Renewable energy is set to be transformed from humble roots into a genuinely world-changing industry over the next 20 years. Charlotte Edmond profiles the market and the lawyers aiming to be there for the revolution

There are growth markets, there are long-term bets and then there is renewable energy. But however many false dawns alternative energy has had over the years, in the long run the business of green energy and nuclear power looks certain to ultimately establish itself as a huge, globally-significant industry.

After all, the forces supporting the sector are obvious. International agreements to cut carbon emissions, dwindling stocks and rising costs of fossil fuels, the challenge of climate change and rising global energy demand mean alternative power will eventually go mainstream. Because, however substantial the challenges and barriers currently in its way, there is no alternative.

But the how, where and when remain very unclear, leaving advisers targeting the sector playing something of a guessing game, as most forms of low-carbon energy are currently uneconomic or impractical without heavy state support. Should, for example, law firms merely service the market through project finance teams or via existing links with bluechip power companies, which have become rapid converts to alternative energy sources over the past five years?

To a considerable extent the current answer is yes, but given the massive projected expansion of the renewable energy industry over the next 30 years, the requirement for specialised legal knowledge cannot be that far away.

Into this vacuum has moved a disparate band of advisers with a very select group of law firms focused on the more specialised regulatory, planning and contractual issues required for alternative energy. Some others are focusing on the green technology and venture capital clients, which will be required to take most forms of renewable energy to the stage of becoming independently economically viable.

Such uncertainties leave many major advisers focused on government policies, which have driven the market for the last 20 years. In the UK, for example, the Government has signed up to legally-binding commitments which would need the UK to increase the use of renewable energy almost seven-fold by 2020 – even if it is widely expected to fall well short of that ambition. In the meantime, lawyers are closely monitoring political developments in the UK, Europe and US, not to mention a rapidly-expanding Chinese market, to work out which way to move.

The politics of power

At the head of the UK's renewable energy strategy is the so-called 2020 Directive, which came into force in 2009 and requires each European Union (EU) member state to increase its use of renewable energy – such as wind, solar, or hydroelectricity – in a bid to boost the EU's renewable energy generation from 8.5% of the energy mix today to 20% by 2020. The directive also calls for corresponding cuts in greenhouse gas emissions.

To achieve the targets, every nation is expected to increase its share of renewables by 5.5% from 2005 levels, with the remaining increase calculated on the basis of per capita gross domestic product. Under the formula, 15% of all the UK's energy is required to come from renewable energy sources by 2020. This will require massive expansion over the next decade, as just 1.3% of the UK's power came from such sources in 2005.

Each country is free to decide what mix of renewables they will use to meet the criteria, and are able to sell or trade excess 'renewable credits' to another nation, based on statistical values, if they have reached interim targets.

Peter Roberts, general counsel of Centrica Energy, comments: "The Government has made commitments that a certain percentage of energy has to be generated by renewable energy sources. What that has meant is a huge investment. There is a balance to be had between making the regulatory regime attractive to new entrants and financiers, but also making sure there is a sufficient amount of legislation that is clear and transparent."

Linked to this directive, the EU's emissions trading system is expected to generate substantial amounts of regulatory work for lawyers as countries move to offset their carbon and greenhouse gas emissions by trading between each other.

More recent developments have seen the UK Government this summer publish its Renewable Energy Strategy, which sets out how the UK aims to achieve the agreed targets. The strategy is based around establishing an Office for Renewable Energy Deployment and supporting investments in technologies such as tidal generation, biofuels, and small-scale energy production. The Government suggests more than 30% of electricity, 12% of heat and 10% of transport energy could come from renewable energy sources. It is also planning to provide around £30bn of financial support to the sector between 2010 and 2020.

Other significant developments in the UK include the introduction of feed-in tariffs – fixed payments made as incentives to the owners of small generating stations for the electricity that they export to the grid – to encourage renewable energy production for projects below five megawatts (MW). These tariffs will come into force in April next year. Incentives for renewable heat production will come into force in April 2011. While uninspiringly named, feed-in tariffs are viewed as a crucial measure by renewable specialists as such incentives are necessary to stimulate renewable energy output, given the high costs of investment and volatility of wholesale power markets.

Given the challenge of getting such a pricing model correct, the Department of Energy and Climate Change (DECC) is currently seeking comment on the electricity feed-in tariffs, and will launch a consultation on its heat strategy before Christmas. The DECC is also known to want to bring in more input from the legal profession as relatively few advisers have so far engaged in the consultation. Linklaters was one of a number of law firms to be involved helping the DECC shape its strategy, including sending a secondee to the department for six months.

