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15 June 2020
General corporate security
Can wind turbines and production licences be subject to security?
Floating wind turbines as vessels
Are wind turbines operating assets?
Can concessions be assigned as security?
Room for further regulation
Equinor's pioneering Hywind Tampen project – set to become the biggest floating wind farm in the world – marks the first foray into offshore wind production in Norway. There are high hopes for the potential of this industry in a country with a long coastline and considerable offshore energy production expertise.
However, a number of issues must be resolved in order for offshore wind production to become a commercially viable industry in Norway. Central in this regard is the establishment of a legal framework that enables projects to attract commercial financiers (Hywind Tampen will by contrast receive heavy financial support from Enova and the NOx Fund). In order for such financiers to be willing to provide capital, adequate security must be available.
As set out in the Mortgage and Pledge Act, a security right can be legally granted only to the extent that it has explicit basis in statutory law. As new industrial opportunities arise, this principle could cause issues if existing legislation insufficiently allows for the relevant security to be created. As discussed in this article, this appears to be the case for offshore wind production.
However, the first question to be addressed is what options do lenders have to secure their exposure in the current regulatory landscape?(1)
The Offshore Renewable Energy Production Act, which regulates offshore wind production, does not address the issue of security. However, numerous security options are generally suitable for all types of debt financing and may correspondingly apply to offshore wind projects.
One such option is parent guarantees. In case of ventures into offshore wind by established industry players, parent guarantees may go a long way to offset a lack of other viable security. However, as in land-based wind production, numerous projects will likely be owned by private funds or other partnerships that, according to their articles of association, cannot issue guarantees.
A charge over the borrower's shares is another option. If the wind turbines and production licence cannot be mortgaged or assigned separately (see below), seizing control of a defaulting borrower may be an alternative route for lenders to access the security value of these assets. However, a share charge will not stop the borrower from disposing of the assets or secure a lender's interest in them should the borrower go bankrupt.
Lenders may also demand standard assignments of monetary claims, such as the project owner's claims against its insurers or deposit bank (by way of a standard account charge) or against an electricity buyer under a power purchase agreement, as well as the full suite of recordable floating charges over the borrower' movables (eg, inventory, operating assets and trade receivables) to the extent that these are relevant.
While not a security right as such, lenders to onshore wind power projects often require step-in rights by way of direct agreements with contractors connected to the project, such as turbine suppliers and power purchasers. Lenders which have come to expect such rights in onshore transactions will likely request similar privileges when following borrowers offshore.
While the abovementioned security will require little tailoring in order to become viable for use in offshore wind financing, a bigger question is whether and how lenders can obtain security over what are likely to be a borrower's most valuable – and perhaps only – assets: the wind turbines themselves and the right to use them for power production.
Although these are separate questions, they are interconnected from a mortgagee's point of view; turbines that cannot be used for power production may be of limited value (and could even pose a liability from a wreck removal or even pollution perspective), whereas a concession without turbines will likely have no value.
In onshore projects, wind turbines are covered by the lender's mortgage over the borrower's land rights, which encompasses all of the mortgagor's plant and structures on the land in question. However, this approach is not transferable to offshore projects: turbines will either be fixed on the seabed or floating freely in the ocean – in either case escaping notions of private land rights altogether.
In the case of floating turbines, the issue of security appears to be solvable through the system adopted for floating production devices in the petroleum sector (ie, registration in the ordinary ship registers). Section 33 of the Maritime Code expressly allows for registration in the Norwegian Ordinary Ship Register of floating devices other than ships as long as they are owned by an entity which satisfies the ordinary nationality requirements for entry.
The fact that floating turbines qualify as floating devices seems apparent as the associated Regulation on Other Floating Devices 1994 broadly defines a 'floating device' as any permanently floating device that is used for commercial purposes (other than aquaculture) and is not a ship. Section 1 of the Norwegian International Ship Register (NIS) Act similarly states that "other floating devices" may be entered in the NIS subject to regulation; however, no such regulation exists at present.
