2. Preliminary and Overarching Considerations
There is a general legal framework for conducting business in every jurisdiction, a framework which is part of the overall business culture of each locale. Our focus is on the legal issues that pervade legal aspects of clean energy projects across most jurisdictions. Legal considerations can range from the fairly obvious (power purchase and interconnection agreements) to the less obvious (avian pathways and indigenous rights). These issues will likely assume importance at the pre-feasibility stage, yet continue to be important throughout the life-and even after the end-of the project.
2.1 Legal Advice: For Whom, What Kind, and How Much?
This overview is meant for developers of clean energy projects (energy efficiency, cogeneration/CHP, and renewables), primarily at levels above that of household projects. However, legal issues should be of interest no matter what one's role in the project, although that role will determine the specific legal focus. Are you a manufacturer of clean energy equipment? A developer of a project? A landowner leasing your land to a clean energy project developer? A tertiary purchaser? An energy consolidator and marketer? A business contracting an energy services company? A financial entity underwriting the project? A utility purchasing power from an electricity producer? A business involved in onsite combined heat and power? Does your project co-locate more than one renewable energy generation facility (such as solar and wind) on a single site? Is there any sharing of project site or transmission costs?
Legal issues will also depend on the type of project as well as the variations of technology employed. For example, is the project on- or off-grid? If it is off-grid or primarily a distributed generation project, major agreements such as the power purchase agreement and interconnection agreement may not be necessary (although one should note that the great majority of projects, at present, are connected in some way to the existing electric grid).
It is also important to realize that the legal agreements in a clean energy project will likely be multifaceted and not always between two parties; the legal relationships may very well form a web among multiple parties, which might include, for example, utilities, construction subcontractors, financiers, fuel suppliers and external consultants.
Finally, it is useful to note that one can either have a set of broad, overarching agreements that try to encompass all relevant categories of issues, or else a series of shorter discrete agreements. As will be discussed later, the approach depends on the type and size of the project, and there are advantages and disadvantages to both approaches.
All parties in clean energy projects, no matter how large or small the project, or the type of project, should nonetheless find the information presented here to be useful and relevant. But while RETScreen will help to outline the legal issues that a project may face, only an individual project team can determine its relationship to these issues.
This overview is meant for developers of clean energy projects (energy efficiency, cogeneration/CHP, and renewables), primarily at levels above that of household projects. However, legal issues should be of interest no matter what one's role in the project, although that role will determine the specific legal focus. Are you a manufacturer of clean energy equipment? A developer of a project? A landowner leasing your land to a clean energy project developer? A tertiary purchaser? An energy consolidator and marketer? A business contracting an energy services company? A financial entity underwriting the project? A utility purchasing power from an electricity producer? A business involved in onsite combined heat and power? Does your project co-locate more than one renewable energy generation facility (such as solar and wind) on a single site? Is there any sharing of project site or transmission costs?
Legal issues will also depend on the type of project as well as the variations of technology employed. For example, is the project on- or off-grid? If it is off-grid or primarily a distributed generation project, major agreements such as the power purchase agreement and interconnection agreement may not be necessary (although one should note that the great majority of projects, at present, are connected in some way to the existing electric grid).
It is also important to realize that the legal agreements in a clean energy project will likely be multifaceted and not always between two parties; the legal relationships may very well form a web among multiple parties, which might include, for example, utilities, construction subcontractors, financiers, fuel suppliers and external consultants.
Finally, it is useful to note that one can either have a set of broad, overarching agreements that try to encompass all relevant categories of issues, or else a series of shorter discrete agreements. As will be discussed later, the approach depends on the type and size of the project, and there are advantages and disadvantages to both approaches.
All parties in clean energy projects, no matter how large or small the project, or the type of project, should nonetheless find the information presented here to be useful and relevant. But while RETScreen will help to outline the legal issues that a project may face, only an individual project team can determine its relationship to these issues.