Linklaters projects partner John Pickett (pictured) says: "Renewables has been such a growth sector and an increasing number of law firms have been getting involved. The time for the UK is absolutely now: at Linklaters we have had a practice for a number of years and I can safely say the UK has lagged behind the EU year on year. Most of the 'first of a kind' deals have not been done in this country – but that is set to change and we are looking to bring the experience gained across the region to bear at home."

There is a general consensus that with the development of recent domestic policies, the UK is near a turning point in its renewables strategy. Many in the industry hope this will see the UK put behind it a past of making bold promises on alternative energy while being overtaken by the US and mainland Europe, which offer more subsidies and less red tape. This expectation largely centres on the UK massively expanding its output of wind power.

And if the UK fails to meet its own targets, then a new stream of policy-related work will emerge, advising clients and existing projects on distressed adjustments. John Constable, director of policy and research at the Renewable Energy Foundation, says: "In order to make transport, heat, and electricity meet the overly ambitious targets set, the rest of the sector is going to have to be substantially altered. We are facing the largest market intervention since World War II."

Back to balance sheet

But while politics and long-term global trends are clearly supporting alternative energy, over the short-term, markets have been a good deal less helpful. After a busy run in the first half of 2008, the collapse of Lehman Brothers and the wider banking crisis quickly saw debt finance for renewable energy projects dry up in the second half of last year. Research from Infrastructure Journal shows not a single UK project financed renewables deal went to financial close in the first half of 2009, though some smaller projects are expected for the second half of the year.

The market has also been sharply impacted by the fortunes of the global economy. At the peak of the boom, high oil prices, strong demand for energy and plentiful equity and debt finance were supporting the alternative energy industry in addition to the aforementioned state intervention. The result was much talk of capacity constraints with, for example, a global shortage of wind turbines holding back the industry's growth (though improving profitability). In addition, venture capitalists, particularly on the west coast of America, were throwing money at clean energy technology resulting, as Ernst & Young recently observed, "dotcom style multiples" on quoted alternative energy companies.

The recession and banking crisis have since brought a sharp short-term correction as debt and equity have become harder to secure for low carbon energy projects. This has left much of the work focused on ongoing projects or deals that are being equity financed on-balance sheet by large energy companies.

That is funnelling much of the investment towards projects that are seen as the most viable in the UK, with the offshore wind sector increasingly gaining attention given that it sidesteps the UK's notoriously difficult planning regime. However, question marks remain over banks' willingness to back offshore projects.

There is also a consensus that lending conditions will ease in the first half of 2010, with a growing number of banks touting their willingness to lend. However, for the foreseeable future, project-financed deals are expected to be largely restricted to smaller projects. Research published in August from Ernst & Young found lenders expecting to step up commitments, though deals under $100m (£61m) would be the norm, and then increasingly using debt syndication. Smaller deals are also likely to favour lease financing.

A developing practice

With conflicting signals from the market regarding the future development of green energy, there is little consensus among legal advisers regarding how to target the sector or even if it requires a specific focus aside from general energy practices.

Many City law firms with established renewables practices have built them off the back of energy client bases, continuing to service large power clients as they increasingly turn their attentions to the sector.

There is an argument that a lot of the significant renewable projects, particularly in the offshore wind arena, can just be grouped as general projects work in terms of financing and commercial agreements, similar in legal terms to what would be required to build a school or a motorway. And to this extent most sizeable legal practices can cover renewable energy work.

This route is where large City advisers first approached the sector, though many feel that renewable energy will increasingly require a more sophisticated approach from advisers.

One partner comments: "It is not a simple case of deciding that is where you want a wind turbine; there are a number of engineering and logistical challenges. From a legal perspective you are looking at multiple contracts to build roads and services, supply cables and turbines – and offshore things get even more complicated still."

And the current lack of debt funding could arguably help to widen the field beyond firms like Clifford Chance and Allen & Overy (A&O) that are dominant players in the project financing.

Of the City's top-tier practices Linklaters and A&O are regarded as having cultivated a position in low carbon energy beyond regular projects work. Linklaters has taken roles on key deals including advising the banks on the 200MW cross-border wind deal, Project Astraeus.

Another stand-out practice among the larger City firms is Norton Rose, which has been building a particular niche in the clean technology sector. The firm has also been active in targeting carbon trading and regulatory issues related to climate change.

Key deals for Norton Rose include advising The Crown Estate on the Round 3 Offshore Programme as well as acting betwen Drax and Siemens on the joint venture to develop three biomass-fired power plants in the UK. SJ Berwin has also built up its profile in offshore wind through its real estate team after being appointed to advise The Crown Estate alongside Norton Rose on Round 3. Although The Crown Estate will not have any role in the eventual ownership or operation of the sites, it owns the seabed which the operators will lease (see page 27).

