Heavy Industries Go Light: Joint Ventures in Renewable Energy Projects23 September 2024

Decision Gates

Where JVs are covering the entire life cycle of a project, including early development stages in which capex and other IRR drivers are still a moving target, JV partners should act on the presumption of an aligned business case, including alignment of the tolerance margins they are willing to accept regarding their IRR expectations. In the current market environment, supply chain costs are particularly volatile. Any JV structure should, therefore, define both decision gates at which the parties can reconsider their commitments and a framework of boundaries within which they remain committed to the project. If key KPIs appear to be outside such boundaries, exit rules need to be defined which apply in case a party wishes to withdraw from the project while others remain.

Governance

Governance is obviously key in any JV structure, the details of which depend on allocation of shareholding in the JV company. Specifically in JVs for large infrastructure/renewables projects, governance will often have to strike a delicate balance between (known) asymmetries amongst the partners. Often, such asymmetries relate to allocation of operative roles: Where, for example, one JV partner is an experienced developer and operator (as are the major European utilities), while the other JV partner lacks such know-how, decision making power (“delegated authorities”) will naturally lean towards the experienced party, while certain check and balances (“reserved matters”) apply in particular in situations where materiality thresholds are passed or where potential conflicts of interest might arise.

Exit Rules

As noted above, asymmetries in relation to the investment horizons (recycle cash vs. long-term commitments) often apply. It is, therefore, key to address these asymmetries in bespoke exit rules. These could include periods in which exits are not allowed (lock-in periods), which would typically apply to the particularly critical phases of a project (construction and early operations). Rights of first refusal (ROFR) or rights of first offer (ROFO) can help to provide comfort that no unwelcome new partner can join without existing JV partners first having had the chance to buy the stake themselves. Where one JV partner is particularly reliant on the others’ operative know-how, sales could be linked to the transferee being a similarly experienced player.

Right to Output

JV partners may also have different expectations regarding generation. Some investors’ interests might be confined to the most efficient monetization of the output, while other JV partners might want to have specific access to the output (electricity, heat, etc.), i.e. they wish to use the output themselves and apply green credits for their own manufacturing processes, or they require the output for their own trading business. In such cases, internal offtake agreements between the relevant JV partner and the JV entity might be put in place. To avoid unfair allocation of JV-rewards amongst the partners, but also to avoid tax-disadvantages, these internal offtake agreements will have to be carefully monitored for their compliance with arms-length standards.

Financing

JV partners often have different funding requirements and sources when it comes to their respective funding obligations. Some JV partners might be interested in sourcing such funds solely from equity, while others might be interested in leveraging their investment (i.e. use external debt). In such situations, it has now become standard in the market to use a “HoldCo-finance structure” in which typical project finance standards are applied, except for the fact that lenders will not receive extensive collateral over the project assets.

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