2.2 Liability and Insurance
As has been mentioned, the legal aspects of a clean energy project are about managing risk to the project and to the people behind it. Clean energy projects may be exposed to contract liability (arising from a party's failure to fulfil commitments made in a contract), tort liability (arising between parties without a contractual relationship, including negligence and nuisance), and regulatory liability (arising because a party engages in actions that are specifically prohibited by law or fails to perform actions that are specifically required by law). An outlier example demonstrates the wide scope of potential liability: under the doctrine of attractive nuisance, a wind developer in the U.S. could be exposed to tort liability if a child attempts to climb a wind turbine and is injured in the process.
It is beyond the purview of this document to discuss all the sources of and mitigation of liability in any great detail. What is important for a party to a clean energy project to know is that appropriate due diligence in planning and implementation of the project is the first step in shielding the project and the people behind it from liability. Experienced legal counsel can both identify and craft a legal strategy to buffer the project from most liability issues. Regardless of how sound one's legal strategy, however, there will always be claims that arise seemingly out of nowhere. For this reason, every clean energy project should have comprehensive policies of insurance. Again, legal counsel in conjunction with other professional support can help to identify and obtain appropriate insurance coverage.
As has been mentioned, the legal aspects of a clean energy project are about managing risk to the project and to the people behind it. Clean energy projects may be exposed to contract liability (arising from a party's failure to fulfil commitments made in a contract), tort liability (arising between parties without a contractual relationship, including negligence and nuisance), and regulatory liability (arising because a party engages in actions that are specifically prohibited by law or fails to perform actions that are specifically required by law). An outlier example demonstrates the wide scope of potential liability: under the doctrine of attractive nuisance, a wind developer in the U.S. could be exposed to tort liability if a child attempts to climb a wind turbine and is injured in the process.
It is beyond the purview of this document to discuss all the sources of and mitigation of liability in any great detail. What is important for a party to a clean energy project to know is that appropriate due diligence in planning and implementation of the project is the first step in shielding the project and the people behind it from liability. Experienced legal counsel can both identify and craft a legal strategy to buffer the project from most liability issues. Regardless of how sound one's legal strategy, however, there will always be claims that arise seemingly out of nowhere. For this reason, every clean energy project should have comprehensive policies of insurance. Again, legal counsel in conjunction with other professional support can help to identify and obtain appropriate insurance coverage.
2.3 Scale
The depth and breadth of the legal advice desired will depend on the size of the project and the costs/consequences of failure. A solar water heater installed in a single-family home or a single wind turbine on a farm will have a much lower degree of legal complexity (and concomitant legal expense) than a large power plant with numerous customers spread out over multiple jurisdictions. For a homeowner looking to install a rooftop solar panel system or engaging in a home energy retrofit, legal documentation might consist of no more than a one page carbon copy agreement with the installer and not normally justify the direct intervention or expense of a lawyer (and a lawyer can probably provide summary advice for a relatively small fee if questions or concerns do arise). For such small projects, legal issues will mostly remain in the background. However, even a household level system, if connected to the larger grid under the governance of a net-metering or feed-in tariff scheme, might require a scaled-down version of an interconnection or power purchase agreement. It bears repeating that every project is unique, as are the legal issues around every project.
One point to note is that with the expansion of markets for clean energy, many new suppliers have entered the industry and the level of governmental regulation may be insufficient to properly oversee the influx of new entrants. Fraud can be an issue when it comes to installations by newly established companies. The precautionary principle is always at play-buyer beware.
On the other hand, a large (municipal-sized), multi-jurisdictional project will almost always have a significant budget for legal counsel; such counsel is probably a required condition of obtaining project financing. For the largest projects, legal fees may constitute a significant component of the project budget.
In sum, whether your project is large or small: when in doubt, err on the side of caution and get expert advice.
