18 August 2021
Foreword
Recently, the government of the People’s Republic of China has put forward their medium and long-term goals of reaching "carbon peak" by 2030 and "carbon neutrality" by 2060, and announced that the total installed capacity of wind and solar power in China will reach more than 1.2 billion kilowatts by 2030. It is predicted that China's wind and solar power sector will embrace large-scale development opportunities in the next decade. Under this backdrop, it is of great importance for investors that are intending to lay out plans or to increase their investments in the fields of wind, solar and other major new energies, to understand the legal issues that may arise in the development of such projects. Such understanding will help to prevent legal risks, standardize project implementation and strengthen M&A transaction compliance management, with the end goal to secure investment income. This article will give a brief introduction to the development and construction process of wind and solar power projects, and briefly comment on the typical legal issues involved in such projects. It is our intention to invite more open discussion from the industry.
An Overview of the Development and Construction Modes for Wind and Solar Power Projects
Wind and solar power projects usually adopt a mode of direct development by the owner or a mode of entrusted development. In addition, the acquisition of equity in an existing power project company is also a common investment mode in the industry.
I. Early Stages of the Project
In the early development stages of wind and solar power projects, in addition to technical verification works (such as wind energy resource evaluation and solar radiation data calculations), feasibility analysis and other works, the following main issues are involved from a legal compliance standpoint:
1. Scale Quotas and Competitive Bidding
In the early days of the development of wind and solar power projects, the government mainly adopts the means of giving subsidies to encourage and support the development of renewable energy power projects. For wind and solar power projects, an important condition for obtaining subsidies is that the project should be included in the "scale quota" published by the state and provinces every year. With the government’s efforts to promote grid parity projects, the requirement of scale quotas has changed accordingly.
It should be noted that from 2019, apart from the already distributed wind power projects, all the newly approved centralized onshore and offshore wind power projects are allocated through auction with the tariff determined through competition. Since 2016, the construction scale quota for solar power projects also needs to be obtained in a competitive way. As mentioned above, if the construction scale quota has not been obtained, the power project and the project company will lose the qualification for receiving subsidies from the National Renewable Energy Fund. The project company and the investors should look closely into the specific conditions of the project and pay attention to the application conditions and procedural requirements, such as qualifications for investors, grid interconnection, dispatch conditions, investment environment, etc., provided in the provincial competitive allocation policy at the application stage of project approval or filing, and analyze and comprehensively evaluate the impact of the relevant requirements on the tariff and the project’s earning capacity.
2. Land Use, Ecological Red Lines and Other Issues
The use of land for wind and solar power projects shall go through relevant land use approval procedures in accordance with the law. In addition, during the preliminary planning and site selection for wind and solar power projects, special attention should be paid to whether the location of the project site overlaps with zones within an ecological red line that prohibits or restricts project construction. If there is an overlap with an ecological red line, the project may face the risk of demolition. At the national and provincial levels, some regulations have been promulgated on an ecological red line of wind and solar power projects. In a reply on the official website of the Ministry of Natural Resources in December 2020, the Ministry of Natural Resources made it clear that facilities of new wind and solar power projects should avoid ecological red lines. Investors should pay close attention to ecological red lines and the related policies and legal risks.
Wind and solar power projects are construction projects that are prone to impact the local ecological environment, destroy vegetation, and cause soil erosion. Therefore, many procedures, such as the approval of the soil and water conservation plans, are required by law, and should also be kept in mind during the development process.
3. Project Approval/Filing
Wind power projects are approved at the state or local government level, while solar power projects are filed with the local investment authorities. When applying for approval and filing, project companies and investors should pay attention to the approval authority and avoid ultra vires approval. During the process of construction and after obtaining project approval or the filing documents, if there are any major changes, for example at the construction site, the invested scale, construction content, etc., the change shall be filed for approval with the original project approval authority. Attention should also be paid to the project’s approval for the power transmission lines of the project.
