News & Insights // Green Energy: The Real Risks


Converting the country to “green” energy is a major priority of government. Wind farms are springing up like dandelions and soon roofs will glitter with photo-voltaic panels. Further ahead, turbines will spin silently in the tides.

As well as heat and power, all of these installations generate something equally attractive: a steady flow of revenue, supported by tax relief, payment for electricity put back into the grid, and other state financial aid. The number of schemes on offer for installation of solar (photo-voltaic) panels alone shows how much interest there is in (financially supported) green energy as an investment. Investors and funders entering a market such as this have their own criteria.

These are likely to include:

Predictability:
There must be no obvious reason why the source of revenue will not continue for the expected period so, for example, the legal mechanism for the installation (a lease, licence etc.) must be reliably valid and effective if ownership of the building changes.

Liquidity:
The investor or funder should be able to sell on their interest without major difficulty.

Consistency:
All of the revenue sources should be as alike as possible in terms of their legal footing, to simplify any future due diligence.

Vulnerability:
The revenue sources should, as far as possible, be protected from disruption and compensation should be available if it happens.

Transactional costs:
The legal and other costs of securing the right to install the equipment need to be predictable and as low as possible.

From that perspective, what could go wrong with an energy project, and what would be the consequences for an investor or a funder? Problems could strike at different phases of installation and during the life of the generating equipment (which seems typically to be taken as 25 years). The problems below are all related to the legal and planning aspects of the installation. Other problems, such as failure of the equipment itself, public liability for any damage it might cause or damage caused to the building itself, also need to be kept in mind.

The legal and planning risks could be that:

the equipment (PV or wind) can’t be installed because someone else (a freeholder, a neighbour with the benefit of a restrictive covenant or a planning authority, as examples) takes steps to prevent it

with wind plant, the boundaries of the site are uncertain (not an uncommon problem given that mapping in remote areas leaves a substantial margin of error)

the equipment has to be taken away (possibly for one of the reasons above or, most seriously, because the person who allowed it to be installed had no right to do so)

the PV equipment can’t be used (perhaps because someone else can object to electrical or water connections running through their property

the equipment (of either type) can’t be serviced or repaired because someone else is able to deny access to it.

If any of these happens, there are three possible financial effects. First, there may be costs involved in defending
the right to install the equipment, use or maintain it or keep it in place. Secondly, revenue may be lost if the use
of the equipment is interrupted for any of the reasons above. Finally, if the equipment has to be taken away,
there may be the cost of the removal works, the lost value of the equipment itself and a loss of the revenue it
would have generated.

A well-designed package of insurance coverage can help address all of these factors. Looking still at the legal and
planning aspects, insurance can be effective at each stage of the life of an energy project.

Insurance can cover the cost of resolving disputes during the installation phase. It can give the same cover,
and deal with the problem of complete loss of the site, and temporary or permanent loss of revenue, during
the equipment’s operational life. Finally, insurance can avoid the need for repeated due diligence, and so
enhance the liquidity of assets and associated debt, as part of investment and funding trading. Risks can be
clearly identified (and their financial consequences quantified), and transferred away from investors, funders
and lawyers. All we need then is for the sun to shine and the wind to blow.

Please contact Brian Chrystal, Underwritriting Director and Solicitor, at CLS for further information or to discuss a village green or any other title-related matter on brian.chrystal@clsl.co.uk or call 01732 897 530.

All insurance policies issued by CLS are underwritten by Great Lakes Reinsurance (UK) PLC, a wholly-owned subsidiary of Munich Re. Munich Re has been awarded robust ratings by the leading rating organisations. Please see http://www.munichre.com/en/ir/ ratings/ratings_01.aspx for current ratings.

October 2011