1. Internet consultation
By means of internet consultation, the Minister of Economic Affairs (the “Minister”) is giving an opportunity to respond to the draft versions of the ‘Regulation on Offshore Wind Energy 2015′ (Regeling windenergie op zee 2015) (the “Regulation“) and the ‘Implementation Regulation on the Offshore Wind Energy Act 2015′ (Uitvoeringsregeling Wet windenergie op zee 2015) (the “Implementation Regulation“).
The Regulation and Implementation Regulation follows from the legislative proposal for the Offshore Wind Energy Act (Wet windenergie op zee). The Dutch House of Representatives adopted this legislative proposal on 26 March 2015. It is now pending before the Dutch Senate. With this legislative proposal the legislature has, within a very short timeframe, created a new statutory regulation for the designation of locations for offshore wind farms and the issue of permits for the construction and operation of wind farms. This constitutes a major step towards achieving the government’s goal, which is to promote the generation of offshore wind energy, also for the purposes of implementing the Energy Agreement for Sustainable Growth (Energieakkoord voor duurzame groei).
The Regulation is based on the Stimulation of Sustainable Energy Production Decree (Besluit stimulering duurzame energieproductie, the “SDE Decree“) and contains further conditions for the grant of subsidy for sites I and II of the Borssele wind farm zone. The Implementation Regulation follows from the Offshore Wind Energy Act and mainly fleshes out certain requirements for granting a permit for an offshore wind farm.
Following an exchange of views with various interested parties, we have formulated some focal points regarding the Regulation and the Implementation Regulation. You will find those focal points set out in this blog.
The focal points discussed in this blog relate to the following issues from the Regulation and the Implementation Regulation:
(i) financial substantiation of the subsidy application;
(ii) ranking of the subsidy applications;
(iii) the Realisation Agreement; and
(iv) distribution of risks;
Stibbe will submit the focal points set out in this blog in the internet consultation. The focal points are summarised and shown in bold print. If you should wish to respond to the draft versions of the Regulation and the Implementation Regulation as well, you can submit your response until 30 April 2015 via the government’s dedicated website (https://www.internetconsultatie.nl/).
It goes without saying that, in your response, you are welcome to use the focal points mentioned in this blog, expand on them, deviate from them or raise them for discussion.
2. Re (i) – financial substantiation of the subsidy application
It is prohibited to construct or operate an offshore wind farm without a permit (the “Wind Permit“) (Article 12 of the Offshore Wind Energy Act). If multiple applications for a permit satisfy the relevant requirements, the permit will be granted to the applicant that received the subsidy (Article 21 of the Offshore Wind Energy Act). In other words, the party that succeeds in obtaining the subsidy has priority in obtaining the Wind Permit.
The applicant of the subsidy must include with its application, among other things, a financial substantiation as referred to in Article 56(2)(e) of the SDE Decree. According to the Regulation, the financial substantiation must provide insight into the applicant’s equity capital. This insight must be provided by submitting the most recent version of the applicant’s annual report.
2.1. The applicant’s equity capital
It appears from the Regulation that the applicant’s equity capital must be at least 5% of the total investment costs of the wind farm. This follows from Article 5 of the Regulation, which provides that the Minister will reject the application if the applicant’s equity capital is lower than 5% of the total investment costs.
It follows from the explanatory note to the Regulation that the background to this provision is that the Minister intends to avoid subsidies being awarded to parties without solid financial means. The 5% equity capital requirement, we assume, originates from the method of funding of these types of projects. Offshore wind farms are expected to be funded by means of project finance. Depending on the circumstances, the banks will require the contribution of a certain percentage of equity capital by the initiators (shareholders in the project company).
We wonder whether the 5% equity capital requirement is the proper indicator of the applicant’s financial solidity. In any event this requirement says little about the question of whether the applicant has sufficient cash available to release the required amount of equity capital for the project, either by payment on shares or as a subordinated loan.
