Andrew Hedges, Partner at Norton Rose Fulbright LLP, presented at FMP Event in October 2014

1. Onsite generation solutions
- fair risk allocations b/w owner and developer
Andrew Hedges – andrew.hedges@nortonrosefulbright.com
Partner
Norton Rose Fulbright LLP
30 October 2014

2. UK business challenges
• Increasing energy bills
• Increasing green regulation
• Tough trading environment
• Reduced capex budgets
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3. Why On-site Generation
• Enhanced energy security
• Long term stable energy cost
• Mitigate or avoid levies on energy supplies
• PR via renewables or community energy strategy
• Good pool of third party developers / financiers
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4. On-site Generation – Getting it right
What it would look like:
• Site owner puts in the work to decide:
• What does it want
• What risk will it accept to get that
• What can it offer to facilitate process
• Site owner develops clear commercial proposal reflecting this
• Achieves competitive tension between well-funded developers
that can meet timescales and make offers that properly reflect
owner expectations
TODAY – examples of issues that should be considered upfront
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5. Value Proposition
• Where does value lie for Site Owner?
• How is it extracted?
Value levers:
• Rent under lease
• Cheap power (eg long term direct PPA)
• Share of asset value
Power
Is there a minimum secure return required?
Is there an interest in more risk vs greater upside?
- eg lower rent but greater share of upside under energy / benefit sales (if export power)
Important to consider how value delivered and tax treatment of this
- eg SDLT issues around indirect consideration for lease
- accounting treatment re finance leases
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Project
Disposal
Value
Green
Benefits
MSA Rent

6. Property Issues
• Lease Option and Lease terms will likely be core element of deal
• Need to think about what developer will want:
– Limited risk re adverse title entries (unregistered land / third party rights / reservation
of rights for mineral extraction)
– What is land being used for and when will it be available (eg process and cost
allocation for removing existing tenancies)
– What access offered (during construction / on-going)
– Robust restrictions on use of adjoining / neighbouring land
– Limited scope of any lift and shift rights re grid connection (or compensation)
• What about from Owner perspective:
– Rent re-openers (if nominal, what can trigger change)
– Limits on tenant right to extend
– Fair allocation of risk re environmental liability
– What is approach to de-commissioning assets as at end of term
– What is the credit strength of the tenant (eg developer SPV?)
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7. Offtake Issues
• Will energy demand take full generation?
– Private wire PPA structure possible
– This should allow for cheaper power than retail prices for user (eg avoidance of
levies imposed on standard energy supplies
• BUT…
• A developer will need to consider revenue certainty
• Likely means PPA to be take or pay
• With strong termination compensation backed by credit worthy entity
• Mitigate this through enabling export of power
• Low host demand = flip to export
• Possible upside to be shared
• Needs to be properly documented (eg easement to grid connection)
• Note export model means grid connection timing needs to be
considered early
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8. How to get there – role of Development Agreement
• Who does what?
• Decision making
• Who carries the costs and how is success incentivised?
• Exit strategies if circumstances change
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9. There is a path to a coherent energy strategy that
reduces costs whilst delivering sustainability
…but it takes the up-front work on strategy to
choose the right solutions and deliver them
andrew.hedges@nortonrosefulbright.com
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