The recent US presidential election has brought the future of that country’s energy transition back to the centre of the debate. Yet, despite the conflicting views on what may transpire across the Atlantic, there seems no doubt that the roadmap in Europe remains unchanged in its clear commitment to deepening said transition. By Rodrigo Berasategui, finance partner, Watson Farley & Williams Madrid
Unlike in the US, and as the conflict in Ukraine has so clearly revealed, reducing Europe’s dependence on imported fossil fuels has become a top geostrategic priority. If we add to this the climate crisis, which recent natural disasters have again thrown the spotlight on, the need to accelerate the energy transition becomes even more pressing.
However, this process is not free from numerous and diverse risks. Among those that have become apparent in recent years, the significant increase in both administrative and judicial challenges placed against the main administrative and environmental authorisations required for the legal construction and operation of renewable installations is particularly noteworthy.
This phenomenon, which is alive and well in many European countries, has acquired a singular virulence in recent years in Spain. It is worthwhile stopping to analyse the causes behind it.
The rapid development in Spain of the installation of renewable projects – accelerated to a large extent by the administrative processing deadlines imposed by RD 23/2020 – has led to growing and widespread opposition from some environmental associations, local communities, and political parties.
Nor is this opposition focused on any particular technology, region or specific project, but is generic with the arguments used by the appellant entities being very similar in most cases.
However, it is also true that there are some regions, such as Galicia, where the success of opponents has been particularly problematic. In this regard, according to data provided by the Galician Wind Energy Association (EGA), the effective administrative authorisations for 69 wind farms totalling 1,901MW of power are currently suspended.
In view of this situation, as Spain's leading photovoltaic energy association UNEF argues, it is absolutely necessary to increase public awareness of the benefits renewable energy can bring to society, the environment and the domestic economy.
Thus, the industry argues that the development of renewable energy is not only essential to curb the climate emergency and reduce energy dependence, but also provide security of electricity supply and against the volatility of international energy prices as well as reduce the cost of electricity bills.
Given that rural areas most concerned at the potential impact of renewable projects are also those where the so-called NIMBY effect ("not in my back yard") is most pronounced, implementing activities and policies to raise awareness of their societal benefits becomes even more necessary.
People need to be better educated as to how the industry represents a great opportunity to fight against the "empty or depopulated Spain" problem, the deeply concerning mass migration out of rural communities (especially of the young), by creating local jobs in both the construction and maintenance phase of projects, attracting new industries (technology hubs, data centres, specialised manufacturing plants etc.), significantly increasing the budget of local councils thanks to ICIO and other local taxes, and providing additional sources of income for farmers.
As for concerns with the impact of renewable energy on the landscape and local industry, data from the Ministry of Agriculture shows that photovoltaic plants currently in operation and/or under construction occupy only 0.2% of fertile land with potential agricultural use in Spain, which would rise to only 0.4% to meet the targets set by the PNIEC for 2030.
Another factor that, in practice, contributes decisively to the proliferation of legal challenges to renewables is that filing them is free of charge and does not entail any cost for the claimant.
Regarding the arguments usually made by claimants, we note that they are generally similar, consisting either of allegations of procedural defects in the processing of the file, or of an ineffective or incorrect assessment of a project’s environmental impact by both the promoter and the environmental administration.
When it comes to procedural issues, claimants usually allege defects or omissions in the authorisation procedures, mainly relating to public information procedures – to their duration, the absence of individual notifications, the provision of sectoral reports, etc – or in consultations with the affected administrations, in the omission of mandatory or non-mandatory reports, the consideration of such reports in the final decision of the environmental body etc.
With regard to the substantive issues, claimants typically argue that the environmental assessment procedure was not as rigorous as it should have been, as certain impacts of the project on the environment or other legal assets worthy of protection such as territorial planning, landscape, human health, etc, were not taken into account or adequately assessed.
It is also very common that, in order to justify the adoption of precautionary measures or the declaration of nullity/cancellation of authorisations, reference is made to the precautionary principle.
In relation to both types of arguments, procedural or substantive, it is essential not to lose sight of the fact that projects in Spain benefit from a legal system that provides guarantees at both European and national level, where there is legal certainty that the decisions of the public administration and courts are respected and where, therefore, projects are processed through established legal channels in accordance with the law, without prejudice to the fact that there may be a handful of exceptional cases (out of hundreds) where an error or omission may have been made in the processing that needs to be rectified.
This is clearly demonstrated by the large number of unfavourable environmental impact statements on projects, evidence of rigour and professionalism of the administration's environmental technicians.
With regard to the precautionary principle, on which appellants' claims for annulment or suspension often hinge, it is worthwhile mentioning the fact that, both at the European and national levels, renewable energy generation projects are deemed to be of overriding public interest with a mandate from EU legislators to limit the exclusion zones for such projects as far as possible and ensure that when weighing conflicting interests during authorisation procedures (especially environmental impact assessment procedures) overriding public interest in implementing and commissioning of projects of this nature takes precedence.
We will now look at how these problems are impacting renewable energy projects and their bankability, as well as the main measures that financing entities are demanding in order to mitigate them.
The main risk that may arise from such challenges is, in the event of their success, the annulment of the permits and administrative authorisations necessary for the construction and operation of a project, or its temporary suspension.