With Design Build Finance and Maintain (DBFM) projects or Private Finance Initiative (PFI) projects, which are funded with project finance as well, the contracting authority often imposes requirements on the financial-economic strength of the tenderers. Tenderers must submit a statement from a financial institution in which it confirms that the shareholders are willing and able to invest a certain minimum of equity capital. The text of the statement is prescribed by the contracting authority, which also sets a certain minimum credit rating for the financial institution issuing the statement (see “Nation-Wide Model of the Tendering Instructions for DBFM Infrastructure Projects “, dated 2 January 2012).
The financial-economic requirement applied to DBFM projects and PFI projects in the Netherlands is more effective than the 5% equity capital requirement proposed in the Regulation. After all, the point is that the applicant must be willing and able to make a certain minimum amount available for the project.
The requirement regarding the applicant’s minimum equity capital (Article 5, Regulation) does not provide sufficient insight into the question of whether the applicant has enough cash to make a certain minimum amount of equity capital available for the project. The better alternative would be to require the applicants to demonstrate, by submitting a statement from a financial institution, that they actually have the requisite minimum contribution at their disposal.
2.2. Combinations and group companies
In the financial substantiation accompanying its application, the applicant must provide insight into its equity capital, specifically by furnishing its most recent annual report. This is evident from the proposed change to Article 2 of the General Implementation Regulation concerning the Stimulation of Sustainable Energy Production (Algemene uitvoeringsregeling stimulering duurzame energieproductie) (see Article 13(A), Regulation). As stated in paragraph 2.1 above (The applicant’s equity capital), the applicant’s equity capital must be at least equal to 5% of the total investment costs.
In Article 56(2)(f) of the SDE Decree the Minister expressly leaves room for parties to submit a subsidy application through a joint venture. That begs the question of how the applicant’s equity capital must be calculated if that applicant is a joint venture of parties. May the equity capital of each party to the joint venture be combined with that of the others? Also relevant is how a joint venture can provide insight into its equity capital. Generally speaking, joint ventures are formed specifically for a certain tender and will not yet have any annual report at the time of the application.
Similar questions arise with group companies. The explanatory note to the Regulation mentions that subsidiaries may count the parent company’s equity capital pro rata parte. However, it is unclear what ‘pro rata parte’ means in this regard. Possibly the parent company’s equity capital may be counted proportionate to its shareholding in the subsidiary, but that does not seem logical. Much more important, for example, is the question of whether the parent company’s equity capital will de facto be used to fund the subsidiary’s equity stake.
By way of comparison, the premise in procurement law is that if the tenderer relies on the resources of group companies or third parties in a joint venture, the tenderer must be able to show that it actually has those resources at its disposal (see, inter alia, ECJ 2 December 1999, no. C-176/98 (Holst Italia)). The tenderer can do so by means of an agreement with the group company or third party on whose standing it relies.
Further to the possibility to submit a subsidy application as a joint venture, the Regulation should contain provisions on: (i) the manner in which the joint venture’s equity capital can be calculated; and (ii) the manner in which a joint venture can provide insight into its equity capital (other than by submitting an annual report).
2.3. Financing plan
Generally, financing a wind farm requires both equity capital and loan capital. That is why Article 2(3) of the General Implementation Regulation concerning the Stimulation of Sustainable Energy Production initially contained the requirement that, with its application (and as part of the financial substantiation mentioned in Article 56(2)(e) of the SDE Decree), an applicant must:
(a) provide insight into its equity capital; and
(b) furnish a letter of intent from a financier for the financing of the production installation.
The Minister intends to relax these requirements for offshore wind farms. To that end the Regulation (in Article 13(A)) provides that the requirement regarding the financier’s letter of intent does not apply to production installations for the production of electricity by means of offshore wind energy. In the explanatory note to the Regulation, the Minister’s explanation for this change is that the letters of intent will not yet be available at the time the subsidy application is submitted. The Minister argues that the costs of constructing an offshore wind farm are a multiple of the costs required to generate wind energy elsewhere. According to the Minister this means that the financing process is more complex and time-consuming. Safeguards for the financial feasibility of offshore wind energy projects are required in a different manner, for example by the equity capital requirement of Article 4(4) of the Regulation and the bank guarantees to be furnished under the draft realisation agreement annexed to the Regulation (the “Realisation Agreement“).
