We would distil the key issues into the following “checklist” of energy specific legal areas that in our experience often benefit from review at Heads of Terms stage. All of these issues are discussed in more detail later in this guide.
Issues Checklist
- Grid connection: Maintaining the ability to draw upon electricity from the grid when required, notwithstanding the introduction of an on-site power solution, is generally essential. Are any consents/amendments needed under the site grid connection agreements with the relevant network company to allow for the introduction of new equipment at the site and the changing nature of usage of electricity from the grid (and the potential for export of electricity to the grid)? Does this extend to the need for physical works on the point of connection? In either case, what will the likely timescale and cost be, and could the necessary changes be denied by the relevant network company?
- Arrangements with existing electricity supplier: How does the envisaged on-site power solution interface with the existing agreements in place with the existing electricity supply arrangements for the site e.g. due to export of generation and the desire to monetise this? Does the new on-site power solution assume/necessitate a change in these arrangements?
- Regulated activities: what electricity sector regulated activities (such as electricity generation, electricity conveyance, and electricity supply) will be performed as part of the proposed on-site power solution and by which parties? Will such parties hold the relevant licences or licence exemptions? What is the commercial impact of performing the relevant activity on a licensed versus licence exempt basis and therefore to what extent does this dictate the necessary approach? Which parties are taking responsibility/risk for ongoing compliance with such regulatory requirements and what is the risk of and position on a change in law in this regard?
- Property Rights: How is the site owned (e.g. freehold or leasehold, security etc)? The consents or restrictions this presents should be scrutinised early on.
- Commercial arrangements: Assuming there are different parties involved in the project (such as a third party owner/operator of the relevant equipment) what benefits/income streams will each be receiving and who will be taking the risk/upsides of external opportunities and changing circumstances. This covers a wide range of areas, for example:
- Volume commitments: will the on-site consumer be committing to a take and/or pay for all output from the on-site facility or a particular volume of electricity and will any form of security be required in respect of this? What happens if usage/demand at the site changes? What happens on a change in control or ownership of the consumer site? Similarly, will the generator be committing to delivering certain volumes and what will the consequence be if they fall short?
- Renewable subsidy: Generally renewable subsidy (such as feed-in tariffs or subsidised green certificates) associated with small-scale renewable generation is on the decrease, but if any such subsidy will be applicable, who will receive such subsidy in the project structure? Will there be a sharing of the benefit of this subsidy? And if the proposal involves adding/amending existing renewable generation, will this change risk losing any subsidy previously secured in respect of the pre-existing facility?
- Flexibility/Capacity Services: In contrast to such subsidy, the potential for income streams (such as from "Capacity Markets” and contracts with network companies) for flexible generation/response is on the increase. Is the intention that these may be put in place in respect of the relevant on-site power solution and, if so, who will directly be party to such benefits and obligations? Will these benefits and obligations be factored into the wider deal?
- Exclusivity: what degree and type of exclusivity will be expected/required in respect of offtake of power from the relevant on-site power solution? How does this approach dovetail with regulation, for example in respect of “third party access” to on-site networks? For third party owners/operators of on-site power solutions the degree of exclusivity from the on-site power consumer is frequently a fundamental issue for project economics and bankability.
- Changing regulation/commercials associated with electricity supply from the grid: the use of on-site power solutions to avoid network charges and policy costs is coming under increasing political scrutiny across a range of jurisdictions and the way in which such charges are applied is evolving in light of this. Wholesale electricity/commodity prices can also of course be turbulent. Who is taking the potential risk and upside of such changes (either foreseeable or unforeseeable)?
- Private wire network responsibilities/charges: on-site power solutions not only require the underlying generation or storage asset, they also require the relevant electricity line(s), apparatus and equipment to convey electricity within the site. There will be a cost associated with running this, regulation will often apply to the way it is operated, and it will of course be fundamental for consumption of the electricity on-site and (if relevant) to getting the electricity to the point of connection to the grid for export. Who will be responsible for the build and ongoing operation of the network and will they directly charge for such activities?
- Planning: given the scale and technology type of project envisaged, what planning/consenting will be required? Who is taking the responsibility and risk for procuring this and what happens if it is not obtained?
- REMIT: will this bite? For large scale projects, the potential relevance of the transparency obligations imposed in respect of wholesale markets by regulation on wholesale energy market integrity and transparency (known as REMIT) should not be overlooked.
- Remedies if things go wrong and asset stranding risk: on-site power solutions by their nature often involve a particularly close reliance between different parties. On the one hand, a third party providing on-site generation/storage will often not only be relying on the relevant on-site consumer to consume (and/or pay for) a certain amount of electricity but in practice will also be reliant on grid connection arrangements held by the site owner for its ability to physically export (and thereby sell) unused electricity onto the grid. Conversely, the relevant consumer will not only be expecting a certain level of supply from the on-site power solution, but will also (i) be physically connecting important infrastructure, (ii) need to carefully assess the extent to which particular actions by a third party on-site power solution operator could jeopardise the sites all-important grid connection, and (iii) in practice will very often be requiring such third parties to ensure energy sector regulatory compliance to some degree or another. Therefore, there is often a benefit to considering early warning breach triggers and step-in rights (with associated property rights), as well as financial compensation and rights to terminate as part of the structure.