The depth and breadth of the legal advice desired will depend on the size of the project and the costs/consequences of failure. A solar water heater installed in a single-family home or a single wind turbine on a farm will have a much lower degree of legal complexity (and concomitant legal expense) than a large power plant with numerous customers spread out over multiple jurisdictions. For a homeowner looking to install a rooftop solar panel system or engaging in a home energy retrofit, legal documentation might consist of no more than a one page carbon copy agreement with the installer and not normally justify the direct intervention or expense of a lawyer (and a lawyer can probably provide summary advice for a relatively small fee if questions or concerns do arise). For such small projects, legal issues will mostly remain in the background. However, even a household level system, if connected to the larger grid under the governance of a net-metering or feed-in tariff scheme, might require a scaled-down version of an interconnection or power purchase agreement. It bears repeating that every project is unique, as are the legal issues around every project.
One point to note is that with the expansion of markets for clean energy, many new suppliers have entered the industry and the level of governmental regulation may be insufficient to properly oversee the influx of new entrants. Fraud can be an issue when it comes to installations by newly established companies. The precautionary principle is always at play-buyer beware.
On the other hand, a large (municipal-sized), multi-jurisdictional project will almost always have a significant budget for legal counsel; such counsel is probably a required condition of obtaining project financing. For the largest projects, legal fees may constitute a significant component of the project budget.
In sum, whether your project is large or small: when in doubt, err on the side of caution and get expert advice.
2.4 Timing
Often minimized in importance, timing issues can affect the financial viability of a project. Developing appropriate legal and financial documents and conducting negotiations with all parties involved takes time. The process for developing certain documents, such as interconnection agreements and power purchase agreements, is known to be time-intensive. Obtaining necessary permits and approvals from multiple levels of government can take time, sometimes an inordinate amount of time.
Do not underestimate how long it will take to satisfy all legal requirements and craft an appropriate legal documentation strategy. If a realistic time-frame is not factored into the project financials, along with a healthy financial reserve to account for delays, project costs and projected returns can quickly go off track. Informed estimates of the timeline are necessary, as well as frequent revisiting and revision of these estimates.
Often minimized in importance, timing issues can affect the financial viability of a project. Developing appropriate legal and financial documents and conducting negotiations with all parties involved takes time. The process for developing certain documents, such as interconnection agreements and power purchase agreements, is known to be time-intensive. Obtaining necessary permits and approvals from multiple levels of government can take time, sometimes an inordinate amount of time.
Do not underestimate how long it will take to satisfy all legal requirements and craft an appropriate legal documentation strategy. If a realistic time-frame is not factored into the project financials, along with a healthy financial reserve to account for delays, project costs and projected returns can quickly go off track. Informed estimates of the timeline are necessary, as well as frequent revisiting and revision of these estimates.
2.5 The Legal Environment
Throughout this discussion, it is useful to distinguish among and bear in mind the legal environment, legal obligations, and legal considerations.
The legal environment, for our purposes, consists of governing laws, regulations, treaties, conventions, and customary modes of conduct at the international, national, state/provincial, and municipal levels. It is the legal world inhabited by the party to a clean energy project, and consists of legal obligations and legal considerations.
One has little control over legal obligations, which may include general compliance with national and provincial commercial or contract laws, securing various municipal permits, adhering to state environmental regulations, or compliance with an international treaty that has been brought into force at the federal level. If an individual, organization, or company does not pay heed to obligations in the legal environment, a properly functioning legal system should impose punitive sanctions on the violator.
One has significant control over legal considerations, which might consist of, for example, the various documents required for a clean energy project. Omitting to have an interconnection agreement or having an inadequate power purchase agreement may not violate any particular laws in one's legal environment nor may it violate one's legal obligations. However, the lack of, or an insufficient interconnection or power purchase agreement could prove to be disastrously foolish. There are obviously a broad range of legal documents that can be brought to bear upon any clean energy project. Only a careful assessment of the situation will undercover what documents are necessary and how they should be crafted. Because there is no legal necessity to put into place most of these documents, business acumen, legal knowledge, and an understanding of risk must combine to ensure that they are done completely and correctly.
