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Offshore Wind Journal

Offshore Wind Journal

Brexit: what impact will it have on the UK offshore wind industry?

Thu 09 Feb 2017

Brexit: what impact will it have on the UK offshore wind industry?
It is likely that, once Brexit takes effect, the environmental standards applicable to offshore wind developments in the UK will change significantly

Partners at law firm Norton Rose Fulbright* anticipate that there will be a number of implications for the UK’s fast-growing offshore wind industry arising from Brexit

The recent UK referendum vote to leave the European Union (EU) has sent ripples through both political and investment circles, the potential implications of which were addressed by Norton Rose Fulbright late last year.

Will UK renewable energy policy alter?

Under many models for the withdrawal of the UK from the EU (other than using the European Economic Area (EEA) model), the UK would be released from its renewable energy targets under the EU Renewable Energy Directive. However, it is highly likely that renewable electricity will form part of the future energy mix. This is because the indications are that the UK still plans to comply with its national emission reduction targets under the Climate Change Act 2008 and its international climate change obligations (although these obligation will need to be disentangled from those of the EU).

On 20 July 2016 (almost a month after the referendum result), the Carbon Budget Order 2016 came into force, enshrining the 5th Carbon Budget covering the period 2028–2032 at an equivalent 57 per cent emission reduction on 1990 levels into law. In addition to climate change considerations, there are other powerful drivers for renewable energy development such as security of supply and environmental benefits.

The secretary of state responsible for the Department for Business, Energy and Industrial Strategy (BEIS), Greg Clark, has made statements supporting offshore wind and recognising that it will have a “big role to play”. Following announcements regarding the shape of the second contract for difference (CFD) allocation round, which will open in April 2017, it appears that offshore wind will be the principal beneficiary of that funding round.

Will renewable energy support schemes alter?

The UK is in the process of moving from one support mechanism to another. The old mechanism (that will continue to apply to projects that have already been accredited under it) is the Renewables Obligation (RO) (a ‘green certificate’ scheme). It is being replaced with CFDs, a revenue stabilisation mechanism that, in broad terms, fixes revenue at a contractual strike price, which are allocated competitively.

For Brexit to take effect, the European Communities Act 1972 (ECA), which provides for the supremacy of EU law, will need to be repealed. Repealing the ECA would bring an end to the constitutional relationship that exists between EU and UK law. Moreover, the vast amounts of secondary legislation that have been passed with the objective and justification of implementing EU law would have to be considered by Parliament. The eventual repeal of the ECA will not affect the CFD legislation, which has the Energy Act 2013 as its enabling legislation.

However, because aspects of the Renewables Obligation Order 2015 (ROO), which governs the RO, rely on the ECA as the primary implementing legislation, the UK Government will need to take some positive action upon repeal of the ECA to preserve the legal basis for the ROO. While this is a formality, it is nevertheless important that the UK Government manages the repeal of the ECA so as to preserve rights to support under the RO. The ROO is not the only secondary legislation affected in this way. Given the volume of legislation affected, the government is considering a Great Repeal Bill to grandfather existing regulatory regimes, retaining EU legislation that could then be amended or repealed as appropriate at a later date.

In many Brexit scenarios (other than the EEA model), the UK will be released from state aid rules, which have been influential in shaping the RO and CFD support regimes. Both regimes have already received state aid clearance, and therefore Brexit is unlikely to have any immediate impact. However, if the UK were no longer bound by EU state aid rules, the government may have more freedom in both the design and phasing out of renewable energy support regimes.

The UK support regimes would, however, be open to bilateral responses from countries that might believe that any subsidies run counter to principles under the WTO regime, although WTO rules restrict the actions that WTO members can take to counter the effects of subsidies. In the longer term, investors will also wish to consider how any changes in law introduced as a result of Brexit will affect the project’s power purchase agreement and/or CFD. However, this analysis will only be able to be carried out once any such changes are proposed.

Will EU merger control restrictions still apply?

The UK offshore wind market has historically attracted a lot of interest from overseas investors. Merger control will be an important consideration for prospective investors in the UK offshore wind market. If the UK remains part of the EEA, rules equivalent to those under the EU Merger Regulation would continue to have potential application to mergers, acquisitions and joint ventures in the UK under the EEA Agreement. In any other scenario, EU-based investors in the UK market would need to consider the application of UK merger control rules. In some cases, both sets of rules might apply.

How will Brexit play out under the financing documents?

An offshore wind project with an existing funding commitment from both EIB and commercial lenders is unlikely to be in breach of its credit agreement directly as a result of the referendum vote or indeed the eventual withdrawal of the UK from the EU.

