What security options are available for lenders to offshore wind projects?
This article has been updated in 2021. The new version is available here.
Even so, there is still a number of issues that 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 Norwegian Mortgage and Pledge Act (Nw. Panteloven), a security right can only be legally granted to the extent it has explicit basis in statutory law. As new industrial opportunities arise, this principle could cause challenges if existing legislation does not sufficiently allow for the relevant security to be created. As will be discussed in this article, this appears to be the case for offshore wind production.
First, however, what options does a lender have for securing his exposure in the current regulatory landscape?
Offshore wind efforts require new mortgage rules
General corporate security
The Norwegian Offshore Renewable Energy Production Act (Nw. Havenergilova), which regulates offshore wind production, does not address the issue of security. A number of security options are however generally suitable for all types of debt financing and may applied to offshore wind projects correspondingly.
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 lack of other viable security. As in land based wind production however, a number of 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 license cannot be mortgaged/assigned separately (more on that below), seizing control of a defaulting borrower may be an alternative route for lenders to access the security value of these assets. A share charge will however not stop the borrower from disposing of the assets – nor does it 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. Add to this the full suite of recordable floating charges over the borrower’ movables (inventory, operating assets, trade receivables) to the extent such are relevant.
While not a security right as such, lenders to onshore wind power projects commonly require step-in rights by way of direct agreements with contractors connected to the project, such as turbine suppliers and power purchasers. Lenders who have come to expect such rights in onshore transactions are likely to request similar privileges when following borrowers offshore.
Can wind turbines and production licenses be subject to security?
While the above-mentioned security will require little tailoring in order to become viable for use in offshore wind financing, a bigger question is whether and how lenders will be able to 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 utilise them for power production.
These are two separate questions, but obviously interconnected from a mortgagee’s point of view: Turbines that cannot be utilised for power production may be of limited value (and could even pose a liability from a «wreck» removal or even pollution perspective); a concession without turbines will likely have no value at all.
In onshore projects, wind turbines are covered by the lender’s mortgage over the borrower’s land rights, which encompasses all the mortgagor’s plant and structures on the land in question. This approach is however 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.
Floating wind turbines as «vessels»
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, i.e. registration in the ordinary ship registers. Section 33 of the Norwegian Maritime Code (Nw. Sjøloven) expressly allows for registration in the Norwegian Ordinary Ship Register (NOR) of «floating devices» other than ships as long as they are owned by an entity which satisfies the ordinary nationality requirements for entry.
That floating turbines qualify as «floating devices» seems apparent as the associated Norwegian Regulation on Other Floating Devices of 1994 (Nw. Forskrift om andre flytende innretninger) 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 NIS Act (Nw. NIS-loven) similarly states that «other floating devices» may be entered in the Norwegian International Ship Register (NIS) subject to regulation; no such regulation however exists as of now.)
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.
For the time being however, an obstacle remains in that, pursuant to the abovementioned regulation, entry of «other floating devices» in the ship registers requires the approval of the Norwegian Maritime Authority. While this may not be an unconquerable hurdle, registration of both the turbines themselves and any security thereover is still an issue that must be resolved on a case-by-case basis.
Are wind turbines operating assets?
While (floating) wind turbines thus 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 around 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.
Arguing for fixed turbines to be covered under this definition may be a harder sell however, and the view that floating and fixed turbines should not be differentiated between in this regard could be an argument against including floating turbines as well. It should also be noted that an operating assets charge in any case does not prevent the mortgagor from selling one or more turbines unless this significantly reduces the value of the mortgagee’s security.
May concessions be assigned as security?
As already indicated, the security issues arising in relation to offshore wind production are similar to those of traditional offshore activities – 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, FPSOs and other mobile production devices for petroleum – recordation in a ship register – seems to be the smoothest approach also 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 Norwegian Petroleum Act (Nw. Petroleumsloven), which allows for security assignment of a concessionaire’s development license (which is recordable in the Petroleum Register). These licenses being assignable is a key point in itself; as noted above, the security potential of production equipment may depend on whether the mortgagee can utilise/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 license for its own benefit.
Additionally, 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 licenses under the Norwegian Aquaculture Act (Nw. akvakulturloven).
Like most power production, offshore wind production will require concession. One could thus imagine 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 licenses for the construction and operation of (onshore) wind farms under the Norwegian Energy Act are not assignable. It should however be kept in mind that the scope of a facility license is the production of electricity on the concessionaire’s own (owned or leased) property, thereby leaving the issue of security over plant and equipment to the Mortgage and Pledge Act. A production license for offshore wind appears thematically closer to development licenses for petroleum as it entitles the concessionaire to exploit natural resources belonging exclusively to the Norwegian State, ref. explicitly Section 1-3 of the Offshore Renewable Energy Production Act.
Room for further regulation
As demonstrated above, the legal framework required to facilitate registration of security over floating wind turbines seems to be more or less in place through the Maritime Code. Even so, while the requirement of consent from the Maritime Authority may be appropriate in the current experimental phase, the Code should be updated with provisions expressly permitting registration of wind turbines before commercial lenders enter the fray. Other specific regulations could also be in order.
In the case of fixed turbines, as well as production licenses, it appears that lenders are currently prevented from obtaining enforceable security. Even so, the Offshore Renewable Energy Production Act, which appears to be the most logical place to regulate these issues, remains a fairly skeletal piece of legislation, and the Norwegian Ministry for Oil and Energy is currently exploring a new regulation under the Act – the question of security being one of the issues reviewed in this connection.
As other obstacles to commercial utilisation of offshore wind are cleared off the way, the onus is on legislators to ensure a regulatory landscape that enables participation by commercial financiers.