Key legal and regulatory developments driving and shaping M&A
In the run-up to COP26 in Glasgow, momentum is strengthening to accelerate the decarbonisation of the global economy, and in particular of energy and transport systems. Important developments include the announcement of China’s net carbon neutrality ambitions by 2060, President Biden’s executive orders making climate change a key focus for the new administration in the US and the adoption by the EU of a vast funding package to deliver the EU Green Deal.
From an energy systems perspective, energy storage technologies are considered key to enabling the increased use of renewable energy sources. IHS Markit forecast that 2021 will see the installation of 10 GW of energy storage facilities globally using various technologies, which is more than double the 4.5 GW of capacity installed in 2020.
To facilitate the investment needed, enabling policy and regulatory frameworks need to be implemented to provide guidance and certainty to storage developers and investors alike. In many jurisdictions, current policy and regulatory frameworks are not sufficiently equipped to support the deployment of storage technologies.
In the various EU member states, unfavourable conditions or barriers to the development and financing of energy storage projects often still prevail. Reform is underway however. In parallel with discussions on the EU Green Deal and COVID-19 related recovery packages, the EU has begun a comprehensive review of relevant EU legislation to determine to what extent amendment or additional legislation will be necessary to make the EU carbon neutral by 2050. This review is expected to be finalised in the second half of 2021. For storage in particular, much is expected from the revision of the Taxation Directive, the Batteries Regulation, the Renewable Energy Directive, the TEN-E Regulation and State Aid Guidelines. These changes are expected to create a true level playing field for storage technologies and also provide the necessary guidance for additional or amended national legislation in member states.
To support the EU Green Deal objectives, the EU has adopted a €1.8 trillion package of funding options to finance the transition through the Multi-annual Financial Framework and Next Generation EU recovery plan. Depending on, among other things, the maturity of the storage technology, the specific system services it can provide, the amount of funding necessary and the debt or equity financing instruments needed, developers can request financing through, for example, the Innovation Fund or Horizon Europe funding schemes. Opportunities may also exist for funding through the Just Transition Fund or the Recovery and Resilience Facility, if energy storage is included in plans to be submitted by member states. These funding frameworks are considered crucial to unlocking the private sector investment needed to finance the transition.
Of those storage projects we have worked on in the EU to date, few have secured project finance due to their risk profile, the lack of proper valuation of the services energy storage can provide and regulatory barriers. Despite this, we see a considerable increase in storage projects being developed using alternative finance such as national subsidies, crowdfunding, or via listed funds. Funding structures are however dependent on local market structures. Indeed, colleagues in the US have recently assisted in the financial close of a portfolio of six storage projects, although doing so required considerable innovation and creativity. Further information is available here.
In relation to transport systems, the European Commission’s Sustainable and smart mobility strategy aims at delivering a 90 percent reduction in transport-related emissions by 2050. Battery electric vehicles will play a strategic role in the decarbonisation of the European transport sector. There is support for increased European battery manufacturing capacity, with the European Investment Bank increasing its financing for the sector in 2020 to €1bn. Electric vehicle sales remain strong despite the present economic downturn and, with a growing number of commitments by manufacturers and governments to phase out internal combustion engines, proposals for gigafactories in Europe are multiplying as a result.
However, the European Commission has made clear that this expansion is not to be undertaken at any cost. As a result of the battery sector’s strategic importance, EU policy is now focused on creating a harmonised framework covering the entire battery life-cycle. Objectives include improving the sustainability of battery supply chains, recycling and re-use. In its proposal for a Regulation on batteries and waste batteries, the European Commission is seeking to strengthen the sustainability of supply chains and improve the recycling of industrial, automotive, electric vehicle and portable batteries placed on the market in the EU. Published in December 2020, the proposals include enhanced recycling targets, carbon footprint reporting requirements, moving to carbon intensity restrictions, as well as mandatory supply chain due diligence.
With the proper policy and regulatory frameworks in place, combined with enabling funding frameworks, energy storage technologies can finally start fulfilling the much anticipated and important role in the acceleration of the decarbonisation of EU and global energy and transport systems. With this in sight, we look forward to continuing our cooperation with authorities, clients and financiers to pro-actively shape future-proof regulatory frameworks that assist in meeting the ambitious decarbonisation targets.
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© Norton Rose Fulbright LLP 2021