There are several reasons why we do not follow this reasoning. It is true that the financing of an offshore wind farm generally involves higher amounts than the financing of an onshore wind farm. However, given sufficient time by the Minister, the applicants would also be able to draw up a sound financing plan for an offshore wind farm, providing insight into their equity capital as well as a letter of intent from the proposed financiers of the project. In our view, and in our experience, a time limit of 9 to 12 months should be sufficient. Importantly, by applying that time limit the scheduled commencement date for the operation of the wind farm need not be postponed. After all, if the applicants must draw up a sound financing plan even before submitting the application, the winning tenderer will need less time – after the subsidy has been granted – to obtain the financing and will be able to start construction sooner. In other words: if a sound financing plan is demanded in the context of the subsidy tender procedure, the period between award and financial close can be greatly reduced.
Another major advantage for requiring a sound financing plan is that the plans received by the Minister with the subsidy applicants will be better substantiated. This reduces the likelihood that the subsidy and the Wind Permit are granted to a party that later proves unable to finance the project.
In our opinion, the Minister’s argument in the explanatory note to the Regulation, that the financial feasibility of the project is already ensured by the capital requirement from Article 5 of the Regulation, does not hold. The capital requirement only relates to equity capital and is not specific enough (see paragraph 2.1 (The applicant’s equity capital)). Even if the equity capital requirement is met, that does not show whether a party or a joint venture will also be able to raise sufficient loan capital. The latter depends, for example, on the risks in the applicant’s plan, the contracts with contractors, suppliers and energy companies, etc. None of this is addressed by the applicant’s “equity capital”. Requiring a letter of intent from financiers is a much better indicator. After all, financiers will not be inclined to issue such a letter if they are not convinced of the soundness of the underlying (financial) plan.
We also do not believe that, as such, the requested bank guarantee, in combination with the penalty of € 5 million for the subsidy recipient that withdraws in the first 12 months after the date of the subsidy decision, provides the safeguard that a sound financing plan would offer (see paragraph 4.3 (Penalty upon withdrawal subsidy decision).
Another advantage of offering more time to the applicants is that they will be better able to calculate the tender price elements and determine the tender amount more precisely. This is discussed in more detail in paragraph 3 (Ranking of the subsidy applications).
As with subsidy applications for other types of sustainable energy production, the applicants should add a sound financing plan to the subsidy application for an offshore wind farm. In this plan they should provide insight into the manner in which they will raise loan capital and include a letter of intent for the financing by a financier.
3. Re (ii) – ranking of the subsidy applications
The Regulation provides that subsidy applications (not rejected on pre-designated grounds) are ranked on the basis of tender amounts (see Article 6(5), Regulation).
3.1. Tender amount
With the application, the applicant must state the tender amount, the full-load hours and the capacity of the installation. As stated, the applications are ranked on the basis of the tender amount, meaning the total amount of the subsidy required per kWh. The lower the tender amount, the higher the ranking. If multiple applications obtain the highest ranking (and therefore have the same tender amount per kWh) their mutual ranking is determined by drawing lots (see Article 6(9), Regulation).
While the tender amount may easily be stated in the subsidy application, determining and substantiating it will prove much more difficult. The applicant will not be able to determine the tender amount precisely if it has not first drawn up a financial model of the costs and revenues of the project.
In turn, the costs and revenues of the project can only be determined after the applicant has drawn up, among other things, a technical design of the wind farm. Based on that design, the applicant will be able to agree heads of terms with contractors and suppliers regarding the costs of building the foundation, the supply and installation of the turbines, and the operation and maintenance of the wind farm. The risks attached to the project will also need to be identified and analysed, in which regard the extent to which risks can be insured will play an important part. Another key cost item is the funding. The applicant will be looking to agree terms (at term sheet level) with financiers about the project funding. On the revenue side, the applicant will want to agree terms with an energy company regarding the power purchase agreement.
