Renewable Energy in the Spotlight – FAQ

Posted on

8 Apr


D&I is a market leader in advising clients in demanding energy and infrastructure transactions in Finland. For example, we have advised IKEA and Infracapital in acquiring several wind farms from the Swedish renewable energy developer OX2, as well as other clients in acquiring ownership stakes from wind farms operating in Finland. In 2020, D&I advised AMP Capital and Infracapital in the sale of the leading industrial energy and district heating solutions operator Adven Group (Sale of Adven reference), which was the largest completed energy and largest private equity transaction in Finland during 2020.

Dittmar & Indrenius > Insight > Renewable Energy in the Spotlight – FAQ

Renewable energy and wind power projects are drawing an increasing amount of attention from both developers and investors. We asked our energy and infrastructure experts to share their insights on frequently asked questions.

What’s the market outlook in Finland?

The need for sustainable energy solutions and recent improvements in turbine technology have caused a swift increase in subsidy-free wind power production. While writing this, the total output of wind power production in Finland is about 2,000 megawatts (MW) and expected to quadruple to 8,000 MW by 2030. The Finnish Wind Power Association estimates that the consumption of electricity in the Nordics will increase by 50 per cent during the next 20-30 years, and the greatest share of new production will most likely be based on wind power.

  • “We are witnessing increasing interest over the wind power projects that are being developed in Finland. In addition to private equity firms and institutional investors, developers and suppliers are currently looking at the market with the intent to invest as well”, says Mikko Eerola, who leads D&I’s Energy and Infrastructure service area .
  • “From our point of view, increased competition means that a prospective bidder should pay a lot of attention to its bid in order to be able to win the race for a project. It’s not only the price that needs to be right, but key terms of transaction documents need to be ‘market’ as well in order to stay competitive.”

When is a wind farm ‘ready-to-build’?

The construction and operation of a wind farm requires that an elaborate contract structure is established between the developer, civil works contractor(s), turbine supplier and the local distribution system operator (DSO). Further, on-shore projects need land access for wind turbine generators (“WTG”), substations and other necessary buildings, as well as the power lines connecting the wind farm to the main power grid. Depending on the size and circumstances of the project, a variety of permits, authorisations and statements have to be applied through several local and national governmental authorities before construction works can start.

Once the recast Renewable Energy Directive (EU) 2018/2001 (“RED II” or “Directive”) is implemented in Finland, all necessary permits and authorisations required for wind farms can be applied electronically through one governmental agency, the ELY Centre of Ostrobothnia, which will also guide applicants through and facilitate the entire administrative permit application and granting process. RED II will also limit the duration of the permit-granting process to a maximum of two years, unless the project is particularly complex.

  • “Acquisition of necessary permits and land use rights is both complex and time-consuming, partially because there has been no ‘one-stop-shop’ for permitting. Careful due diligence is key for investors because smaller and less-experienced wind farm developers could be selling ‘ready-to-build’ wind farm projects which are not, after all, be as advanced as described in marketing materials”, says Tuomas Tiensuu who specialises in cross-border energy transactions.
  • “RED II will make things easier for developers operating in Finland but does not appear to be the perfect remedy. This is because the time limitations set out in the Directive will not apply to permit processes pertaining to land use planning, which have been excluded from the scope of the new legislation that is intended to take effect in June 2021.”

What is required to make a wind farm bankable?

Project financing is commonly used to finance large energy and infrastructure projects. In project finance, the loans are secured by the project assets and paid entirely from the project’s revenue. The lenders do not have recourse to other assets of the sponsor or owner. In the context of wind farms, this means that all contracts and land use rights ─ including WTGs, substations and other necessary buildings and constructions ─ are pledged to the lenders as a security.

  • “Lenders are reluctant to accept merchant risk in relation to the project, meaning that an acceptable PPA is a key requirement for the lenders. The length and type of PPA must be agreed with the lenders”, says Juha-Pekka Mutanen, Head of D&I’s Finance and Capital Markets service areas.
  • “The repayment period of the term loans is an important consideration as the parties may have differing views on the issue. In order to reduce risk, lenders may seek to achieve the shortest possible repayment time, whereas a sponsor may prefer a longer period. Periods of 10 to 15 years have been seen on the market. The duration of the PPA is important when deciding on the repayment period of the term loans.”
  • “The borrower will need to give representations and warranties concerning a number of matters including that the project timetable will be followed, that the wind farm will be constructed in accordance with the project documents and that the agreed insurance coverage will be maintained.”
  • “Everything has to be pledged to the lender at first priority, that is clear. Nordic lenders tend to be somewhat conservative in their position on whether any lower priority pledges can be accepted and to what extent any other deviations are acceptable. From an investor perspective, it is prudent to negotiate appropriate materiality qualifiers to the representations and warranties to obtain at least some flexibility in the event of unexpected hiccups or delays in the construction or production of the wind farm.”

What to consider when negotiating a power purchase agreements (PPA)?

Without going into details of various types of PPAs (financial, physical etc.), a power purchase agreement (PPA) is in short a contract between an electricity generator (wind farm) and a party who is purchasing the power (offtaker). The PPA incorporates the commercial terms for the sale and purchase of electricity for a project and is usually signed for a period ranging from 10-20 years. The rationale with entering into a PPA is to secure predictable cash flow for the project and thus allowing the use of external debt for the financing of the project.

  • “The term of the PPA must commensurate with the debt package. Now that the Nordics are experiencing low and occasionally even negative spot prices, it is essential for the lenders that a floor price or a fixed price is secured with a PPA before entering into a loan agreement”, says Sakari Sedbom, who advises in a range of finance, capital markets and energy transactions.
  • “Finland is still a developing market in comparison to Sweden and Norway.In comparison to Sweden and Norway, Finland has a single electricity market area, which sets Finland at a price advantage over other Nordic countries, which in turn have been divided in multiple smaller electricity market areas. The price of electricity generated in the northern and less populous parts of the country is the same as the price of electricity generated in the coastal areas of Finland. Therefore, building of a new wind capacity does not similarly cannibalize the existing market and lead to falling market prices as has been the case with some price areas in Sweden and Norway. In other words, Finland can at the moment offer investors far greater investment opportunities than the other Nordic countries.”
  • “When considering an investment, we believe it could be worth for investors to invest more time for negotiations and the timing of the PPA. If the PPA is entered into a certain pre-defined date (which unfortunately often is the case due to the project having reached a ‘ready-to-build’ stage being sold to an investor), it might be harder to negotiate a very good PPA. Therefore, we encourage investors to explore whether offtakers would be willing to negotiate and conclude PPAs already at an earlier stage and to consider any available solutions to increase flexibility for the timing and entering into a PPA.”

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