is growing”
“We’ve done a huge amount of renewables work in the last 18 months including a number of very large offshore wind financings for banks in Germany and a big offshore wind sale for DONG Energy, which was one of the first projects supported by the new contracts-for-difference scheme in the UK,” says Evan Stergoulis, head of the energy and infrastructure sector at Watson Farley and Williams. “Just under a quarter of our global revenue comes from renewables, including our offshore wind transmission work, and this percentage is growing.”
Of course, most law firms don’t generate anywhere near this proportion of revenues from renewables. The majority of the 25 firms interviewed for this report generated between three and six percent of their revenues from renewable energy.
Having a strong renewables practice also has wider strategic benefits beyond the immediate fee-earning potential. “Being big in renewables enables us to get on panels of large global corporates and investors in a way we simply couldn’t do 10 years ago when we didn’t have this expertise,” explains Anne Lapierre, head of energy, EMEA, at Norton Rose Fulbright. “Even if renewables isn’t the client’s core business, most huge corporates have a sustainability programme that might involve renewables. So our expertise in this sector provides strategic advantages.”
The European renewables elite
Which are the most active renewables law firms in Europe? The answer depends on the nature of the work. When it comes to project finance the magic circle firms dominate, with Clifford Chance, Allen & Overy and Linklaters occupying the first, second and fourth places measured by deal credit in 2015. They sandwich Watson Farley & Williams in third place.
An interesting mix of firms follows the top four. German firm Hengeler Mueller comes fifth despite having only advised on three renewables project finance transactions: the financing of the Nordlink transmission line, which will transport surplus renewable power between Germany and Norway; and the financing of the Veja Mate (€1.9bn [£1.5bn]) and Gode Wind 1 offshore wind farms, both located in Germany.
Freshfields Bruckhaus Deringer (ranked sixth) and Kromann Reumert (ranked eighth) similarly rank highly because they advised on a small number of particularly large renewable project finance deals. Norton Rose Fulbright (ranked seventh) advised on 22 project finance deals totalling £2.1bn.
“Renewables is fundamentally a local business because even if it achieves grid parity the power market is very domestic”
The league table that ranks renewables project finance by the raw number of deals reveals a different set of firms. Bird & Bird ranks first having advised on 68 financings in 2015; Burges Salmon ranks third having advised on 29 project finance transactions; TLT places seventh with 18 deals; and Eversheds and DLA Piper come in eighth and ninth respectively, having advised on 17
The most active renewables firms measured by the number and value of M&A deals includes a few new names. Simpson Thacher & Bartlett is the most active law firm in European renewables M&A by deal value despite only advising on two M&A deals in 2015. Bird & Bird, Burges Salmon, Eversheds, TLT and Dentons were the top five firms ranked by the number of European M&A deals in 2015.
Of course, these league tables only tell half the story. Firms that frequently advise on land rights, planning permission and construction and PPA contracts but don’t get involved too much in financing and M&A often get overlooked. Those that don’t feature highly in the league tables but are particularly strong in this area include Bond Dickinson, Osborne Clarke, Shepherd & Wedderburn and Herbert Smith Freehills.
End of the boom years?
Renewable energy subsidies have been slashed in most major European renewable energy markets in the past five years. Even in countries that remain committed to renewables, the subsidy mechanisms have been forced by an EU directive to change to a more market-oriented scheme.
This double whammy resulted in a slowdown in installations of renewables capacity. Some 21GW (gigawatts) of wind and solar capacity was installed across Europe in 2015, a 34 per cent decrease on the 32GW installed in 2011 – the peak year for renewables installations according to the European Wind Energy Association.
But this doesn’t mean the amount of work for law firms to do in this sector has diminished. Renewables projects are often sold or refinanced a few years after they start generating power. The critical mass of projects that are now operating in Europe therefore means there is an almost constant supply of refinancing and M&A work.
“The secondary M&A market is quite strong,” confirms Stergoulis. “There is a lot of institutional money out there looking for a home because of the low interest rate environment. Some may want construction risk and the resulting higher risk-weighted returns but others will not take the risk at all and want operating projects. There is also enormous liquidity in the debt market, which is driving refinancing activity.”
While the growth in renewables work outside Europe may not be nosediving, it’s certainly not as booming as when the market was at its peak some five years ago. For this reason many firms have taken strides to capitalise on their European renewables expertise by either expanding into new non-European markets or expanding into high-growth adjacent sectors.
Eversheds is a good example. “Five years ago I realised we had to identify the rapidly growing markets outside the UK and outside Europe because we could see the UK and wider European market being subject to political risk,” says Michelle T Davies, head of Eversheds’ clean energy and sustainability group. “At the time Saudi Arabia launched a significant 54GW solar program. We invested a significant amount of time focusing on accessing this market and developing new client relationships. Sadly, the Saudi market failed to proceed for various reasons but by then many of our clients were simply looking to opportunities close by and invested in Jordan’s new programme where we successfully advised them on 80 per cent of the first round of solar projects in the country.”
Other firms latched onto the huge growth in sub-Saharan Africa. Norton Rose Fulbright for example has carved out a dominant position in South Africa and has advised on three project finance transactions in South Africa and one in Morocco in 2015. Meanwhile Allen & Overy advised on four renewables financing deals in Uganda and two in Morocco in 2015.
But building an international renewables presence is not just a defensive strategy to make up for a downturn in activity in firms’ home jurisdiction. It is also a way to ensure winning work with the international investors that are increasingly targeting renewable energy investments.
“Renewables is fundamentally a local business because even if it achieves grid parity the power market is very domestic, much more so than the oil and gas industry,” says John Pickett, a partner at Linklaters.
“The regulatory and subsidy regimes makes it a really local market so you need people that are plugged in domestically to do these deals well. A network enables you to work with big clients that are in many different jurisdictions.”
Offshore wind – the golden ticket
Not all renewables projects are the same. Project financing and M&A deals involving small to medium sized solar or onshore wind farms typically have a ticket of £10m-£50m. Firms can generate good but not great fees from advising on transactions for these types of projects.
But offshore wind is completely different. Given the size of the projects, offshore wind financing and M&A deals can easily run into the billions.
Take the 336MW Galloper offshore wind farm situated off the Suffolk coast as an example. In October 2015 the project raised a staggering £1.4bn from a consortium of 12 commercial banks and the European Investment Bank. At the same time the UK Green Investment Bank, Siemens Financial Services and Macquarie Capital acquired a majority stake in the project from RWE Innogy. These are huge transactions that command equally huge legal fees.
The challenge for law firms is that these deals are very few and far between and involve a handful of large utilities and financial investors. It is therefore hard to make inroads into this sector without the right relationships.
Which firms have grabbed significant market share? Clifford Chance advised on the financing of five offshore wind farms in 2015 in transactions worth £4.9bn. It also advised on three offshore wind M&A deals with a deal credit of £1.2bn. Watson Farley & Williams was the second most active offshore wind law firm last year, advising on three M&A deals totalling £1.3bn and three project finance deals totalling £2.7bn.
Renewables is a very important sector for a wide range of firms. Not only does it command high fees, it is also a sector in which lawyers in nearly every practice area can find work.
And while renewable installations may be slowing down in Europe, this doesn’t mean there is less work for law firms. The sheer number of operating projects means there is a robust pipeline of refinancing and M&A work to keep firms busy for years to come.