THE ROLE OF LAW IN FINANCING OFFSHORE WIND: GOING AGAINST THE TIDE OR FEEDING THE STORM?

摘要

OverviewThe International Energy Agency has calculated that in order to meet future energy demand by low-carbon supplyworldwide investments are required of $3,5 trillion anually. The states bordering the North Sea have established thatfurther development of energy projects at sea is essential for security of supply and to reach climate change goals,reducing CO_2-emissions and increasing renewable energy production. The North Sea area will play a vital rolebecause of the potential to produce electricity from especially wind, but also the tides and waves, to store CO_2 indepleted hydrocarbon fields and to construct trans-European transmission infrastructure. Considering the costs ofoffshore projects, wind farms usually exceed €1 billion and electricity interconnectors €500 million, any reduction inthe cost of capital results in a significant reduction of overall project costs which can be invested in other renewableenergy projects.Law and policy should stimulate investments in such projects. In addition, governments should financiallysupport the road to economic viability of promising technologies where possible. This contribution will address inwhich ways the law can either support or hinder investments in renewable energy sources and legal rules whichinfluence the cost of capital. The law plays a crucial role in the both attracting investors and cost of capital in generalas investors most prominently require legal certainty and because the law can be an important tool to allow for thehedging of different risks the project encounters during its lifetime. The result is the identification of a number oflegal instruments which can be used by legislators in both developed and developing countries to attract investorsand potentially lower the cost of capital. The legal issues touched upon range from international investment law toEuropean law and national property law.MethodsIn order to establish the issues which are encountered in practice, informal interviews have been held with bankersand lawyers active in (project) finance in different jurisdictions. To establish the legal issues envisaged in academia aliterature review has been carried out. The Dutch offshore wind sector has been taken as an example and is comparedto other jurisdictions to establish strong points, weak areas and possible alternatives for regulation. The resultingknowledge of the practical legal issues and strong suits of energy finance in different jurisdictions allowed for theidentification of best practices which can be applied in other jurisdictions. The lessons drawn are relevant for anystate which wishes to attract foreign direct investment in the renewable energy sector, of which some applyspecifically to offshore wind.ResultsThe interviews, literature and comparative legal research resulted in the following. Firstly, policy uncertainty is theprimary reason for institutional investors to decide against investing. Secondly, there is a range of legal matterswhich influence investment decisions and the cost of capital. Thirdly, in some cases essential financial matters arenot provided for by law while the necessary legal changes could adopted be without having determintal side-effects.An overview of different legal barriers to investments has been made on the basis of this research. Whererequired, further legal research has been carried out to find legal solutions for the problems encountered. The issuesinclude the opening of markets and investment protection through international investment law, the costs of localcontent requirements, the benefits of guaranteed market access and priority dispatch, different manners in whichsubsidies can be provided by government, the benefits of long term, clear agreements between government andindustry and the protection of subsidy streams from influence of a change in government.An important issue raised specifically concerning offshore wind is the impossibility to establish security rights,such as a mortgage, against the installations at sea. The main reason for this issue is the rule of private international law lex rei sitae, which provides that the law of the state where property is located applies to that property. This is anissue when installations at sea are located beyond the territorial sea, which is limited to 12nm or 22.2 km from thecoast. The reason therefore is that beyond the territorial sea, international law provides that the coastal state has anexclusive economic zone (broadly limited to 360 km off the coast) in which does enjoy jurisdiction to regulate theconstruction of offshore wind farms while the sea bed is not part of the territory of the coastal state. The result is thatmany wind farms are located in this area between 22 and 360 km off the coast where the sea bed has no owner. Incombination with the aforementioned lex rei sitae, which applies in roughly 150 states, this means that there are noproperty laws which apply to these installations. Thus, no property laws appl and security interests such as mortgagecannot be established. These security interests are of foremost importance to investors to be ensured of repayment oftheir loans in case of insolvency. The reason why wind farms are still financed in practice is that all other assets ofthe companies holding the wind farm license, including the shares of the company where it concerns a specialpurpose vehicle, are included in the security package granted to the lenders. The validity of a number of the securityrights usually established in such deals, however, is uncertain and thus may not hold up when challenged in court.Moreover, these alternatives do not provide the lenders with an as strong and certain rights as a mortgage would.Therefore, all barriers to establish mortgage against offshore installations have been researched and three alternativesfor legislators to close this gap have been formulated.ConclusionsFor large scale energy projects, legal and policy certainty are paramount to attract investors. There is a range of legalinstruments which can either hinder investors and increase the cost of capital and on the other hand there are otherswhich could increase investor apetite and decrease the cost of capital as they decrease the risks involved forinvestors. The overview of legal issues which this research includes is particularly relevant for developing countrieswho wish to attract (foreign) investors, while a number of the points on the list are also of significant of importancefor developed countries. The main reason therefore is that the total investments which have to be made in developedcountries to transition towards a low carbon energy system are astronomical while the available budget and burdenwhich the tax payer can handle are limited. Any reduction in costs can thus result in billions of euros of savings,allowing for additional projects to be realized. Moreover, a reduction in the cost of capital results in a largerreduction in a larger reduction of the LCOE and thus reduces costs on both sides.Specifically as regards the offshore energy sector, there are issues with establishing a mortgange againstinstallations at sea. The basic rule of private international law, the lex rei sitae, applies in 150 states. The result isthat these states have to adopt specific legislation dealing with property laws beyond their territorial sea. I haveformulated three proposals in order to allow for the establishment of security rights against installations at sea. Theresults are not only useful for the offshore wind sector, but for any activity at sea such as electricity production fromthe waves, interconnection, CO_2-storage or other re-use of existing oil and gas platforms, pipelines and fields.Especially as regards CO_2-storage and interconnection the governments controlling the natural resources of the NorthSea have significant plans which include large scale storage and building an island on the Doggersbank. Also inthese cases, any decrease in the cost of capital resulting from laws which can be adopted without having a negativeimpact should be adopted as soon as possible.