Enhancing the financial performance of energy assets: understanding legal obligations
Published on 23rd Oct 2020
As the regulator Ofgem becomes increasingly interventionist, it pays off to be aware of directors' duties, health and safety risks, and the detail of power purchase agreements and other schemes.
Wholesale electricity prices have fallen to their lowest level for a decade, which has made it even more crucial for energy investors to address threats to the financial performance of energy assets through risk management. One of the most effective ways for investors and asset managers to do this is to ensure that their legal obligations are proactively managed and understood.
The financial performance of energy assets can be enhanced by understanding related legal obligations. A recent Osborne Clarke webinar considered how this can be achieved, looking at: directors' duties and why they matter across a portfolio; responsibility and effective delegation, and health and safety liabilities in practice; and obligations and opportunities offered by power purchase agreements (PPAs) and other schemes.
There are three main areas where directors of energy assets should be aware of their statutory duties to the company:
- Conflicts of interest across a portfolio: These can arise when directors represent multiple companies across a portfolio. If there is any risk of conflict, directors should disclose this to the board as soon as possible. Directors need to consider which "hat" they are wearing when they are making decisions.
- Reviewing regulatory compliance: Directors could face personal liability for any non-compliance with regulations.
- Solvency and restructuring: If a company is restructuring its equity or refinancing, the directors will need to consider their duties and make decisions on statements for which they may be liable, and if a company becomes insolvent, directors no longer owe their duties to shareholders, but instead to creditors to preserve the company's value.
If a director is found to be in breach of their statutory duties, then they will be personally liable. There are various remedies that can be claimed against a director, the most common of which is a financial claim, including the payment of damages and requiring the director to pay back profits they have made through the improper use of opportunities or information belonging to the company.
Directors therefore need to exercise caution when making decisions. To minimise risk, directors should be rigorous about whose interests they are representing, and ensure all decisions are carefully documented. It is important that directors ensure they have enough information to make informed decisions, and that they use their own judgment when doing so. Directors should take appropriate professional advice where possible, particularly if a company is facing financial difficulty, and directors should ensure that they engage with the management team on a regular basis.
Health and safety risks
Effective delegation both internally and to third parties, such as contractors or specialist consultants, is an essential part of managing health and safety risks. However, an organisation retains health and safety obligations. While a contractor may carry out a particular activity, it does so in connection within the scope of an organisation's undertaking. The Health and Safety at Work Act 1974 requires an employer to reduce the risk to health and safety of those (contractors, visitors or the general public) who may be affected by its undertaking, effectively its business activities.
Delegation can narrow the scope of responsibility and so liability. However, key to this is having visibility of how effective an individual or party undertaking an activity on an organisation's behalf is in working safely.
Directors and senior managers have personal criminal liability in the event that a company fails to meet its health and safety obligations and that failing is due to the officer's “consent or connivance”, or where their neglect permitted the safety failure. The test is not whether an individual knew of the risk, but rather that in the circumstances it was reasonable for them to do so and that they had the capacity to take some action to control it.
The ways in which directors and officers can demonstrate that they are discharging their obligations insuring that those with the delegated duties are competent, that they are sufficiently resourced, that they understand their role and responsibilities and that there is some degree of check as to their health and safety performance. Some degree of active monitoring is necessary to demonstrate that reliance on the delegation is reasonable, however this need not be onerous, but instead a proportionate response to the risk involved.
PPAs and industry schemes
How asset revenue can be best enhanced from a power offtake perspective will to some extent vary depending on the type of PPA that applies to a project, the term of the arrangement, and the position of the parties (and any financer) involved. When seeking to enhance asset revenue from a PPA perspective – particularly in the current market where we are seeing depressed prices and low offtaker margins – it is vital that the agreement is transparent around pricing, particularly when revenue share models are being used and clarity over how the services and underlying payment streams break down can be harder to ascertain.
Clarity must be sought around how invoice validation will work, particularly as many offtakers move to self-billing. PPAs in the utility offtake space have shown a real trend towards the utilisation of self-billing in recent years, meaning it has been increasingly difficult for a generator to validate calculations used by the offtaker. Apportionment of responsibility for invoice validation can be a key point for negotiation where an asset manager is involved and it is vital all parties are clear on how this will work and where responsibility for retaining records sits.
Another key revenue protection point which will be relevant to some plants is how any ROCs awarded to that plant are traded. Clearly, this is only relevant to plants which have been operational for some time, but we've seen some innovative structures around this. Consideration should be given to whether ROCs could be sold separately from power to minimise credit risk, or whether alternative structures could be employed.
It is important to reach commercial agreement on when credit support will be called at the outset or during the term and, if the latter, to be clear on how any conditions around the call of credit support will be met (and monitored). The overarching message is that the PPA is a dynamic instrument – it needs to take the strain of change and be revisited regularly.
From a regulatory and incentives schemes perspective, Ofgem continues to investigate historic commissioning and accreditation issues with operating plant, with potentially serious consequences (including revocation of accreditation and clawback of payments) where non-conformances are identified. It remains vital for asset owners and managers to understand and have in place their evidence chain in relation to commissioning and accreditation, particularly where an asset or portfolio has been acquired from another party.
Ofgem is increasing the number and frequency of audits, with the specific intention of identifying misreporting of data and non-compliance with reporting obligations. It is important that asset owners and managers understand and can stand behind their data position in the event of the UK regulator initiating an audit.
The impact of data issues on the performance of an asset can be significant; problems identified by Ofgem can result in suspension of payments, clawback and potentially withdrawal of accreditation entirely. The answer is to ask questions within an organisation to ensure that it has in place robust evidence, policies and procedures to ensure maximum preparedness in the event of an approach from an increasingly interventionist regulator.