Moving away from finance-driven work introduces a handful of practices that have carved out a genuinely specialist reputation, many of them outside London. In particular, Bond Pearce has built up a well-regarded practice in the regions having been one of the early movers in the sector. Recent mandates include advising on ScottishPower Renewables' Whitelee Windfarm, which became one of Europe's largest onshore wind farms when it went live this year.

However, some feel that Bond Pearce's profile has suffered by the departure last year of highly regarded partner Marcus Trinnick to Eversheds, who is cited by many as the UK's key renewables planning partner, particularly in the wind farm sector. The hire comes as part of a push in the sector for Eversheds, which also recently hired environment and climate change partner Michael Woods from Stephenson Harwood.

Both Wragge & Co and Watson Farley & Williams also have growing practices in the renewables sector.

In Scotland, where land for space-intensive projects such as wind farms is more readily available, a number of local firms have also built up a specialism. McGrigors' Euan McVicar comes recommended and has advised on several wind deals as well as carbon trading and heat deals.

There are also many stand-out names internationally. In the US, still by far the largest market for green energy, project leaders like Milbank Tweed Hadley & McCloy and Latham & Watkins are well-established. Likewise, the sheer level of investment pumped into renewable energy projects in Spain thanks to generous state-subsidies has helped Garrigues to build up a sizeable profile.

Though the recession has slowed activity of late, there have also been some sizeable M&A mandates in the sector as energy companies aim to position themselves for the future. The $2.9bn (£1.8bn) acquisition by Energias de Portugal (EDP) of Horizon Wind Energy from Goldman Sachs in 2007 handed roles to Skadden Arps Slate Meagher & Flom, Chadbourne & Parke and Morais Leitao Galvao Teles Soares da Silva & Associados for EDP.

Skadden also landed a role for Airtricity on the acquisition of its North American operations by E.ON, advised by Jones Day, for $1.4bn (£850m). In the UK, Bond Pearce secured a role opposite Linklaters advising regular energy client npower renewables on its 2008 acquisition of a 50% stake in Greater Gabbard Offshore Winds from Scottish and Southern Energy in a transaction valued at £308m.

Simon Currie (pictured), a banking and projects lawyer at Norton Rose, comments: "The first half of 2009 saw a very significant drop in the level of financing of renewable projects globally. This did not result in the industry just standing still as M&A activity increased and new participants such as strategic Middle East investors entered the sector on a global basis."

Specialist commercial advice on grid connections and transmission is also a factor.

Bond Pearce partner Luke Gabb comments: "For lawyers, renewables work proves to be a comparatively lucrative sector because for the most part they are large projects, requiring a lot of legal input and can command sizeable fees. Clients recognise the need for specialist advice in this area."

Major energy players such as Centrica, E.ON and EDF all have significant involvement in existing projects – and all have more on the horizon.

Sue Wheeler, head of power business development at Centrica, says: "As far as we are concerned, we are now looking at how we can adapt our portfolio. We have quite a strong focus on renewables but are definitely looking to increase our presence in that area. When the company first started out there would not have been anything near the level of renewables but we, along with a lot of our competitors, certainly see that as a significant part of the way forward."

Working in the clean tech arena brings its own specialisms as developers turn to intellectual property lawyers to protect their work, and hand corporate and capital markets lawyers their business as they expand and look for an initial public offering.

Norton Rose is one of a number of law firms that has made a conscious effort to target clean tech, advising clients such as solar technology company PV Crystalox Solar, which listed on the London Stock Exchange in 2007, and investment fund Low Carbon Accelerator on its Alternative Investment Markets (AIM) listing and various investments.

However, Dominic Hearth of renewable energy developer RES is one of a number of people that believe a lot of law firms claim a renewables practice without much specific experience.

"There are times, because our business has been growing so rapidly and because our competitors' businesses have been growing so rapidly that it becomes apparent there is a shortage of lawyers with renewables expertise. The sector started off small and very few of the major City firms had expertise a few years ago. That has completely changed now. Although for the big financing-type work there [has never been] a shortage of advisers."

Such sentiments reflect a wider scepticism from clients regarding the level of genuine renewables expertise there exists in private practice. In common with oil and gas and nuclear energy, many feel that the best lawyers in renewable energy work in-house, a trend that looks likely to continue as long as major energy companies keep expanding their renewables output.

Looking ahead – Copenhagen calls

The key date in the diary for everyone involved in the sector is the United Nations climate change conference in Copenhagen at the end of the year. The new treaty will replace the Kyoto Protocol, which entered into force on 16 February 2005.

