The use of “GridCo” structures in renewable energy projects and how to achieve a bankable arrangement

Background

Grid connection challenges are a multifaceted concern for the energy sector and the requirement to have a viable grid connection continues to impact upon the development of renewable energy projects. One of the biggest current issues with obtaining grid connections is the delay customers are facing due to the number of projects attempting to connect to the distribution and transmission networks.

As such, we are seeing developers consider the use of other “behind the meter” arrangements to achieve a viable grid connection. In particular, we are seeing developers use GridCo structures, which allow two neighbouring projects to share a grid connection.

In this article, based on our recent experiences advising different lenders on a variety of GridCo structures, we will explore what a GridCo is, a typical contract structure and key considerations for developers when using GridCo structures, with a particular focus on how to achieve a bankable arrangement on projects which are or are intended to be debt financed.

 

What is a GridCo

Let us consider the following scenario: ProjectCo 1 operates a renewable energy project with a total installed capacity of 30 MW (Project 1). Project 1 benefits from a grid connection agreement with the relevant distribution network operator (DNO) with a maximum export capacity of 48 MW. The construction of Project 1 was funded by a lender. ProjectCo 2 wishes to construct a further renewable energy project with a total installed capacity of 18 MW (Project 2) on a neighbouring site to Project 1. ProjectCo 2 does not have its own grid connection. ProjectCo 1 has agreed to let ProjectCo 2 use their grid connection and the associated electrical infrastructure installed for Project 1 to export to the distribution network (Shared Infrastructure).

A grid sharing agreement could be entered into between ProjectCo 1 and ProjectCo 2 in respect of ProjectCo 2’s rights to use ProjectCo’s 1 grid connection agreement. ProjectCo 1 will however need to include strict rights on ProjectCo 2 to ensure that ProjectCo 2 cannot by its actions or omissions cause a breach of the grid connection agreement. From a ProjectCo 2 perspective, if ProjectCo 1 was to go insolvent or breach the terms of its grid connection agreement, the DNO may terminate the grid connection agreement, leaving ProjectCo 2 with no grid connection and ultimately a stranded asset.

Instead, a GridCo could be incorporated, owned by ProjectCo 1 and ProjectCo 2, with their relationship governed by a Shareholders Agreement. As such, the grid connection agreement is novated to GridCo and the Shared Infrastructure is transferred to GridCo. The use of this GridCo structure is generally regarded in the market as being a robust and bankable approach for allowing multiple parties to share a grid connection. This arrangement would typically require the following contracts to be entered into:

• Shareholders Agreement and Articles of Association in respect of GridCo;
• Novation agreement to transfer the grid connection agreement to GridCo, entered into between the relevant DNO, ProjectCo 1 as the outgoing customer and GridCo as the incoming GridCo;
• Asset Transfer Agreement between ProjectCo 1 and GridCo in respect of the Shared Infrastructure;
• Tripartite Grid Sharing Agreement between ProjectCo 1; ProjectCo 2; and GridCo in respect of the shared use of the grid connection and the fees in respect of such,

and any other agreements required on a deal specific basis, such as other new contracts or amendments as are needed to deal with land, O&M, EPC and PPA positions depending on the stage and nature of each of the two projects.

 

Key Considerations

We set out below some key considerations in relation to a GridCo structure which are worth discussing and agreeing between the parties in advance of drafting any contracts.

1. What costs will GridCo have to pay and how will these costs be funded?

The parties will need to consider what costs GridCo will have to pay, typically such fees include operation and maintenance fees, management fees and ongoing grid connection charges. The parties should consider how these fees should be split between ProjectCo 1 and ProjectCo 2 and which contract is best placed to include such payment obligations. The parties also need to consider the timings of such payments to ensure that from a working capital perspective, GridCo has sufficient funds to avoid being in breach of any of the applicable contracts, in particular the grid connection agreement.

2. Options where an insolvency event occurs in respect of GridCo

The Shareholders Agreement and Tripartite Grid Sharing Agreement should include provisions which deal with an insolvency event of GridCo or where GridCo is in material breach of the Tripartite Grid Sharing Agreement, which puts the grid connection agreement at risk of being terminated by the relevant DNO. The parties should discuss and agree a process, noting that this is a worst case scenario given the nature of GridCo, to agree a suitable basis for dealing with the interests and assets of GridCo to preserve the grid connection rights necessary for the operation of each of the Projects.

3. How should voting rights be structured?

The parties should consider how voting rights should be structured to ensure both ProjectCo 1 and ProjectCo 2 are protected. A list of “reserved matters” requiring the approval of both ProjectCo 1 and ProjectCo 2 would be typical. The parties should consider including deadlock provisions in the Shareholders Agreement to provide for the situation where the parties cannot resolve a matter after a certain number of occasions where the parties have tried to reach agreement.

4. What if ProjectCo 1 or ProjectCo 2 are in material breach of the Tripartite Grid Sharing Agreement or an insolvency event occurs?  

Given the use of a tripartite agreement, there is a risk that either ProjectCo 1 or ProjectCo 2 (Defaulting Party) could trigger a termination right of the Tripartite Grid Sharing Agreement which would allow GridCo to terminate the agreement. As such, transitional provisions should be included in the Tripartite Grid Sharing Agreement to preserve the non-Defaulting Party’s rights to continue to use the grid connection.

5. Construction Risk

In the event where Project 2 is to be constructed, commissioned and energised after Project 1, the parties should consider the likelihood of Project 2 delaying Project 1 or causing downtime risk in respect of Project 1.

The parties should also consider the risk of outages during the construction of Project 2 and once Project 2 is operational, whether Project 2 could impact Project 1, resulting in lost generation and/or lost revenue of Project 1. Input from a technical advisor is recommended on this point.

Mutual indemnities from ProjectCo 1 and ProjectCo 2 are also typically included in the Tripartite Grid Sharing Agreement in relation to losses caused by one party to the other party and GridCo in respect of the GridCo arrangement.  The financial standing of each of ProjectCo 1 and ProjectCo 2 also needs to be considered.

6. O&M Contractors 

Where the scope of services in respect of ProjectCo 1 and the Shared Infrastructure is subsequently amended, such that a new operations and maintenance agreement is entered into by GridCo in respect of the Shared Infrastructure, consideration of the existing ProjectCo O&M availability warranty is required. We would recommend that technical input is sought on such.

7. Funder protections

We would recommend that funder requirements be established early in the process or if funding is anticipated later, key anticipated protections are built in. We would expect this to include a requirement for direct agreements for certain of the key contracts within the grid sharing structure. The terms of any existing or new finance documents will also need to be considered and we would expect specific controls will be required by funders in relation to the exercise of rights under the grid sharing documentation. Ensuring that the expected security net for each of the two projects is compatible is also key.

8. What tax advice is needed for the GridCo structure?

We typically see the parties obtaining tax advice from an independent tax advisor given the transfer of the Shared Infrastructure and novation of the grid connection agreement to GridCo. We would also expect a lender to request reliance on this tax advice.

Whilst the above list is not an exhaustive list, it does provide insight into some of the typical discussions held in respect of grid sharing arrangements.

Please contact Andreas Gunst, Laura Gordon and Sophie Linnell if you would like further information.