The latter is especially concerning given the deadlines set in RD 23/2020 and the disastrous effect a substantial delay in construction would have by preventing the achievement of its so-called fifth milestone leading to the forfeiture of the right of access and connection to the grid of the project in question.
The first step is to carry out a rigorous analysis of the appeals, especially the likelihood of the associated risk materialising according to the nature of the challenge.
There are many other factors to take into consideration, such as the project being challenged, the quality or justification of the arguments used by the claimants, the region where the project is located, which administration is competent for its authorisation (as this also determines the competence of the court when the risk is likely to occur (construction or operation) phase, whether the appeal affects the plant or line, the rejection or not of precautionary measures etc.
In addition, this analysis may also be influenced by the profile of the financing entities as well as by the experience and knowledge of their legal adviser in charge of this first judgement or filter of the potential success of the appeals. Given the large number of existing cases, it is difficult to establish a common or standard position, meaning ad hoc solutions must be sought for each case.
That said, in those cases in which this initial legal analysis is positive in the sense that the financiers and their advisers deem that the likelihood of success of the challenges is low and therefore the project is bankable, we can see how the market proposes various hedging and mitigating measures depending on the risk.
Thus, although the casuistry can be infinite, we believe the main risks to cover are:
* A final administrative or judicial resolution that annuls an administrative authorisation and prevents the construction of a project. Regardless of the possible re-processing of the project, given the deadlines foreseen for the accreditation of the fifth milestone in accordance with RD 23/2020, such a resolution would imply de facto the non-viability of the project. For this reason, this scenario would give rise to the mandatory early repayment or early termination of the facilities agreement. In addition, the banks would most likely require that this debt repayment obligation be covered by a guarantee from the sponsor;
* A final administrative or judicial decision annulling an administrative authorisation and preventing the operation of a project. In this case, it is necessary to assess whether the reasons for the annulment are substantive – for example, the installation of the project in an area that is incompatible for its purpose – or procedural. In the first case, this could imply the impossibility of re-processing the project and therefore the compulsory dismantling of the plant, which would trigger a mandatory prepayment or early termination of the facilities agreement. In the case of deficiencies or procedural infringements, it is most likely that there will be the possibility to re-process the project and the judge may decide to maintain the operational activity of the plant or, on the contrary, to suspend it for the duration of the re-processing period. A standstill of the operation for a long period of time could lead to the early termination of the facilities agreement, but it cannot be ruled out that the banks would allow the loan to remain in force subject to the provision of a guarantee by the sponsor to cover the shortfall in cashflows, possible cost overruns arising from the implementation of compensatory measures or debt servicing. There are also alternative mechanisms, such as the creation of reserve accounts to be funded sufficiently in advance of a final judgement or even collateralisation with the cashflows generated by other plants in the case of portfolio financing;
* An administrative or judicial resolution suspending the enforceability of the administrative authorisations and preventing the construction and completion of the project before the end of the deadline for accrediting compliance with the fifth milestone in accordance with Royal Decree 23/2020. As in the first of the above cases, this situation would lead to a mandatory prepayment or early termination of the facilities agreement, with consequent coverage by the sponsor; and
* An administrative or judicial resolution suspending the enforceability of the administrative authorisations and preventing construction for a period that does not prevent reaching the fifth milestone, but which implies delays or the necessary adoption of additional compensatory or remedial measures. In this case, the banks, relying on the opinion of their technical adviser, would most likely order a draw stop and require a firm commitment from the sponsor to proceed with the project by making the necessary funding contributions.
Regarding meeting said economic obligations, as an alternative to recourse to the sponsor, insurance coverage is also being considered in the market whereby the occurrence of the aforementioned risks qualifies as an indemnifiable loss. Obviously, this alternative and, in particular, its economic cost will depend on the specific case.
There may also be situations in which the financing of projects affected by challenges is considered in the context of a purchase and sale, in which these risks have been analysed in parallel and compensatory measures to be granted by the seller have been agreed.
In this case, mechanisms could be agreed in the financing for access by the financing entities to such compensatory measures through the pledge of the credit rights arising from the sale and purchase agreement or through direct trilateral agreements linking the seller, buyer and financiers.
Finally, as regards the validity of the previously mentioned protective measures, it is normal and reasonable for them to be released with the extinction of the aforementioned risks, which would coincide with the obtaining of a final judgment rejecting the appeals in question or, in the opposite case of an affirmative ruling, with the successful re-processing of the projects.
In conclusion, this increase in litigation is not going to change, at least in the short term, meaning sponsors, funders and advisers alike need to adapt by analysing and structuring their projects in detail to find ad hoc solutions to allow them to be financed. It also requires a prior and rigorous analysis of the content of appeals, their feasibility and potential consequences in the event of a total or partial rejection.
Leaving aside the exceptional case of the High Court of Justice of Galicia, the tendency of the courts is to either presume the validity and legality of the work carried out by government technical experts, who are presumed to be impartial, or to take into consideration the overriding public interest of such project, so that, in the vast majority of cases, they are ruling in their favour.
While it is necessary to agree contractual protection mechanisms to protect lenders from the risk of appeal, it must be remembered that most appeals are unsuccessful and, when they are successful, most are due to easily remedied defects with vanishingly few leading to a project’s complete termination.
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