At the conference, Yvo de Boer, executive secretary of the United Nations Framework Convention on Climate Change, is set to clarify:

• How much are industrialised countries willing to reduce their emissions of greenhouse gases?
• How much are major developing countries such as China and India willing to do to limit the growth of their emissions?
• How is the help needed by developing countries to engage in reducing their emissions and adapting to the impacts of climate change going to be financed?
• How is that money going to be managed?

These questions will undoubtedly form the shape of things to come. With much political wrangling between developed and developing nations – notably India, China and the US – getting these countries on board is key.

On a national level, with the Conservative Party widely expected to assume office in next year's general election, their policies will be closely watched.

Although unsurprisingly the Conservatives have criticised Labour's renewables policy to date (in particular its £50m Marine Renewables Deployment Fund, which it says almost no renewables company has been able to access, and a Low Carbon Buildings Programme that was closed a year before the successor scheme is ready to roll out), broadly their strategies are similar.

The Conservative Party's current energy strategy focuses on decentralising the energy system and will see the use of feed-in tariffs to encourage micro-generation of energy. With Government backing, it also plans to expand offshore wind and marine parks.

As Eversheds' Marcus Trinnick summarises: "Since the offshore wind market gathered pace, lots of lawyers have now discovered renewables, and the market promises to deliver work all round for years to come. The key buyers of legal services are now looking for all round expertise and experience, and are not so prepared to buy specialist expertise from a number of firms. And the market that lawyers are chasing has changed dramatically."

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Renewable sources – place your bets

Wind

From a UK perspective wind power is where all the interest is, being the most economically viable and technologically proven form of renewable energy.

The flagship project in the UK currently is the London Array, which is set to be the largest offshore wind farm in the world on completion. Situated 12 miles off the Kent and Essex coasts, the eventual 341 turbines could supply around a quarter of Greater London's electricity. Handing roles to firms including Norton Rose, Bond Pearce, Watson Farley & WIlliams and Freshfields Bruckhaus Deringer, construction started earlier this year. Ian Fairclough, legal counsel for renewables and generation at E.ON, comments: "[The London Array] has been a flagship project for this year for us. It will be the world's largest offshore wind farm, generating 1,000MW if we get phase 1 and 2. It will be the same size as a nuclear power station or gas fire power station: renewables are moving from boutique to industrial."

Other major UK deals envisaged include the series of Crown Estate projects: in 2001, Round 1 allocated 14 lease options to developers totalling just over 1GW and in 2003, Round 2 gave lease options to 15 projects totaling 7.2GW.

Round 3 envisages up to 25,000MW in additional offshore windfarms at an estimated cost of £100bn, and is currently in the tendering process. Projects of this size are music to the ears of lawyers, spinning off work not just in the initial tendering phase, but also for their construction and environmental lawyers, not to mention the logistics of transporting and sourcing all of the turbines and cables required.

A number of key utilities have already made significant moves in the wind sector – Centrica currently has investments in six offshore wind farm developments, of which three are operational, as well as two onshore farms in Scotland. E.ON, meanwhile, operates 21 wind firms, having invested in its first wind farm in 1991.

However, aside from difficulties relating to costs and financing, a key issue significantly slowing wind farm development to date has been planning consent and NIMBY-ism. The UK is currently making moves to bring its planning process more inline with other European countries, which are seen to be more flexible.

Norton Rose's John Wood comments: "We in the UK have got caught up with local issues – the UK is the hardest part of the EU to get planning consent. In Spain, for example, the process is much more straightforward."

Biomass

Biomass is also seen as a substantial component of the UK's 2020 targets – depending on the type it can be combusted to produce heat or electricity or digested to create biogas for heat or transport fuel. But for the UK one of the largest holdbacks for this technology is supply, as sources of domestic biomass are currently limited. However, generating energy from biomass waste would lead to a significant reduction in landfill.

Drax, owners and operators of a major power station in North Yorkshire, recently announced plans to develop three biomass-fired generating plants in the UK. The three plants, each of which will have a capacity of 300MW, are currently going through the design and environmental assessment. The plants will be built through a joint development agreement with Siemens Project Ventures and the cost including logistics and processing facilities is likely to be in the region of £2bn. So far law firms to have got involved in these developments include Norton Rose.