Thus, it is important to thoroughly understand your legal environment: what your legal obligations are at all levels of government, and also what specific legal considerations are germane to your project.
Throughout this discussion, it is useful to distinguish among and bear in mind the legal environment, legal obligations, and legal considerations.
The legal environment, for our purposes, consists of governing laws, regulations, treaties, conventions, and customary modes of conduct at the international, national, state/provincial, and municipal levels. It is the legal world inhabited by the party to a clean energy project, and consists of legal obligations and legal considerations.
One has little control over legal obligations, which may include general compliance with national and provincial commercial or contract laws, securing various municipal permits, adhering to state environmental regulations, or compliance with an international treaty that has been brought into force at the federal level. If an individual, organization, or company does not pay heed to obligations in the legal environment, a properly functioning legal system should impose punitive sanctions on the violator.
One has significant control over legal considerations, which might consist of, for example, the various documents required for a clean energy project. Omitting to have an interconnection agreement or having an inadequate power purchase agreement may not violate any particular laws in one's legal environment nor may it violate one's legal obligations. However, the lack of, or an insufficient interconnection or power purchase agreement could prove to be disastrously foolish. There are obviously a broad range of legal documents that can be brought to bear upon any clean energy project. Only a careful assessment of the situation will undercover what documents are necessary and how they should be crafted. Because there is no legal necessity to put into place most of these documents, business acumen, legal knowledge, and an understanding of risk must combine to ensure that they are done completely and correctly.
Thus, it is important to thoroughly understand your legal environment: what your legal obligations are at all levels of government, and also what specific legal considerations are germane to your project.
2.5.1 Jurisdiction
Law is generally highly jurisdiction-specific-that is, laws and regulations are drafted to reflect the prevailing business conditions, social considerations, and policy objectives of the place in which they are made. Law may be jurisdiction-specific in terms of content (different laws) and in terms of form (different systems or approaches to legal codification, such as common, civil, customary, and statutory). Laws of countries often differ from one another, but even parts of the same country (i.e. various states or provinces) can have differing, mutually exclusive, or conflicting laws. Where such jurisdictional variations are most stark, such as in matters of taxation and financial incentives, legal obligations and considerations can only be discussed in the abstract.
Related to the issue of jurisdiction is the level of law applicable. Most countries will enact laws at both a federal and provincial or state level, with some doctrine analogous to paramountcy often applying. Paramountcy is the notion that in the event of conflict or inconsistency between laws at the federal and provincial/state level, one set of laws will be given priority. Normally, federal laws have priority, but this is not always the case. The jurisdiction of international law can also become a consideration, as discussed below.
Law is generally highly jurisdiction-specific-that is, laws and regulations are drafted to reflect the prevailing business conditions, social considerations, and policy objectives of the place in which they are made. Law may be jurisdiction-specific in terms of content (different laws) and in terms of form (different systems or approaches to legal codification, such as common, civil, customary, and statutory). Laws of countries often differ from one another, but even parts of the same country (i.e. various states or provinces) can have differing, mutually exclusive, or conflicting laws. Where such jurisdictional variations are most stark, such as in matters of taxation and financial incentives, legal obligations and considerations can only be discussed in the abstract.
Related to the issue of jurisdiction is the level of law applicable. Most countries will enact laws at both a federal and provincial or state level, with some doctrine analogous to paramountcy often applying. Paramountcy is the notion that in the event of conflict or inconsistency between laws at the federal and provincial/state level, one set of laws will be given priority. Normally, federal laws have priority, but this is not always the case. The jurisdiction of international law can also become a consideration, as discussed below.