3.2. Application period
The Regulation is expected to enter into force on 1 December 2015. The application period will commence the next day and subsidy applications may be submitted until 31 March 2016 (Article 4(1), Regulation). Accordingly, there is, in principle, a period of 4 months for submitting an application.
The date on which the Regulation enters into force has not been fixed yet and depends on the adoption of the Borssele wind farm site decision (kavel besluit). Article 4(2) of the Regulation prescribes that if the Regulation enters into force after 3 March 2016, the application period will end on the fifth Thursday after the date of entry into force of the Regulation. In that case the period for submitting the application is only 4 weeks.
We believe that a period of 4 months is too short to precisely determine and substantiate the tender amount, let alone a period of 4 (!) weeks. We gather that the Minister is of the opinion that these time limits are feasible because the applicants will already have important project information at their disposal (e.g. seabed surveys). Although making project information available at an early stage is welcome, we do not think that this warrants a radical reduction of time limits like those now being proposed by the Minister.
If the time for preparing applications is too short, it is not possible to precisely determine and substantiate the tender amount forming part of the application. In extremis, the result would be that applicants either tender too high – because they apply mark-ups in the tender amount for risks that have not been properly assessed – or too low. In the former case the tender amount will be too high and the State will be paying an excessive subsidy; in the latter case there is a risk that the party receiving the subsidy will later withdraw because it is unable to obtain the financing. The system of the Regulation opens the door to parties that offer a low tender amount for opportunistic reasons and accept the risk that they might not be able to obtain the financing after all.
The explanatory note to the Realisation Agreement shows that the Minister is aware of the risk of opportunistic applications. The Minister wants to avoid that risk by including, in the Realisation Agreement with the subsidy recipient, an obligation to realise and operate the wind farm, in combination with a bank guarantee.
We are not convinced that this measure can prevent non-serious tenders – in particular because, during the first 12 months after the date of the subsidy decision, the subsidy recipient may still withdraw, on pain of a penalty of € 5 million. In our view this deterrence is not enough, when compared with the value of and potential return on the project (see also paragraph 4.3 (Penalty upon withdrawal subsidy decision)).
The proposed period for the application for a subsidy is at most 4 months and may possibly be reduced to merely 4 weeks. That period is too short to enable applicants to determine an accurate tender amount and substantiate it. The short time limit for submitting the application, combined with the possibility that subsidy recipients may withdraw from the project prematurely, opens the door to excessively low subsidy applications made for opportunistic reasons.
4. Re (iii) – Realisation Agreement
The subsidy decision is subject to the condition precedent of execution of the Realisation Agreement within 2 weeks of the date of the decision (Article 8(1), Regulation).
4.1. Obligation to start operation
The Realisation Agreement sets out an obligation on the part of the subsidy recipient to start operation of the wind farm within 5 years of the date of the subsidy decision (Article 1, Realisation Agreement). If the wind farm site decision has still not become irrevocable on the date of the subsidy decision, then the 5-year time limit commences upon the wind farm site decision becoming irrevocable (Article 10(2), Regulation).
Relevant here is how this 5-year time limit is broken down. The explanatory note to the Regulation says that the wind farm must be operational within 4 years of the date of the subsidy decision. That time limit is also found in Article 14 of the Offshore Wind Energy Act; the permit applicant must demonstrate that the wind farm will be operational within 4 years after the Wind Permit becomes irrevocable. Further to this, Article 15(1)(c) of the Offshore Wind Energy Act provides that the activities (i.e. the construction and operation of an offshore wind farm) must be performed within the time periods mentioned in the Wind Permit. The Minister may grant postponement of this time limit, in which regard – we assume – he will also stay within the 5-year time limit of Article 10 of the Regulation.
