Avoiding compliance shocks in solar power plant investment

By Yuan Wenqing, AllBright Law Offices
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As China sets its sights on reaching “peak carbon” with a view to ending net emissions in line with its commitments under the 2015 Paris Agreement, the photovoltaic (PV) industry offers a host of opportunities. From commercial banks and financial leasing companies to other debt financing or equity investment institutions, lending businesses are taking a keen interest in the development of solar power plants.

袁雯卿,-Yuan-Wenqing,-Allbright-S
Yuan Wenqing
Partner
AllBright Law Offices

However, the compliance requirements for the PV sector are scattered through numerous laws, regulations and ministerial-level regulatory documents, while some areas are lacking explicit provisions for compliance altogether. Investment in and financing of PV power plants and projects therefore presents challenges, including high demands for specialisation and difficulty in passing compliance reviews.

It should be noted that, for length reasons, this article does not analyse PV power plants by type, but focuses on practical issues frequently raised by clients involved in PV power plant investment and financing.

Land compliance

Common land acquisition methods for ground-based PV power plants include grant, allocation and lease. These must comply with laws and regulations on the transfer and use of land, such as the Land Administration Law, the Implementing Regulations for Land Administration and the Rural Land Contracting Law. Requirements for using land for PV power generation that must also be observed are found in such documents as the Opinions on Supporting the Development of New Industries and Businesses and Promoting Land Use for Mass Entrepreneurship and Innovation, and the Several Opinions of the State Council on Promoting the Healthy Development of the Photovoltaic Industry (the State Council opinions).

Since certain structures of a ground-based PV power plant project are permanent, the land used should be registered as land for permanent use, and the approval process should be carried out as if for construction land, i.e., the land use right should be obtained by grant or allocation. In practice, due to the cumbersome procedures for obtaining land use rights via grant or allocation, many ground-based PV projects have taken an “approval as we go” approach – commencing project construction before land approval is acquired. Such projects will face the risk of being ordered to demolish any illegally erected buildings and facilities in violation of regulations.

It should be noted that, due to keen government interest out of their massive investment potential and possible involvement of well-known energy enterprises, PV power plants are subject to their own unique land use compliance review process. In fact, there have been PV power plants penalised for not sticking to that specific process.

Rooftop particularity

Under article 16 of the Provisional Measures for the Administration of Distributed Photovoltaic Power Generation Projects, the entity for a rooftop distributed PV project (DPV) need not be the owner of the building, site or facility, but is nevertheless required to execute a use or lease agreement to secure the right to use the rooftop.

Whether the rooftop can be continuously leased and used for the project can present latent compliance risks. In particular, as the lease terms for some rooftop PV projects has exceeded 10 years, financiers need to keep an eye on the risk of the rooftop lease agreement being interrupted by a change in ownership of the building.

A rooftop PV power plant ceasing to generate electricity due to sustaining damage, thereby affecting the project entity’s cash flow, is another major risk. Investors or financiers should pay attention to whether the project insurance indemnifies for fire caused by the PV components heating up, and for projects built in areas prone to typhoons, lightning strikes, windstorms and other natural disasters.

Compliance of equity transfer

According to the Notice of the National Energy Administration on Regulating the Order of Photovoltaic Power Plant Investment and Development, an investment entity having completed the filing procedures for a PV power plant may not transfer the project to another without consent of the filing authority before the project is brought online.

The administration also refuted the possibility that an equity transfer may be carried out at nil consideration, in a reply published on its website to a question on transferring equity in a project company before the PV project had been connected to the grid.

Any institution involved in PV financing during its construction should therefore pay attention to whether the two issues mentioned above have taken place, and if so, whether re-filing is required.

In order to resolve the compliance issue of a change in investor during construction of the PV project, some operators have opted to transfer the shareholder equity of the project company. This eliminates the need to make another filing, but whether this meets compliance requirements is somewhat controversial. Investors are advised to further consult with the local competent energy authority on this matter.

Pseudo-DPVs

Under both the State Council opinions and the provisional measures, DPVs are exempt from the need to secure a power generation business permit and other such documents. Because of the speedier approval process, some projects opt to apply for approval for DPV construction, when they are really centralised PV projects. For this type of “pseudo-DPV”, whether it enjoys these benefits will entirely depend on the opinion of the local competent energy authority.

Yuan Wenqing is a partner at AllBright Law Offices

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