Climate change is at the forefront of the international political agenda and decarbonisation of the energy sector has become crucial. The phase out of fossil-fuel intensive energy sources and their replacement with zero or low-carbon alternatives is key to the energy transition. One tool in achieving this is to repurpose existing fossil fuel assets and infrastructure into low or zero carbon generating assets. This blog post considers the legal and related risks that arise when energy facilities are repurposed in this way, and how those risks can be mitigated.
What is repurposing?
Repurposing an asset means taking an existing asset and changing that asset so that it can be used for less carbon intensive energy generation (for example, turning a coal plant into one that is carbon neutral).
There are many examples where countries have successfully repurposed assets that were previously carbon intensive. These include repurposing coal plants as:
- a solar plant (Nanticoke, Canada);
- a wind farm (Brayton Point, US);
- data centres (Widows Creek, US); and
- a biomass power station (Drax Group in Yorkshire, UK).
Assets can also be repurposed to provide infrastructure to support energy transition projects, for example oil and gas fields and gas pipelines could be repurposed for CO2 storage and transportation (thereby supporting CCUS projects).
Why repurpose an asset?
Repurposing an existing asset can have various benefits, for example:
- it makes use of existing infrastructure, such as pipelines and grid connections;
- existing structures are reutilised, thereby reducing the use of resources and materials and bringing about economic and environmental benefits (an obvious one being the avoidance of waste generation);
- a reduction (or even avoidance) of the pollution or other negative environmental impacts that could have arisen from dismantling the existing asset;
- in some scenarios, the protection of employment in the local area; and
- as noted above, it results in a zero or low carbon asset thereby supporting the energy transition process.
For the reasons set out above, repurposing an existing asset has the potential to be cheaper than commissioning a greenfield renewable facility. However, this will depend on the specific circumstances of the project itself – for example the cost of the technology that is to be used and the need to deal with any constraints posed by existing structures already part of the asset.
What risks arise in repurposing assets?
While there are risks that arise generally on construction projects, such as supply chain disruption, there are also certain risks that are specific to repurposing existing energy facilities, such as:
Various practical risks, for example:
- New or untested technology: As considered in our previous blog post, new technology on energy transition projects brings with it a number of risks, which can lead to delays or cost overruns. Careful project structuring and contracting can help mitigate risk, for example by ensuring that there is clear risk allocation and liability is limited where appropriate. It is also essential that full performance guarantees are sought to manage risks that arise in the interface between the design, construction and operation phases.
- Project on project risk: In some circumstances an old asset that is still within its lifetime will be repurposed (for example a coal plant to a biomass plant). It is important to ensure that the projects are effectively dovetailed and, as above, proper performance guarantees and a sound contractual framework are in place so that any inherent or latent defects in the underlying project do not give rise to cross claims when an asset is repurposed.
- CO2 leakage: In projects which rely on carbon capture to achieve decarbonisation, there is a risk of CO2 leakage. This might give rise to project interruption, remedial costs and, potentially, purchase of carbon allowances and/or indemnification against clawbacks. There is also the potential risk of civil claims. Ensuring proper indemnification and insurance is key to mitigating them.
Legal or regulatory risk
Legal and regulatory risks can arise both at the planning stage and throughout the lifetime of a repurposed asset. In particular, it is critical to ensure that the following risks are monitored, and active steps taken to mitigate their impact:
- Changes in law or policy during the lifetime of a project: These can impact both the practical and financial viability of a project. While changes are often unpredictable, they can be mitigated with careful planning at the outset. Stakeholders should seek assurances to the extent possible and include change in law clauses where possible. Careful monitoring is key to ensuring that the project is compliant with new and existing regulatory regimes.
- Changes in government subsidies during the lifetime of a project: Parties should ensure that they understand the legal and commercial implications of promises made by a state before making substantial investment decisions. See our blog post on state risks for more detail on this.
It is particularly critical to consider risk and effective contract and project structuring upfront when repurposing existing assets - there are a combination of risk factors at play when repurposing such assets, often using new technology in a changing legal and regulatory landscape. However, with careful consideration, these risks can be managed and mitigated as part of the broader trend towards decarbonisation.
This is part of a series of blog posts exploring the potential impacts of energy transition and climate change on global projects. Click here to see other posts in the series.