Under the SDE Decree, in specific situations the Minister may grant an exemption (i.e. postponement) from the obligation to realise and operate the wind farm in accordance with the subsidy recipient’s plan (Article 62(3), SDE Decree). However, the exemption may not result in the wind farm starting operation more than 6 years after the date of the subsidy decision.
The holder of the Wind Permit must start operation of the wind farm within the time limits mentioned in the permit. The Minister may grant a postponement of these time limits up to 5 years after the date of the subsidy decision and, in specific situations, up to 6 years after the date of the subsidy decision. Any delay (or aggregate of delays) exceeding the 5-year time limit or, for specific situations, the 6-year time limit, is at the expense and risk of the permit holder, regardless of the cause. This condition may impede the financing of the project.
4.2. Subsidy period
The subsidy period is 15 years (Article 9, Regulation). Relevant here is that the subsidy period, depending on the situation, may commence before the start of operation of the wind farm and that the subsidy recipient will thus miss out on an amount of subsidy.
The subsidy period commences on the date mentioned in the plan submitted with the subsidy application (Article 6(2), SDE Decree). The subsidy recipient may change the subsidy commencement date up to three times, subject to the condition that the subsidy will in no event commence later than 5 years after the date of the subsidy decision (Article 6(2) and Article 61(1), SDE Decree, and Article 10, Regulation).
As stated above, on the basis of Article 62(3), SDE Decree, the Minister may grant postponement of the obligation to start operation, up to 6 years after the date of the subsidy decision. No such possibility exists for the subsidy period. The result can be, at least theoretically, that the wind farm starts operation 6 years after the date of the subsidy decision, while the subsidy period commenced one year earlier, being 5 years after the date of the subsidy decision. In that case only a subsidy for 14 years remains on the date that the wind farm starts operation.
The subsidy period commences on the date mentioned in the plan that the applicant submitted with its application. During the course of the project, the subsidy recipient may change the subsidy commencement date up to three times, but in no event beyond 5 years after the date of the subsidy decision. Any delay (or aggregate of delays) exceeding the 5-year time limit will be deducted from the 15-year subsidy period and is effectively at the expense of the subsidy recipient. This condition may impede the financing of the project.
4.3. Penalty upon withdrawal of the subsidy decision
Within 4 weeks of the date of the subsidy decision, the subsidy recipient must furnish a bank guarantee of € 5 million (Article 2, Realisation Agreement). This bank guarantee corresponds with the € 5 million penalty the subsidy recipient stands to forfeit if the State withdraws the subsidy decision within 12 months of the date of the subsidy decision on request of the subsidy recipient . Twelve months after the date of the subsidy decision, the subsidy recipient must furnish a bank guarantee of € 25 million (or raise the € 5 million bank guarantee to € 25 million).
With this scheme, the Minister gives the subsidy recipient the opportunity to withdraw during the first 12 months of the project if it does not succeed in reaching financial close, but on pain of a penalty of € 5 million. We believe that this penalty does not provide enough deterrents. In addition, this scheme facilitates opportunistic applications. It allows a party to submit a low tender amount and then speculate on reaching financial close after the subsidy has been granted. The risk this entails is forfeiting a penalty of € 5 million. Given the value of the offshore wind farms and the potential returns, it can by no means be ruled out that a calculating applicant would be prepared to take that risk.
A penalty of € 5 million (by itself) for withdrawing from the project prematurely might provide insufficient deterrents. In our view this penalty should be combined with an obligation on the part of applicants to submit a sound financing plan with the subsidy application, along with a letter of intent from a financier for the financing.
4.4. Penalty upon late start of operation
The penalty for a late start of operation of the wind farm amounts to € 2.5 million per month, capped at € 25 million (Article 4, Realisation Agreement).
