Activity in the New Zealand solar sector has ticked up considerably in the last 12 months with a number of utility-scale projects announced. The political climate is favourable for larger scale solar projects - New Zealand's first Emissions Reduction Plan released in June 2022 has a clear focus on carbon neutral power generation, with solar playing a core role.1
With increased scale comes potential investment from local and overseas investors looking for viable long term green assets. Good due diligence will be important for investors to sort through the gold dust from the lemons. We set out below our top four things to look for from a legal perspective before you make an investment into a utility-scale solar project in New Zealand.
These cover:
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Land access rights – purchase vs lease vs licence of the land?
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The Overseas Investment Act 2005 (OIA) – are there OIA consent or advertising requirements and if so, how to maximise your chances of navigating such requirements successfully?
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Consenting and engagement – will the project require resource consent and what type of stakeholder engagement should occur?
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Grid connection - Is a connection agreement in place?
There will, of course, be other commercial issues to consider, such as financing and sources of revenue to support that – but that is another topic for another day.
1. Land access rights – purchase vs lease vs licence of the land?
Suitable build sites are hot property, with keen competitive interest shown by developers, especially when the facilities can be built on a single site (minimising energy losses and inefficiencies) and neighbouring landowners are supportive of use of the land for solar generation. So, any investor in feasibility studies for solar generation should ensure the developer has legal exclusivity rights of access and use of the site from the outset, from the undertaking of the studies, to the development and undertaking of the project in due course. This could prevent the landowner from marketing the land access rights to another party despite the investment in the feasibility studies.
Assuming OIA requirements are complied with (more on this below), a developer can secure access and use rights by way of an exclusive feasibility licence signed contemporaneously as an option agreement, with robust non-compete/solicitation and confidentiality obligations binding on the landowner, and providing the developer with an option to acquire the land or enter into a long-term lease/licence of the land, on specified terms and conditions.
Care should be taken so that there is no permitted concurrent access to or use of the site, including by third parties, which can potentially hinder development of the project and solar generation (for example, concurrent activities on the site could result in damage to the panels). Where there are already permitted concurrent access or use, then the investor needs to be clear about how this could impact the project, as well as ensure the terms agreed with the landowner appropriately allocates the risk of interference or damage caused by those third parties.
Assuming feasibility is proven and subject to complying with the OIA, an investor should decide whether it requires land rights by way of freehold acquisition, a lease, or a licence, recognising that the life of the solar farm can extend to 30-35 years.
Ideally, the project would have acquired the site freehold, or at a minimum, secure a registrable long-term lease, so that:
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the developer has complete control over the site, including to prevent access or uses that could delay or prevent the development of the solar farm or damage the panels when the solar farm is constructed. The developer can allow concurrent uses that would not adversely affect the development or the solar farm, for example, entering into grazing licences post commissioning;
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leasehold interests run with the land and may be registered against the certificate of title. As such, leasehold interests are enforceable against any buyer of the land, even though the lease was entered into with the original landowner. Contrast this to licence rights that cannot be registered against the land and are instead a personal / contractual right that can only be enforced by the investor against the original landowner; and
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unlike a licence interest, freehold or leasehold land interests can be used as security to support third party finance.
The investor should also ensure that the developer has rights to access the site and if required, to use that or other sites for storage during the construction period – these rights may be required from adjoining landowners and should be recorded in writing. These rights are usually in the form of leases if for exclusive use, or licences for non-exclusive use.
2. Overseas Investment Act – are there OIA consent or advertising requirements and if so, how would an investor maximise its chances of navigating such requirements successfully?
The investor is an "overseas person" for the purposes of the OIA if it is a person or entity domiciled, or owned by a person or entity domiciled, outside of New Zealand – this includes entities where more than 25% of their ownership or control interests are held by overseas persons. In that case, then Overseas Investment Office (OIO) consent under the OIA may be required with respect to the investment.
Specifically, an overseas investor will require OIO consent if it:
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Invests in significant business assets – including acquiring assets (including where those assets are held in another entity) for or valued at more than $100 million or incurring more than $100 million to set up a business in New Zealand; and
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acquire an interest in 'sensitive land' (including indirectly, by acquiring more than a 25% ownership or control interest in an entity that holds 'sensitive land'). 'Sensitive land' includes non-urban land of five ha or more, and land of specified size that is adjoining marine and coastal area, the bed of a lake, or any reserves.
Solar farms are typically constructed on large, rural sites, with interests in long term land rights, both of which are features of a transaction that are likely to require OIO consent. Accordingly, an investor should consider carefully whether OIO consent is required for the investment.
If OIO consent is required, the overseas investor will also need to ensure that any farm land included in the assets is advertised for sale on the open market to New Zealanders and that any transactional documents for the investment/acquisition are conditional upon OIO consent. In particular:
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Such advertising of farm land is required before a 'transaction' is entered into with the overseas investor and before an application for OIO consent is made. A 'transaction' is defined broadly and can include an option agreement. However, an appropriately scoped initial licence to determine feasibility will not trigger a requirement for OIO consent or farm land advertising, provided no further interest in land is acquired.