2.5.2 The Application of International Law
Considerable work has been ongoing on the international front with regards to the mitigation of climate change and the promotion of clean energy. While the general practice is that the law of states governs the vast majority of activities within a country-and thus for a clean energy project-international treaties, such as the UN Convention on Contracts for the International Sale of Goods or the UN Framework Convention on Climate Change (and its Kyoto Protocol), can have legal force, particularly when the federal government of a country has purposively brought such conventions into force.
A salient feature of international law is that it is non-binding; international law, as it currently exists, applies only when a national government has made it a part of a country's legislation. There may, however, be sub-international or regional conventions/treaties that have been brought into force through ratification by a specified percentage of the sub-international body's members, i.e., the EU Emissions Trading Scheme of 2005, adherence to the terms of which is binding on all European Union members.
Various international and regional treaties have varying degrees of application to clean energy projects. The Bonn Convention on Migratory Species may offer guidance on how to mitigate any adverse effects of fauna affected by wind turbines. The UN Convention on the Law of the Sea may be applicable to offshore wind installations as well as ocean, wave & tidal power. The European Community's Renewables Directive, binding on European Union members, is an example of renewable or energy efficiency portfolio standards, through which a certain percentage of all electricity generated must be from renewable sources. The aforementioned EU Emissions Trading Scheme (2005) requires conventional power stations in the European Union to obtain CO2 allowances, either through a governmental allotment or through marketplace purchases.
There will be more international regulation of clean energy as its share in total global energy production and consumption rises. For now, what should be of concern to any party involved in a clean energy project are the legally binding obligations created through ratification of one of these international or regional treaties by a national government. For example, in a country which has ratified the Kyoto Protocol and enacted national legislation to bring it into force, a clean energy project developer will have to take special note of its legal obligations under the Protocol. Such obligations might include mandatory energy efficiency measures, mandatory participation in the clean development mechanism or joint implementation, or the adoption of or contribution to renewable fuel standards, wherein a percentage of all electricity generated or purchased must come from renewable sources. It should be noted that, as of 2008, and apart from the EU examples cited, internationally legally binding obligations are relatively few and will not concern most clean energy projects.
There is one final critical point to note: even in the absence of a binding international treaty or convention, voluntary compliance with such treaties or conventions may make the project eligible for significant financial incentives, which might contribute to project viability.
Considerable work has been ongoing on the international front with regards to the mitigation of climate change and the promotion of clean energy. While the general practice is that the law of states governs the vast majority of activities within a country-and thus for a clean energy project-international treaties, such as the UN Convention on Contracts for the International Sale of Goods or the UN Framework Convention on Climate Change (and its Kyoto Protocol), can have legal force, particularly when the federal government of a country has purposively brought such conventions into force.
A salient feature of international law is that it is non-binding; international law, as it currently exists, applies only when a national government has made it a part of a country's legislation. There may, however, be sub-international or regional conventions/treaties that have been brought into force through ratification by a specified percentage of the sub-international body's members, i.e., the EU Emissions Trading Scheme of 2005, adherence to the terms of which is binding on all European Union members.
Various international and regional treaties have varying degrees of application to clean energy projects. The Bonn Convention on Migratory Species may offer guidance on how to mitigate any adverse effects of fauna affected by wind turbines. The UN Convention on the Law of the Sea may be applicable to offshore wind installations as well as ocean, wave & tidal power. The European Community's Renewables Directive, binding on European Union members, is an example of renewable or energy efficiency portfolio standards, through which a certain percentage of all electricity generated must be from renewable sources. The aforementioned EU Emissions Trading Scheme (2005) requires conventional power stations in the European Union to obtain CO2 allowances, either through a governmental allotment or through marketplace purchases.
