The revised Renewable Energy Directive, adopted in 2023, increased the EU’s binding renewable energy target for 2030 to a minimum of 42.5% share in the gross final energy consumption, up from the previous 32.5% target.¹
Historically, Member States have been free to choose their own policy instruments to reach national renewable energy targets. Feed-in-Tariffs (“FiTs²”) used to be the prevalent support policies for scaling up renewable electricity capacity, along with Feed-in-Premium (“FiPs³”).
The legal frameworks implemented by the Member States for the producers to benefit from these mechanisms sometimes leave room for interpretation, which creates uncertainties with respect to the level and/or duration of FiTs or FiPs.
In the context of an M&A deal, these uncertainties can be highly disruptive in the valuation process of the target company and possibly result in a deadlock situation between buyer and seller. Investors are expecting a high degree of predictability over future cash flows deriving from the regulated remuneration when assessing the viability of an acquisition. The risk of overpaying for the assets should the FiTs or FiPs be terminated, reduced or subject to a claw back post-closing may impair significantly the attractiveness of a renewable energy target.
Over the past few years, Liberty GTS have come across a broad range of risks arising from the interpretation of European regulated remuneration regimes, from uncertainties with respect to the start date of FiTs for phased projects, to a lack of clarity regarding the rates applicable when tariffs have been revised after the licensing phase but before the assets enter into operation.
Specific risks insurance policies have proven to successfully provide the comfort required by investors in European renewable energy assets so they can get the deals across the line.
The two scenarios below illustrate in more detail some of the risks that Liberty GTS has insured in this space.
Scenario A: parties to a windfarm deal in Central and Eastern Europe (CEE) identified a low risk that a target company may not have qualified as an “existing producer” at a point in time when a new renewable energy legislation reduced the FiP incentive period. "Existing producers" benefited from a protective status as they were not subject to the newly adopted reduction in the FiP incentive period. If the target company did not properly qualify as an “existing producer” though, the FiP incentive period may have reduced to 12 years instead of the expected 15 years under the previous legislation. The lack of a clear legal definition for “existing producer” under the applicable transitional provisions left room for interpretation and created uncertainties with respect to the duration of the regulated remuneration. The sellers perceived the risk as low but were unwilling to grant any indemnity under the share purchase agreement whilst the buyer had very limited tolerance for any risk that may potentially impact the projected revenues. The buyer took out a specific risk insurance policy to cover the loss that it could have suffered if the target company was denied the qualification of “existing producer” under the transitional provisions resulting in the termination of the FiP after 12 years (or in a clawback claim that may come from the competent regulatory body years later). It enabled the buyer to reach the comfort it needed with respect to the duration of the FiP and the parties were able to close the transaction.
Scenario B: parties to a Southern European solar deal identified a low risk that three separate plants may be classified as one single plant during an inspection, which would have resulted in a less favourable FiT overall. In the event of a reclassification, the target company would have benefited from a less favourable FiT for the future and could have been subject to a clawback for the overpayment of FiT received in the past. The potential severity of the consequences in the event of an adverse finding by the regulator created an unacceptable level of uncertainty for the investor, which was therefore considering abandoning the project. The investor took out a specific risk policy to cover the loss that it could have suffered in the event of a reclassification of the three solar plants into one single plant. This took the risk off the table and enabled the parties to unlock the negotiations and proceed with the signing of the transaction.
These two examples are illustrative only and are not meant to represent an exhaustive state of play of all the possible risks that may arise from the various regulatory frameworks applicable to renewable energy assets across the globe.
With a wealth of experience in the renewable energy sector, both in Warranty & Indemnity (W&I) insurance and in Contingent Legal Risk Insurance (CLRI), Liberty GTS is very well placed to offer creative solutions. We are willing to develop our offering for specific risks insurance policies and we are committed to supporting our clients’ needs as the clean energy transition accelerates.
¹ European Commission, Renewable energy targets. [Online]. Available on <https://energy.ec.europa.eu/topics/renewable-energy/renewable-energy-directive-targets-and-rules/renewable-energy-targets_en>, last consultation on 30 August 2024.
² Feed-in tariffs guarantee steady retail prices for a renewable energy producer of a pre-determined source of electricity per kWh fed into the electricity grid, for a given period.
³ Feed-in premium provides an additional payment on top of the electricity market price (either as a fixed payment or adapted to changing market prices) paid to a renewable energy producer of a pre-determined source of electricity per kWh fed into the electricity grid, for a given period.