Tidal and wave

Wave and tidal technologies are relatively underdeveloped at the moment, but hold the potential to be the jewel in the crown for the UK's renewable strategy given the nation's island status. The Government is set to make a decision on the Severn tidal scheme next year. A study is considering a number of possible ways to generate electricity from the tides, ranging from a £21bn barrage between Cardiff and Weston-super-Mare that could produce 5% of UK electricity, to a £2.3bn 625MW option supplying around 1% of electricity. Spanning 10 miles, the barrage project has been compared to the construction of the Channel Tunnel in terms of the level of engineering required. Feasibility studies are also being conducted in the Mersey and Solway Firth and the Wyre and Dee Estuaries and Morecambe Bay are being considered as potential sites. Bond Pearce and Eversheds are both understood to have taken roles.

Solar

The use of solar energy production in the UK is limited due to a lack of sun, in contrast to foreign markets like the US and Spain. However, on a small scale there is potential to use solar thermal or photo-voltaic panels as partial energy generation on a community or individual scale, and it is here that the Department of Energy and Climate Change hopes feed-in tariffs and renewable heat incentives will come to fruition. Low Carbon West Oxford is one such scheme – one idea is to get the large businesses around West Oxford to lease their roofs to the community for solar panels.

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Renewables – A market view

There is a school of thought within the UK's traditional power advisory community that is mirrored in the renewables sector: chase the mega-projects.

In traditional power, legal advisers are building relations with nuclear leaders. In much the same way, there is a market shift in renewables towards chasing mandates on the big ticket offshore wind projects.

This shift in focus is in line with government aspirations as it seeks to sidestep the contentious issue of planning permission and lack of grid connections.

Offshore projects have also been sweetened by the incentive regime that was tweaked to make them more financially viable. However, this will remain a preserve for the largest renewables players with balance sheets to finance projects with pure equity. The success of Centrica's Boreas wind portfolio in closing the refinancing of several of its operational assets together with the ability of the three sponsors on London Array to attract senior debt will serve as the catalyst for such projects to progress.

It should be noted that not one UK project finance renewables facility made it to financial close in H1 of 2009, but now there are a number of banks stating their ability to lend in the UK – the most notable (not surprisingly) being Royal Bank of Scotland and Lloyds. They are joined by the likes of HSBC, Barclays, Dexia, BNP Paribas, Santander, Commerzbank, NordLB and National Australia Bank.

In tandem with offshore wind will be national grid interconnect projects which should allow a number of interesting opportunities and need not be spearheaded by legal advisers with a deep history in renewables. Because of the nature of these projects, they would appeal to firms with a history of advising on oil and gas, telecoms and cable-laying.

The greatest opportunity for the legal community lies with offshore wind, but there will be continued activity in other renewable sectors. Onshore wind will see continued investment, while ocean power remains unproven, and biomass turns into a niche sector with some interesting developments on the horizon for combined heat and power.

With Scotland taking such a prominent role in ocean power and England forging ahead with the Severn Barrage, there are opportunities for law firms to carve out a reputation as sector leaders in nascent industries.

Angus Leslie Melville, editor of Infrastructure Journal

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The international perspective

Climate change may be a global problem but the response in terms of green energy varies radically across different nationals. The US remains by far the largest market for renewable energy and a key centre for clean energy technology thanks to the west coast venture capital community.

Power generation is widely spread across solar, wind and biomass, and the country is widely considered one of the most attractive countries to develop alternative energy projects (see table below). More recently the US Government has provided substantial support as part of its 2009 economic stimulus package and introduced federal grants for up to 30% of project capital costs. The US also provides relatively generous tax incentives to invest in alternative energy. Legislation is also expected to support the long-term development of low-carbon energy with June seeing the passing of the American Clean Energy and Security Act. This set targets to reduce greenhouse gases by 83% by 2050 from 2005 levels and requires electric utilities to produce at least 12% of their power from renewable sources. There are expectations that 2010 and 2011 will see a sharp upturn in M&A and initial public offering work as well as new projects in the green technology sector.

Western Europe is the other major region for renewable energy with Germany, Italy and Spain all having seen substantial investment in green energy thanks to state support. Spain in particular has seen an explosion of activity in alternative energy over the last two years dominated by solar projects.

In contrast, the UK is viewed as having lagged well behind the continent due to lack of clarity over energy policy, planning difficulties and more generous state-aid in other market.

Nevertheless, the UK is seen as a strong future prospect, given its potential to generate wind power, high energy demand, falling reserves of north sea oil and political commitments.

However, the country currently attracting most attention on the international stage is China, which has aggressive targets to increase alternative energy generation. Chinese 2020 targets for solar power have risen to 9GW, which is 75 times the country's current solar capacity of 120MW.

The national wind sector has also seen aggressive growth thanks to economic stimulus measures. China is also set to introduce feed-in tariffs to support wind power. With attention now on the flagship Jiuquan wind project, set to be completed by the end of 2010, China looks set to be a major driver of the global renewables industry.