There will be more international regulation of clean energy as its share in total global energy production and consumption rises. For now, what should be of concern to any party involved in a clean energy project are the legally binding obligations created through ratification of one of these international or regional treaties by a national government. For example, in a country which has ratified the Kyoto Protocol and enacted national legislation to bring it into force, a clean energy project developer will have to take special note of its legal obligations under the Protocol. Such obligations might include mandatory energy efficiency measures, mandatory participation in the clean development mechanism or joint implementation, or the adoption of or contribution to renewable fuel standards, wherein a percentage of all electricity generated or purchased must come from renewable sources. It should be noted that, as of 2008, and apart from the EU examples cited, internationally legally binding obligations are relatively few and will not concern most clean energy projects.
There is one final critical point to note: even in the absence of a binding international treaty or convention, voluntary compliance with such treaties or conventions may make the project eligible for significant financial incentives, which might contribute to project viability.
2.6 The Need for Legal Counsel
If the need for legal counsel is not already clear, we reiterate two facts that make experienced legal counsel essential to a clean energy project. First, legal agreements are often very complex, particularly so in the realm of energy projects; thus, a do-it-yourself approach is definitely not advisable. Second, the law of energy and clean energy is fast-changing and highly dynamic; thus expert assistance is critical in navigating its sometimes perilous waters and keeping up-to-date with the latest developments.
Furthermore, no matter how cooperative the spirit, parties in a clean energy project will always have at least slightly differing interests. Legal counsel is necessary to advocate in one's interests. The necessity of legal counsel often increases in direct proportion to the size of the project. Counsel is necessary not only to draft specific agreements, but also for steps such as title review and remedies, regulatory applications and representations, and in litigation. An experienced lawyer can be critical to the success of project negotiations, particularly if the other party is a utility, corporation, government or similar entity with disproportionate resources and power. Finally, employing counsel shifts a small degree of project risk to the lawyer and his/her law firm, as lawyers are normally covered by professional liability insurance. Thus, one has a degree of assurance that hiring appropriate legal counsel will result in legal issues being properly dealt with.
Although links to sample agreements have been provided in section 4 (Project Legal Documentation) of this chapter, it should be noted that these are not standardized documents, nor are standardized documents possible. Each document must be tailored to the particular situation. Thus, this overview and the documents that it links to in no way eliminate the need for legal counsel. Rather, because clean energy is not an area of the law familiar to many lawyers, we attempt to outline the legal issues in some detail in order to assist in reducing some of the transactional costs associated with developing appropriate documents. At the very least, a project's legal counsel will know where to start and what to consider.
If the need for legal counsel is not already clear, we reiterate two facts that make experienced legal counsel essential to a clean energy project. First, legal agreements are often very complex, particularly so in the realm of energy projects; thus, a do-it-yourself approach is definitely not advisable. Second, the law of energy and clean energy is fast-changing and highly dynamic; thus expert assistance is critical in navigating its sometimes perilous waters and keeping up-to-date with the latest developments.
Furthermore, no matter how cooperative the spirit, parties in a clean energy project will always have at least slightly differing interests. Legal counsel is necessary to advocate in one's interests. The necessity of legal counsel often increases in direct proportion to the size of the project. Counsel is necessary not only to draft specific agreements, but also for steps such as title review and remedies, regulatory applications and representations, and in litigation. An experienced lawyer can be critical to the success of project negotiations, particularly if the other party is a utility, corporation, government or similar entity with disproportionate resources and power. Finally, employing counsel shifts a small degree of project risk to the lawyer and his/her law firm, as lawyers are normally covered by professional liability insurance. Thus, one has a degree of assurance that hiring appropriate legal counsel will result in legal issues being properly dealt with.
Although links to sample agreements have been provided in section 4 (Project Legal Documentation) of this chapter, it should be noted that these are not standardized documents, nor are standardized documents possible. Each document must be tailored to the particular situation. Thus, this overview and the documents that it links to in no way eliminate the need for legal counsel. Rather, because clean energy is not an area of the law familiar to many lawyers, we attempt to outline the legal issues in some detail in order to assist in reducing some of the transactional costs associated with developing appropriate documents. At the very least, a project's legal counsel will know where to start and what to consider.