As we see it, these penalties will not achieve the desired effect. In principle the commencement date of the subsidy period is linked to the date on which the wind farm must start operation. If the two dates differ (if at all), only the commencement date of the subsidy period can lie before the compulsory date of the start of operation (see paragraph 4.2 (Subsidy period)). If a delay has occurred with regard to the compulsory date of the start of operation for which the Minister has granted no exemption (i.e. postponement), then that delay will be deducted from the 15-year subsidy period. A reduction of the subsidy period translates into less subsidy income and represents a major loss for the subsidy recipient (and its financiers). Moreover, as a rule the subsidy recipient will undertake to the banks to make repayments and interest payment as from the scheduled date of the start of operation. If it is late with the start of operation, the subsidy recipient will be forced to make repayments later, resulting in additional costs under the finance documents.
Together with the additional costs under the finance documentation, the reduction of the subsidy period provides sufficient incentive for the subsidy recipient to start operation of the wind farm in good time. The penalty from Article 4 of the Realisation Agreement adds nothing to this other than that the subsidy recipient’s loss – which was considerable already – increases even further. An additional negative impact of penalties is that the subsidy recipient will take the risk of those penalties materialising into account in its financial plan by applying risk mark-ups. These mark-ups will increase the tender amount so that, at the end of the day, the State foots the bill.
In our opinion the penalties for the late start of operation of a wind farm have marginal effect, if any. We propose leaving them out.
5. Re (iv) – distribution of risks
Generally speaking, offshore wind farms will be funded by means of project finance. The distribution of risks plays an important part in this respect. Risks can drive the price up and form an impediment to the financing. The Regulation, the Realisation Agreement and the Implementation Regulation are, in our view, the proper instruments for recording and detailing the risk distribution between the State and the subsidy recipient. However, no such risk distribution is to be found in the Regulation, the Realisation Agreement and the Implementation Regulation currently submitted for consultation.
Below, we provide some examples of risks and make a suggestion for their distribution between the State and the subsidy recipient. Absent a further distribution of these risks, we expect the financing of the upcoming projects to be seriously hindered.
5.1. Changes to the wind farm site decision
According to the latest planning, the Minister will take the Borssele wind farm site decision in November 2015. The expectation is that the Regulation will enter into force on 1 December 2015. The Regulation provides that subsidy applications must, in principle, be submitted before 31 March 2016 (Article 4, Regulation). The wind farm site decision is subject to the Crisis and Reform Act (Crisis- en herstelwet) (Article 8, Offshore Wind Energy Act). If an appeal is lodged against the wind farm site decision, the Council of State must render judgment within 6 months; for Borssele, this means by mid-2016. As a result, the wind farm site decisions might not be irrevocable on the date of the permit decision. It is, however, expected to become irrevocable within the period planned by the applicants for obtaining financial close.
A major risk is that the wind farm site decision may yet change after the subsidy application has been submitted, due to the fact that this decision has not yet become irrevocable. Those changes may have pervasive effects. For example, the wind farm site decision contains the conditions for the construction and operation of the farm, including the outer contours, the height of the blades, and the maximum blade surface. Any change to these conditions will have a major impact on the subsidy recipient’s design (including the lay-out of the wind farm, the foundation technology to be applied, the type of turbine, the rotor blades and towers) as well as the tender amount offered.
The Regulation hardly offers the subsidy recipient any protection from changes to the wind farm site decision. While the Realisation Agreement (Article 4(7)) provides that the subsidy recipient may, in the event of any change to the wind farm site decision, without forfeiting a penalty submit a request for withdrawal of the subsidy decision, the subsidy recipient does not have the right to adjust the amount of the subsidy. In our opinion this is unacceptable. After all, this is a situation in which the subsidy tender procedure has already been completed and won by the (incumbent) subsidy recipient. The subsidy recipient will rarely demand withdrawal of the entire subsidy decision – it will only require adjustments in response to any changes to the wind farm site decision.
The subsidy recipient should be protected under the Regulation from changes to the (still not irrevocable) wind farm site decision. The amount of the subsidy should then be adjusted by means of a mechanism to be included in the Realisation Agreement.