It is unlikely that a specific provision relating to the UK’s continued membership of the EU is included in the documentation. However, investors and funders should monitor indirect triggers, which are often included in credit agreements, and, depending on how withdrawal negotiations play out, may be triggered at a later date. For example, many credit agreements contain material adverse change clauses that consist of representations or events of default relating to an event or circumstance (for example, a change in law), which has (or is reasonably likely to have) a material adverse effect (MAE).

The drafting of these varies widely and is often heavily negotiated, so whether a MAE is triggered by the eventual withdrawal of the UK from the EU will depend on the terms of that particular clause. This can often lead to problems in interpreting provisions of the finance documents themselves.

At the time of writing, there has been no change to English law as a result of the Brexit vote. However, it is anticipated that regulatory change will follow in the medium to long term as the UK seeks to decouple itself from the EU. As a result, lenders will also be monitoring whether any change in law would render it unlawful for a lender to perform any of its obligations under the financing documents or fund or maintain its participation in the loan, triggering a mandatory pre-payment.

How will Brexit impact EIB funding?

EIB investment has played an important role in the construction of offshore windfarms in the UK. Projects that are already funded will need to examine the terms of their credit agreements to establish the impact of Brexit. These contracts may include provisions requiring compliance with EU law, which exposes the offshore windfarm to the risk of regulatory mismatch to the extent that the UK and EU regulatory regimes diverge.

The more significant implications may be for projects that have not yet secured financing. In the short term, as an EU member state, the UK is still a shareholder of and contributor to EIB. In the longer term, however, EIB funding will depend on the terms of the UK withdrawal settlement and the extent to which the investment opportunity furthers EU policy. EIB does invest outside of the EU and the EEA, for example, investing in renewable energy projects in South Africa.

How will performance under project contracts be affected?

There is a possibility that the outcome of withdrawal negotiations results in some restrictions on the free movement of people, goods and services between the EU and the UK. Depending on their nature, such restrictions may affect future offshore wind projects in the UK but might also impact operational projects, for example, where technicians and components come from outside of the UK.

Many operation and maintenance contracts and some engineering, procurement and construction contracts contain ‘change in law’ provisions that might be triggered as a result. Some such clauses refer to a change in law that affects the scope of the contractor’s services (so may not be affected by Brexit), but others just talk about causing the contractor additional cost (and so might be triggered).

How will contractual payments in euros be affected?

Since the referendum vote, the pound devalued dramatically against the euro, making euro-denominated contracts more expensive for UK offshore wind. Where a project is incurring costs in euros but is receiving revenue in pounds, lenders will very likely have required the project to have hedged a proportion of that exposure at financial close for the term of the debt.

The project’s exposure is therefore only in respect of any unhedged costs. This issue is particularly relevant to future projects where a significant proportion of supply and instalment contracts are likely to be denominated in euros. A mitigating factor will be the extent to which those elements can be sourced from within the UK.

Will there be any impact on an offshore windfarm’s development consent?

Consents for offshore windfarms between 1MW and 100MW are granted pursuant to section 36 of the Electricity Act 1989 and those over 100MW pursuant to the Nationally Significant Infrastructure Project (NSIP) regime under the Planning Act 2008. ‘Development consent’ is the term given to consents granted under the NSIP regime. Both forms of consent are granted pursuant to domestic legislation, and as such, existing consents will not be affected by Brexit.

In respect of future applications for consent, the main potential impact may be to the requirement to undertake EU-derived environmental impact assessments (EIAs). While international treaty obligations make it likely that the government will seek to maintain a requirement for EIAs as part of the UK planning system, depending on the terms of the UK’s withdrawal from the EU, the government may have scope to alter the assessment process to suit circumstances in the UK. This may result in fewer obligations on developers and planning authorities if the thresholds at which an EIA is required are increased.

Will there be a change to the environmental standards the project will be required to comply with?

It is likely that, once Brexit takes effect, the environmental standards applicable to offshore wind developments in the UK will change significantly. Of particular relevance is the Habitats Directive 1992 and the Birds Directive 2009 (the EU Nature Directives), which require that specified sites containing certain species and their habitats are conserved. The EU Nature Directives require offshore wind developments that are likely to have a significant effect on protected sites to undergo assessment procedures to determine any relevant safeguards that should be put in place. It is likely that the EU Nature Directives will cease to apply to the UK once Brexit takes effect.

As the EU Nature Directives have been implemented in the UK by domestic legislation such as the Offshore Marine Conservation (Natural Habitats) Regulations 2007, the Conservation of Habitats and Species Regulations 2010 and the Wildlife and Countryside Act 1981, once Brexit has taken place, Parliament may decide to water down or repeal them altogether. It is important to emphasise that, until Article 50 has been triggered and the ensuing two-year negotiating period has expired, environmental legislation derived from European law will continue to apply.

*Nicholas Pincott, Rob Marsh, Mark Simpson, Kathryn Emmett, Lucy Bruce Jones

This article is based on an edited version of an article by the above-mentioned. The full article can be read here.

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