II. Construction Stage
As the construction progress and interconnection date of wind and solar power projects are closely related to the feed-in tariff price and the subsidy policy, in order to obtain the subsidy, "rushed installation" is a common practice in the industry, which also brings many compliance issues and legal risks.
1. Approval Procedures and Bidding before the Commencement of Construction
Like other construction projects, after obtaining the project approval/filing and before the commencement of construction, wind and solar power projects need to obtain the relevant governmental approvals based on the specific circumstances of the project, such as approval of the environmental impact assessment, approval of the overlying mineral resources, approval of the protection of cultural relics, approval of military facilities, approval of energy conservation, etc.. In addition, the project company should obtain the relevant approvals for electric power business at this stage. Investors also need to pay attention to the impact of the national mandatory bidding requirements under the bidding law regarding the project’s construction, and the compliance risks in that regard.
2. Use of Land Compliance
The status of land is a key issue and a challenging issue for these types of projects. Both wind and solar power projects occupy large areas of land for construction and the land use of the occupied land varies. For onshore wind power projects and solar power projects, the land occupied by permanent facilities such as wind turbines and booster stations are managed and treated as construction land, and the project company needs to obtain the land use rights (if the agricultural land is not converted to construction land, the approval procedures for the conversion of the agricultural land should be completed. If land acquisition is involved, the corresponding land acquisition approvals should be completed). For the photovoltaic array, wind turbine hoisting platforms and alike, if the occupied lands are Gobi Desert, desert, wasteland or other unused land, the land occupied by this part of the project can keep the original land use type identification, and the land can be obtained by leasing. For qualified photovoltaic composite projects and photovoltaic poverty alleviation projects, there are more preferential land use policies. In practice, the status of project land use is generally complex, and needs to be judged according to the specific project. It is advised that investors should strengthen their review and compliance control of land use, to avoid the risk of project shutdown, demolition, administrative punishment and even criminal responsibility caused by a violation of land use regulations.
3. Project Construction and Completion Acceptance
In the construction stage, onshore wind and solar power projects need to obtain the corresponding construction land planning permits, construction project planning permits and permits for construction, etc. For offshore wind power projects in the construction stage, approval needs to be obtained for sea use rights and many other special approvals for the use of the sea and offshore operations. In practice, the focus is on a situation whereby the EPC contractor handles the project on behalf of the project owner and its related legal risks. After the completion of the project’s construction, wind and solar power projects need to be organized in accordance with the law and regulations to complete the acceptance for the environment, safety facilities, soil and water conservation, grid connection and construction. Without those acceptances, the project shall not be put into operation.
III. Operation Stage
The project company of a wind and solar power project shall obtain an Electricity Power Business License for the commercial operation of the relevant generating units of the wind or solar power project. For distributed solar power projects and distributed wind power projects, if the competent filing (approval) documents issued by the competent energy authorities clarify that the relevant wind or solar power projects are distributed power generation projects, such projects are not included in the administrative scope of an Electricity Power Business License, and such projects can apply directly for grid-interconnection and power generation without obtaining an Electricity Power Business License for the power generation.
During the operation stage, wind and solar power projects mainly involve tariff determination, power purchase, operation and maintenance, etc. Before the projects are put into commercial operation, the project company needs to sign a power purchase agreement and a grid interconnection and dispatch agreement with the local grid company, and sign the necessary agreements according to the actual operation and maintenance arrangements. During the due diligence, attention should be paid to the key and difficult clauses of the above agreements to understand the core commercial risks.
IV. Financing Models and Cash Flow
In terms of project financing, fewer domestic wind and solar power projects use the standard limited recourse or non-recourse project financing model, and more projects use the traditional corporate financing model. There are many projects that use bank loans or financial leases, and sign corresponding loan or financial lease contracts with financial institutions. Project companies usually use the pledge of their power station tariff charging rights, the pledge of the project company's equity, the guarantee of the major shareholders and the mortgage of real estate as financing credit enhancement measures to obtain financial support from financial institutions to meet the capital needs of construction and the operation of the project companies.