Through the ordinary mortgage provisions in the Maritime Code, a lender could therefore register what would essentially be a ship mortgage over a Norwegian-flagged turbine.
However, an obstacle remains in that pursuant to the abovementioned regulation, the entry of other floating devices in the ship registers requires the approval of the Maritime Authority. While this may not be an unconquerable hurdle, the registration of both turbines themselves and any security thereover is still an issue that must be resolved on a case-by-case basis.
While (floating) wind turbines seem to constitute 'floating devices', another question is whether they would also be deemed 'operating assets' and be covered under a standard Norwegian operating assets charge.
At least in the case of floating turbines, which in principle may be moved to perform work at various locations (akin to heavy construction equipment on land – which is covered by such charges), a case could be made for this.
However, arguing for fixed turbines to be covered under this definition may be a harder sell, and the view that floating and fixed turbines should not be differentiated in this regard could be an argument against also including floating turbines. In any case, an operating assets charge does not prevent the mortgagor from selling one or more turbines unless this significantly reduces the value of the mortgagee's security.
As indicated above, the security issues arising in relation to offshore wind production are similar to those of traditional offshore activities (ie, oil and gas production) which also involve various floating and fixed production equipment on offshore worksites. The approach chosen by legislators for registration of security over semi-submersible platforms, floating production storage and offloading units and other mobile production devices for petroleum – namely, recordation in a ship register – also seems to be the smoothest approach in relation to floating wind turbines.
How then is the issue of security over fixed production equipment solved in the petroleum sector?
The answer follows from the Petroleum Act, which allows for security assignment of a concessionaire's development licence (which is recordable in the Petroleum Register). These licences being assignable is a key point in itself – as noted above, the security potential of production equipment may depend on whether the mortgagee can use or dispose of it to the same extent as a concessionaire. The Petroleum Act expressly provides that subject to the approval of the granting authority, an assignee may demand a forced sale or obtain forcible use of the licence for its own benefit.
In addition, these assignments cover title to any associated production equipment not being registered in a ship register, such as fixed platforms, which are not eligible for entry in the Norwegian registers.
Similar provisions also apply to development licences under the Norwegian Aquaculture Act.
Like most power production, offshore wind production will require a concession. This could lead to a system whereby such concessions are made subject to security assignments covering the turbines and associated equipment along similar lines as provided for in the Petroleum Act.
By comparison, facility licences for the construction and operation of (onshore) wind farms under the Energy Act are not assignable. However, the scope of a facility licence is the production of electricity on the concessionaire's own (owned or leased) property, which thereby leaves the issue of security over plants and equipment to the Mortgage and Pledge Act. A production licence for offshore wind appears thematically closer to development licences for petroleum as it entitles the concessionaire to exploit natural resources belonging exclusively to the Norwegian state (referenced explicitly in Section 1-3 of the Offshore Renewable Energy Production Act).
As demonstrated above, the legal framework required to facilitate registration of security over floating wind turbines seems to exist in the Maritime Code. Even so, while the requirement of Maritime Authority consent may be appropriate in the current experimental phase, the code should be updated with provisions which expressly permit the registration of wind turbines before commercial lenders enter the fray. Other specific regulations may also be necessary.
In the case of fixed turbines, as well as production licences, lenders appear to be prevented from obtaining enforceable security. Even so, the Offshore Renewable Energy Production Act, which appears to be the most logical instrument to regulate these issues, remains fairly skeletal and the Ministry for Oil and Energy is exploring a new regulation under the act – the question of security being one of the issues under review in this regard.
As other obstacles to the commercial use of offshore wind are removed, the onus is on legislators to ensure a regulatory landscape that enables participation by commercial financiers.
For further information on this topic please contact Peter Aall Simonsen at Advokatfirmaet Simonsen Vogt Wiig AS by telephone (+47 51 82 32 00) or email (email@example.com). The Advokatfirmaet Simonsen Vogt Wiig AS website can be accessed at www.svw.no.
(1) Further information is available here.
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