5.2. Delay and the wind farm site decision
In addition to the right to change the tender amount, the subsidy recipient should also be given the right to postponement of the operation start date if a change to the wind farm site decision leads to a critical delay (for example, the situation where the design needs to be adjusted in response to a changed wind farm site decision). The Regulation appears to provide for this only in part.
Article 10(2) of the Regulation contains an obligation to start operation. It provides that the subsidy recipient must start operation of the wind farm within 5 years of the time that the wind farm site decision has become irrevocable. This provision offers some measure of protection, as the 5-year time limit is linked to the time that the wind farm site decision becomes irrevocable. Moreover, the 5-year time limit includes a buffer of 1 year for delays caused by unforeseen circumstances and the Minister may, based on Article 62(3), SDE Decree, decide to grant an extra postponement of 1 year (see also paragraph 4.1 (Obligation to start operation)).
The issue lies in the commencement date of the subsidy period. According to Article 6(2) of the SDE Decree, the subsidy recipient may change the commencement date at most three times, but only up to a total of 5 years after the date of the subsidy decision. If, due to a delay in adopting the wind farm site decision or due to a change to the conditions of the wind farm site decision, the wind farm has not started operation within 5 years of the date of the subsidy decision, any further delay will be deducted from the subsidy period. This means that the subsidy period will effectively be reduced by any delay in excess of those 5 years. That will cause the operator of the wind farm (and the financiers) to suffer a loss (see also paragraph 4.4 (Penalty upon late start of operation).
The Regulation does not include any arrangement for compensating the subsidy recipient’s loss due to such delay, and as things stand that loss must apparently be borne by the subsidy recipient. The subsidy recipient’s loss could include extra financing costs, such as interest on the principal, commitment fees and (interest) restructuring costs.
In this context Article 5(2) of the Realisation Agreement also poses problems for the subsidy recipient. It provides that any commencement of construction before the wind farm site decision has become irrevocable is at the expense and risk of the subsidy recipient.
The subsidy recipient should be protected under the Regulation from delays caused by changes to the (still not irrevocable) wind farm site decision. In that event the subsidy recipient should be entitled to postponement of the scheduled date for start of operation, postponement of the scheduled commencement date of the subsidy period and compensation of additional costs, including extra financing costs.
5.3. Objection and appeal against the subsidy decision and Wind Permit
The winning applicant will be granted a subsidy by means of a subsidy decision and, as a rule, may also lay claim to the Wind Permit.
Unlike the wind farm site decision, the subsidy decision and the Wind Permit are not subject to the Crisis and Reform Act. Consequently, both decision are open to objection, a request for suspension and appeal, according to the ‘regular’ procedures of the General Administrative Law Act (Algemene wet bestuursrecht). This means that it may take years for the subsidy decision and Wind Permit to become irrevocable.
The winning applicant will generally try to achieve financial close within 6 to 12 months after the grant of the subsidy. However, as a condition for financial close, the banks will generally require the subsidy decision and Wind Permit to be irrevocable. Under the Regulation, it is a distinct possibility that this requirement cannot be satisfied. After all, the objection and appeal procedures may take much longer than the aforementioned period of 6 to 12 months after the subsidy grant.
The latter risk is compounded by the fact that the losing applicants will likely target the subsidy decision and Wind Permit. These, after all, are the decisions taken in follow-up to the ranking of the subsidy applications (grant of the subsidy). Given the system of the Regulation, we believe it cannot be ruled out that the losing applicants may effectively prevent the winner from achieving financial close by initiating objection and appeal procedures against the subsidy decision and Wind Permit.
