Matthew Clayton, lead counsel in Total Group’s renewables team, argues that traditional approaches to project development are failing the solar sector’s needs
Matthew Clayton, head of legal for renewables at the French global energy company, warns that traditional approaches to project financing in European renewables may be constraining its competitiveness. The rigid finance model imported from traditional energy sectors in Europe can smother projects and leave the door open for less traditional players from other regions, most notably the Middle East and Asia. Clayton also argues that solar project development is evolving rapidly and national regulators and governments, as well as legal counsel and lenders need, in some cases, to rethink their approaches. Total has launched itself into renewables, in particular solar power, with projects in over 30 countries worldwide and in 2016 it announced a tender offer for industrial battery maker Saft.
What's your reading of the renewables sector and where are some of the impending challenges?
The renewables sector is very healthy. At Total we're largely focused on solar. The reduction in solar cell prices has made solar incredibly successful over the past two to three years and there are huge opportunities to move that sector forward in the coming years. There are challenges in having a lot of people very interested in solar. We've seen a lot of competition and at the same time perhaps not a lot of experience, both on the side of the developers and finance providers, and on the side of the off-takers or governments that we're working with. There are a lot of challenges coming through the market and they're not being settled quickly enough. For example, in many of the areas where we're looking to move forward and introduce solar projects, the legal framework has not been settled or adapted to facilitate renewables entering the energy mix.
Are regulatory frameworks across Europe going in the right direction to support renewable project development?
We're involved in a broad mix of jurisdictions and since legislation is very often country specific, there's a wide variety of attempts to make solar work. In some cases, we've seen resistance to having solar work; this has come from the traditional energy producers and/or grid operators which are facing some technical and competitiveness challenges resulting from additional producers, with different cost structures and intermittent energy delivery, for example. The good news is that we have been seeing some governments attempt to deal with these issues, not only on large utility-scale solar plants but more and more where we're looking at smaller business-to-business projects.
The questions that arise here are whether a smaller industrial user can produce its own electricity or tap someone producing their own energy and buy it. What happens to the excess electricity that is produced but cannot be sold into the grid? Can there be wheeling arrangements? And so on. We see attempts to deal with this but in many areas the opportunities for solar are growing faster than the ability of the regulators and legislators to adapt their legal frameworks to facilitate those developments.
How important is it for national regulators to be forward-thinking on their legal frameworks?
The legal frameworks are key. Projects need to attract the right kind of financing to be competitive, and to be able to build a business and absorb the costs of launching a business in a new country. A useful example is that of the French market, where French authorities have been able to adapt and interpret some of the legislation to make it clear that the idea of having self-production or self-consumption is broad enough to allow a developer to use renewable power, structure a project and own and operate a plant for a commercial off-taker. There is still some work that needs to be done and some clarification to be made as programmes are put into place.
In other countries, we're seeing legislation that is unclear about whether a solar developer can own an asset on an industrial or commercial site and be considered self-producing. This of course can make it more complicated to put in place the financing structures that are needed to make the price of self-produced electricity competitive with that available from the grid. Although the legislative intent seems clear, getting the details of the various bits of regulations at different levels working together and clearly often requires work and slows down development initiatives. One of the advantages of a renewables model, when done right, is bringing clean, affordable power to the right off-taker at the right site. Many places seem still to be going through the teething pains of making this model work.
Is commercial financing readily available for solar projects?
I get the impression that the traditional project financing markets want to provide financing but are a bit caught up in a risk-analysis model that is too rigid – leading to taking too long to negotiate bankable power purchase agreements, adding high costs for lenders due diligence, and ultimately making development too expensive to provide the returns sponsors need to make their projects come to light.
Have you seen successful instances where the project financing approach has been rethought and been able to unlock projects?
We have been able to work productively with outside counsel, both on the sponsors' side and the lenders' side, to try and streamline the process and not duplicate work where the sponsors' and the lenders interest should be aligned. I believe it's sometimes difficult for lenders to get comfortable with these kinds of arrangements in jurisdictions where there is not a long track record of solar project financings, but as an industry we need to find ways to digest the fact that the risks and amounts at stake for renewables projects are not the same as for large conventional energy projects where the project financing models were developed. If not, western project financing will have a hard time providing competitive solutions, and the financing and projects will come from other lenders and sponsors.
What evolution have you had to go through inside Total to diversify into these very different energy markets and what does it mean for what you need from external counsel?
The pressure to come out with competitive projects has pushed us to rethink how we do some things. Change is needed for success, and some of these changes have helped us learn how to better adjust to challenges in the solar sector. Being willing to take more collaborative approaches with sponsors, outside lawyers and internal lawyers and working together with lenders' counsel has helped. We need to go further, and think about who does what not just best, but with the most added value and cost-efficiency. It takes outside counsel who are very in tune with the needs of the market and with the approach that renewables project sponsors are taking to make those projects come to fruition.
For example, we have multi-billion-dollar oil and gas projects coming through that we are doing project financings on, compared to a $50 million, $80 million or $100 million solar project; you just can't have the same legal bills from the lender's counsel and then again from the sponsor's counsel. Both inside and outside lawyers have to change their mindset to be able to focus quickly on what are the real deal killers and what are acceptable levels of risk for renewables projects – which don't have the same risk profile as some of these major oil and gas projects.
If things don't change, is there a risk that European sponsors might lose out competitively to Asian or Middle East counterparts?
Yes, it is already very difficult and we're seeing some appetite from Asia and the Middle East to finance these projects. We've had opportunities to work with partners from those areas and they have come up with some very good proposals. But clearly the market is going to be sorted out and there are different developers out there who are very interested in gaining and keeping market share right now but who are having a hard time understanding whether the directions they are going in are economically sound.
What is the prospect for traditional oil and gas companies that do not diversify into renewables?
I won't make any predictions – the energy industry has never been very good at predictions. One thing everyone does agree on is that there is a need for more renewable energy in the energy mix and at Total we have decided to be very involved in that movement.
|About the author|
Matthew Clayton is the head of the renewables legal team at the Total Group. After both studying law and working in New York and Paris, Clayton joined the legal team at Total to focus on corporate and securities law, project financing and mergers and acquisitions. After leading the legal work on Total's first large solar project in 2008, Clayton spent a significant amount of time helping Total develop its renewables activities through its investments in several companies listed in New York. He and his team are now principally focused on developing solar projects in nearly 30 jurisdictions around the world.