Payment milestones and price adjustments in the sale and purchase of greenfield renewable energy project companies
Published on 26th Feb 2021
The sale and purchase transactions of companies owning greenfield renewable energy projects present particularities in terms of payment milestones and price adjustments insofar as their structure is based on the fulfilment of the various administrative and construction phases that these projects must undergo before they can start producing energy.
Due to the characteristics of the investment, linked to investors' decarbonisation and ESG objectives, and its attractive profitability, derived on the one hand from the learning curve based on years of investment in technological development, and on the lower cost of equipment, the renewable energy sector has been experiencing an investment euphoria for several years, giving rise to numerous acquisition transactions involving companies owning projects in development (greenfield) and in operation (brownfield) of renewable energy generation plants. In particular, in the acquisition of greenfield project companies ("SPVs"), the sale and purchase agreements ("SPAs") have certain particularities related to the timing of the transfer of the SPVs, the determination of the price and the payment milestones, which require a great deal of sector knowledge on the part of the teams involved in the negotiation (corporate, public-regulatory, real estate).
The timing of the transfer of ownership of the SPVs (and thus of the risks associated with the project) to the buyer is conditioned by the stage of administrative processing and construction of the project, and also by the investor's risk profile. Thus, investments in greenfield projects in which investors acquire ownership of the SPVs by assuming only the construction risk, and even the project development risk, are becoming increasingly common, either at the earliest stage of project development (early stage), when the project only has evacuation and land rights, with a higher risk in terms of the prognosis of its viability, or at an intermediate stage of the project's development (mid stage), which usually coincides with the granting of environmental authorisation for the project, or finally, once the SPVs have obtained all licences, permits and authorisations ("PLAs") and all land rights necessary for the construction, operation and evacuation of the plant, i.e. when the project reaches "Ready-to-Build" ("RtB") status. Once RtB is reached, the construction phase begins, and the notification to the project construction contractor of the commencement of the works on the plant and its connection infrastructures and, finally, once the project begins to operate, produce and discharge energy to the grid, the Commercial Operations Date ("COD") is reached and the brownfield phase begins, with the operation of the plant.
To the extent that the sale and purchase of greenfield investments is conditional upon the fulfilment of certain administrative milestones, it is common for SPAs to be initially entered into as a private document (the signing) which does not produce the full transfer of ownership of the SPV, but which will establish the obligations relating to, inter alia, the conditions that must be met for the parties to be obliged to raise the SPA into a public document (i.e. to formalise the closing of the transaction, giving rise to the effective transfer of the SPV), the compliance with the milestones of the administrative processing and construction, to which the successive milestones for payment of the price are conditional, and finally the guarantees to be provided by the seller and/or buyer.
Thus, if the closing takes place when the project is in early or mid stage, it is common for the buyer to pay a small percentage of the price at closing, with the remainder deferred to RtB and/or COD. In these cases the buyer will require from the seller a guarantee of the return of the payment made in case of termination of the SPA if the project does not reach RtB status. However, if the closing takes place when the project reaches RtB status, the buyer will pay 100% of the purchase price at closing, although it is common for the seller to negotiate an upfront payment at signing (against the seller's guarantee of its return if the closing does not take place) and there are other occasions when the buyer will negotiate a deferred payment to COD, which will give rise to the need for the buyer to provide the corresponding guarantee of such deferred payment.
The price of SPAs is usually established on the basis of a price €/MWp of installed capacity, assuming all the costs of the project, i.e. those associated with obtaining the PLAs for the project to reach RtB status, those of securing land rights (including, where applicable, the price and expenses of the administrative procedure for the expropriation of land), the construction costs, as well as those corresponding to the fees for processing licences and taxes applicable to construction, and the connection costs. However, as the price is determined by the plant's capacity to produce electricity, it is usual for the SPAs to contain detailed price adjustment mechanisms in the different phases of the Project's development, depending on:
- the SPV's net debt at the closing date (for more information on this price adjustment: Price adjustment vs locked box - Osborne Clarke | Osborne Clarke)
- the installed capacity of the project at the COD date, depending on whether it was lower or higher than the estimated capacity.
- the energy production of the project, depending on whether it is below a certain figure.
- the variation in the development and construction costs.
Finally, where the seller is itself the developer of the plant, the overall price of the transaction is usually split between the price of the SPA and the price of the development services agreement signed between the seller/developer and the SPV. In these cases, it will normally be a matter for negotiation to determine which development costs are borne by which party and, in particular, who bears the fees and/or costs associated with the contracts for obtaining the land rights and their raise to public deed and registration in the Land Registry.