The core issues affecting the cash flow of the project are electricity consumption and tariff (subsidies). In terms of tariffs (subsidies), the tariff policies for wind and solar power projects in China have evolved from fixed benchmark tariffs to guide tariffs. Specifically, from 2011 to 2018, the benchmark feed-in tariffs of wind power projects were determined and promulgated in accordance with the four types of wind resource areas nationally and the benchmark feed-in tariffs of solar power projects were determined and promulgated in accordance with the three types of solar resource areas nationally. The benchmark feed-in tariffs are trending down year by year. In 2019, the guiding price system and the competitive allocation system for wind and solar power projects was introduced to replace the benchmark feed-in tariff system. On January 1, 2020, the coal-fired power generation benchmark tariff mechanism was changed to the market-based price mechanism of "benchmark price + up and down". For wind and solar power projects, if the guide price is lower than the local coal-fired power benchmark price (including desulfurization, denitrification and dust removal), the guide price shall be implemented according to the local coal-fired power benchmark price.
With the market reform of power trading, some provinces such as Inner Mongolia, Yunnan, Shaanxi and Shanxi have issued regulations requiring part of the power of wind and solar power projects to enter the local power trading market. In this case, where the electricity quantity is traded in the power trading market, the actual tariff may be lower than the local coal-fired power generation benchmark price. Additionally,, in recent years the national government has actively promoted the construction of grid parity wind and solar power projects. For grid parity projects, supporting policies are given in terms of guaranteed priority power generation and fully guaranteed acquisition, terms of power purchase agreements and fixed tariff, priority use of unutilized state-owned land, and land-related charges. Many provinces have introduced further regulations on grid parity wind and solar power projects to provide certain local preferential policies for grid parity projects. In general, the implementation of policies related to market-based power trading and grid parity projects will also have a great impact on the electricity consumption of the projects, which is worthwhile for investors to pay close attention to.
Investors, whether intending to acquire equity in existing projects or develop new wind and solar power projects, should firstly pay close attention to the requirements in current policies on subsidies, the filing/approval of grid parity projects and grid interconnection, and review the compliance of tariffs and subsidies according to the actual construction progress and the specific conditions of each project. For example, starting from January 1, 2021, newly approved onshore wind power projects will fully achieve grid parity without state subsidies. For past stock projects, the state will no longer provide subsidies to onshore wind power projects approved before the end of 2018 which did not achieve grid interconnection by the end of 2020; for onshore wind power projects approved between January 1, 2019 and the end of 2020, the state will no longer provide subsidies to those projects that have not achieved grid interconnection by the end of 2021. Those projects will be changed to a grid parity project for administration. For grid parity wind and solar power projects, the project company also needs to apply in a timely manner to be included on the list of grid parity projects organized by the states, provinces and cities. Only the grid parity projects which are included on the list can enjoy the preferential treatment of grid parity project policies. Secondly, cash flow and project investment returns need to be reasonably evaluated and measured based on the applicable full life-cycle hours of the specific project, the actual subsidy payment (or delayed payment) period, the technical boundaries (e.g., the project unit utilization rate) and the risks related to the electricity consumption of the project.
Conclusion
With the rapid development of China's wind and solar power generation and other new energy industries and technological innovations, the cost of wind and solar power generation has dropped significantly, and its economic aspects have gradually developed the ability to compete with traditional energy sources. Wind and solar power projects have become a green and clean energy source with clear development prospects and huge market development space. With the start of the 14th Five-Year Plan and under the long-term policy guided by "carbon neutrality", the wind and solar power industry is on the rise and the future looks promising. For project owners and investors, understanding the development and construction process and the typical legal issues of new energy projects, especially for wind and solar power projects, will help them improve their awareness of the rules and regulations, strengthen their risk management and develop the market in compliance with the law.
For further information, please contact:
CHENG, Yuan, Partner, JunHe
chengyuan@junhe.com