This problem could have been solved by declaring the Crisis and Reform Act applicable to the subsidy decision and the Wind Permit as well, in the Offshore Wind Energy Act. That is no longer a realistic possibility, as the legislative proposal has already passed through and adopted by the House of Representatives. As an alternative, the State could indemnify the winning applicant from any negative consequences of objection, suspension or appeal. That is not unusual; in Dutch DBF M or PFI-based infrastructure projects, the State compensates the winning applicant in the event of:
“(…) a decision by the competent administrative authority or competent court further to a request, objection or appeal from a third party to withdraw, suspend or avoid, whether or not by way of preliminary relief, a Permit to be obtained by the Contractor, all such in so far as the Contractor shows that the application as submitted meets the rules for processing it (…)”
Such a scheme, to be included in the Realisation Agreement, makes it possible to achieve financial close without the subsidy decision and Wind Permit being irrevocable. Objection and appeal against the subsidy decision and the Wind Permit not only represent a risk of delay but also a risk that these decisions may yet be changed after they have been issued. That risk was already discussed with regard to the wind farm site decision (see paragraph 5.1 (Changes to the wind farm site decision)). A similar compensation mechanism should be included for the subsidy decision and the Wind Permit in the Realisation Agreement.
The subsidy decision and Wind Permit are open to objection and appeal according to the ‘regular’ procedures from the General Administrative Law Act. Consequently, it may take years before these decisions become irrevocable. However, as a rule the wind farm financiers will require these decisions to be irrevocable before financial close can be achieved. As things stand, objection and appeal against the subsidy decision and Wind Permit may cause serious delay. This risk can be limited if the State assumes the negative effects of objection and appeal against the subsidy decision and Wind Permit by virtue of a provision in the Realisation Agreement.
5.4. Other risks
Besides the risk of changes to the wind farm site decision (see paragraph 5.1 (Changes to the wind farm site decision) and 5.2 (Delay and the wind farm site decision)) and the risk of objection and appeal against the subsidy decision and the Wind Permit (see paragraph 5.3 (Objection and appeal against the subsidy decision and Wind Permit)), various other risks have not yet been addressed in the Regulation, the Implementation Regulation and the Realisation Agreement. For example, relevant changes to legislation and regulations and force majeure. Based on the Regulation and the Implementation Regulation, it is unclear whether the Minister will allow a subsidy recipient postponement of the scheduled date for the start of operation and of the scheduled commencement date of the subsidy period if any of these risks should materialise.
Furthermore, in our opinion – and at variance with Article 5(1) of the Realisation Agreement – the State should assume the risk of the occurrence of facts or circumstances that are not evident from the information provided by the State and of information provided by the State being inaccurate. After all, the applicant will base its tender on that information (including archaeological and geological research information) and will be unable to conduct an independent investigation to verify whether such information is complete and accurate.
In Dutch DBFM or PFI-based infrastructure projects, the State grants a postponement to the contractor in the event of ‘supervening events’ (defined in the Nation-Wide Model of the DBFM agreement), which include risks of the sort mentioned above. In addition, the State compensates the financing costs of the contractor caused by the occurrence of ‘supervening events’, such as the extra interest on the principal, commitment fees and (interest) restructuring costs. There are also ‘supervening events’ in which the State compensates the entire financial loss incurred by the contractor, such as the costs of delay of the contractor’s subcontractors. See, inter alia, Article 9 of the Nation-Wide Model of the “DBFM Agreement Rijkswaterstaat”, version 4.1.
Several risks, such as force majeure and changes to legislation and regulations, are not addressed in the Regulation, the Implementation Regulation and the Realisation Agreement. If these risks materialise, the State should grant postponement of obligations to the subsidy recipient. By extension, the State should compensate the subsidy recipient’s additional costs caused by these risks materialising.
The State should also assume the risk of information it has provided being incomplete or inaccurate, and grant a postponement of obligations and compensate additional costs if that risk materialises.
The government has set itself the goal of promoting offshore wind energy. By issuing draft versions of the Regulation on Offshore Wind Energy 2015 and the Implementation Regulation on the Offshore Wind Energy Act 2015, it has taken another major step towards that goal.
Upon examination of the draft versions of these regulations, several questions came up, which led us to formulate the focal points set out in this blog. We will introduce these focal points in the internet consultation in hopes that the Minister will incorporate them in a next version of the regulations.