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Advertising is to be undertaken by the landowner and must be genuine.
The OIO consent process can take up to 9 months for large rural sites (though the relatively recent statutory timeframes indicate this may be decreasing). Overseas investors will need to factor this into their timeline for the investment.
Where OIO consent is required, an overseas investor will need to meet the investor test. The investor test applies to all relevant overseas persons and all of their individuals with control (typically directors). The tests assess character factors (eg convictions, corporate fines and eligibility to come to New Zealand) and capability factors (eg any prohibitions on being a director and showing a history of tax compliance).
For an overseas investor, it may be worthwhile considering if it would meet the investor test before proceeding with substantive due diligence of a potential investment, and in any case, before submitting a consent application to the OIO.
An overseas investor can also apply for pre-approval and satisfaction of the investor test. This approval is personal to the overseas investor and cannot be transferred to a related group company if it were decided later that such vehicle would be used to make the investment.
Once consent is granted and an investment goes ahead, there is a possibility that the investor could transfer the ownership or control rights to the project to a related company without seeking a further OIO consent, if the requirements for the exemption for internal re-organisations under the OIA is met.
For a sensitive farm land acquisition, an overseas investor will also need to show that the overseas investment will or is likely to "benefit New Zealand" and that such benefits are proportionate to the sensitivity of the land and the nature of the transaction. Where farm land is involved, there must also be substantial benefits to New Zealand in terms of economic benefits and/or oversight and participation by New Zealanders.
Accordingly, an overseas investor will want to ensure it offers benefits such as economic benefits arising from the expenditure on the construction of the solar farm, and the creation of jobs for New Zealanders. Further, it could be helpful offering to use parts of the land not used for the solar farm for purposes relating to the natural environment (eg, protection of indigenous flora and fauna) or to provide enhanced public access for recreation. It would also be useful to point out to the OIO that development of solar generation facilities give effect to and advance the Government's policy – see footnote 1.
An overseas investor that has successfully obtained their first OIO consent becomes a more attractive investor, for the purposes of future investment, including for new projects, as it would have a positive track record in obtaining consent from the OIO.
3. Resource consenting and engagement – will the project require resource consent and what type of stakeholder engagement should be in place?
A solar farm typically requires a land use resource consent (and potentially a subdivision), unless the relevant district plan has categorised this activity as a permitted activity, which can be undertaken as of right. Resource consents are issued and administered by the relevant local council. It is the responsibility of the developer to ensure that it holds all the necessary resource consents to establish and operate the solar farm lawfully.
Councils will pay close attention to the following key issues and effects that are often prominent in solar projects:
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Landscape, visual and natural character effects – large scale solar farms will often have tens of thousands of solar panels spanning across the site. As well as the visual effects, this can also impact on landscape and rural character. Mitigation options, such as planting, should be carefully planned to help manage effects.
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Productive soil – the protection of productive soil is a key issue.2 Identifying the land use classification of the soils on a site is important. For sites on highly productive soils (eg Land Use Capability 1-3 in rural zones), it will be important to demonstrate that the activity is temporary and the productivity of those soils is not impacted. Often this can be achieved through dual use of the site (for example, by sheep being allowed to graze at the site).
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Glint and glare – solar panels can reflect sunlight, which can create risks, particularly in terms of road and airport safety. Modelling can be undertaken to demonstrate the extent of this effect and screening planting can be used to mitigate these effects.
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Cultural impacts – given the nature and scale of any solar farm project there is the potential for cultural effects. Genuine partnerships with iwi and hapū will provide the project with local relationships and a social licence to operate, amongst other things. This will be key to the success of a project. We will discuss this further in a future Energy Blog post.
When conducting site due diligence, in particular, where resource consent has not yet been obtained, an investor should have regard to these factors at the outset.
Due to the likely scale of these solar projects, there is potential for interest from locals.3 An investor should be aware that affected parties, for example neighbours, and iwi authorities, will be served notices (if public notification is required), in which case, these parties will have theopportunity to lodge a submission opposing the application, which could then proceed to a hearing.
Engaging early with neighbours, iwi and hapū and building enduring relationships is, therefore, incredibly important. Doing so allows for a transparent consenting process in which the applicant can explain their intentions with the site, prior to these parties receiving public notification. Further, these parties have the opportunity to express any concerns at the formative stages of the development, a time when changes can be implemented, and meaningful discussions can be had.
Once a resource consent application has been lodged, it will typically take three to nine months to obtain a decision from the relevant local council.
4. Grid connection - Is a connection agreement in place?
Transpower is experiencing significantly increased enquires for new customer connections.4 As capacity is exhausted, the ability of developers to access new connections becomes increasingly limited. The viability of a solar farm development will depend on its ability to connect to the grid (either directly with Transpower or through a local distributor). As an investor, it is critical to understand whether a project has a connection agreement in place, and whether Transpower and/or the distributor has committed resource to complete connection works within the timeframes needed for the development.
Transpower is due to release its decision on the Renewable Energy Zone (REZ) proposal in October. We are working on another post on connection issues, capacity constraints, and the REZ outcome – watch this space.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.