Écrit par Michael Chow, Luke Morrison and Samantha Lush
Update to blog published February 16, 2021
In 2016, the Province of Alberta passed the Renewable Electricity Act, cementing its commitment to increasing the amount of green energy produced in Alberta, with a goal of 30 percent of Alberta's electricity coming from renewable sources by 2030. Since that time, the number and size of renewables projects in Alberta, particularly utility-scale wind and solar projects, have grown rapidly. In 2022, Alberta accounted for over three-quarters of all new wind and solar capacity growth in Canada, and the Alberta Electric System Operator (AESO) has projected that renewables will account for 30 percent of the Province’s generation by 2026.
Unexpectedly, on August 3, 2023, the Alberta government announced that the Alberta Utilities Commission (AUC) was being directed to pause all approvals on new renewable electricity generation projects until at least February 29, 2024. Our blog posts, Alberta's Pause on Renewable Projects: What We Know So Far and Update on Alberta's Renewables Pause: AUC Inquiry and Interim Requirements provide further details on this pause and developments related thereto. Although the pause on AUC approvals has chilled investment in what was otherwise a rapidly-growing industry, the pause should only be temporary. Once the approval process resumes, the development of renewable energy projects is expected to continue, as over 3,500 megawatts of renewable power generation projects are currently under construction in Alberta.
The rapid growth in renewable energy projects in Alberta has brought a greater focus on understanding the legal aspects of land leases for such projects in Alberta for both landowners as lessors and project developers as lessees. The following are some key issues to consider for a new project.
Issues for Landowners
- Subdivision or No Subdivision: Will the project developer be leasing all of the land or only a portion of the land? If the amount of the land being leased is only a portion of the land, this may be considered a deemed subdivision by the applicable governmental authority depending on the other terms of the land lease. If so, in certain circumstances, the land lease may be considered invalid or void.
- Restrictions on Landowners: Does the land lease restrict the landowner from selling, mortgaging, granting interests in or otherwise using or developing the land not being leased by the project developer, notwithstanding that the project developer will only be leasing a portion of the land or if the project developer has an option to lease further land? Landowners need to consider what restrictions they are willing or able to accept given the circumstances.
- Third Party Rights: Does the land lease affect or is the land restricted by third party rights on the lands? These may include utility right of way holders, easement grantees or other lessees that may hold prior land rights on the lands, which may prohibit or restrict the development and operation of the project by the project developer. This may also include (1) third party lenders, which the landowner may require approval from prior to any development on the lands, and (2) owners or lessees of oil and gas or other minerals rights below the surface of the land.
- Rent: What rent or compensation structure will be used? Will the landowner be charging basic rent and additional rent or will there be a more custom compensation structure required? Is the project developer offering the same compensation structure to all applicable landowners? Landowners need to consider if rent will increase on a fixed amount, based on an applicable consumer price index or by some other metric. Landowners also need to consider whether the project developer will be responsible for rent and all or certain expenses of the landowner in relation to the lands during the term of the land lease. These expenses may include property taxes, landowner’s insurance and maintenance and security costs.
- Insurance: What policies of insurance should the landowner maintain and require the project developer to maintain? Landowners should ensure that the landowner and the project developer maintain adequate insurance, including property loss and damage and commercial general liability insurance. Landowners also need to consider course of construction insurance during the construction of the project and should review whether environmental liability insurance is required.
- Surrender and Restoration: What surrender and restoration obligations should be placed on the project developer at the expiry or early termination of the land lease? What obligations are imposed on the landowner vs the project developer by applicable governmental authorities? In most cases, the land lease will be for a lengthy term of likely 20 years or more and the project may be obsolete by the time the term expires. Landowners should ensure that there are obligations on the project developer to surrender, remove and decommission the project and restore the lands to the condition at the commencement of the term. The landowner should also consider whether it should require any security to guarantee the removal, decommissioning and restoration obligations, such as a letter of credit from a financial institution or performance bonds.
- Guarantors: Should the landowner be requesting a parent company or affiliate company of the project developer to guarantee the obligations of the project developer under the land lease? In many instances, a project developer will incorporate a single purpose entity for each renewable energy project. This potentially leaves the landowner exposed in the event of default by the project developer under the land lease. By requiring a guarantor, the risk for the landowner may be mitigated.
Issues for Renewable Energy Project Developers
- Due Diligence: Is the land suitable for the project? Is the project permitted under applicable zoning and land-use bylaws established by the applicable governmental authority? Does the project developer need to engage with any third parties that have existing rights in respect of the land (e.g., oil and gas operators or existing pipeline facilities that will impact the project design). When executing a land lease, the project developer needs to consider whether to structure the land lease by way of an option to lease or a conditional land lease to allow the project developer to complete proper due diligence of the lands to ensure feasibility and many other issues prior to proceeding with the project.
- Permitted Use: Is the language in the land lease broad enough to permit all of the intended uses of the project developer? The project developer should ensure that the land lease allows for all aspects of the project’s intended development, construction, operation and decommissioning. Such terms around permitted use need to be tailored to the project type (i.e. specific considerations for issues that are unique to wind or solar facilities) and the particular project (e.g., temporary workspace requirements; setback requirements; road usage; fencing and boundary considerations).
- Regulatory Issues/Governmental Approvals: What approvals will the project require from applicable governmental authorities? In addition to obtaining approval from the AUC and navigating the AESO interconnection process, project developers need to review and assess the requirements to obtain county/municipal development and other regulatory permits. In particular, the current pause on AUC approvals may lead to new or revised laws or regulations applicable to renewable projects, such as in relation to reclamation security requirements.
- Foreign Ownership of Land Regulations (FOLR): Is the project located on lands outside of a municipality or town? If so, is the land lease for a term of more than 20 years and/or for more than 20 acres (either separately or in consolidation with other interests held by the project developer in Alberta)? If so, is the project developer a Canadian controlled entity or does the project developer or project satisfy any exemptions under FOLR? If not, the project developer may be restricted in developing the project and claiming a leasehold interest in the leased land.
- Termination Rights: Does the project developer need a right of termination? The project developer should consider a right to terminate the land lease without cause in the event the project does not meet the initial project plans or goals.
- Assignment and Leasehold Title: Does the project developer need the flexibility to assign the land lease, either fully to a third party operator or partially to a joint venture partner? Does the project developer need the flexibility to finance the project with a third party lender and therefore may wish to consider a leasehold title? The project developer needs to consider whether it requires this flexibility to meet its business goals and increase the likelihood of success of the project.
- Credits: What credits (i.e. emissions credits or offsets, renewable energy certificates or similar credits) will be produced or generated from the project? Typically, the project developer will explicitly confirm that the landowner has no interest in or title to such credits, and such credits will be critical to supporting the developer entering into a corporate virtual power purchase agreement with an offtaker/buyer.
Bennett Jones' Commercial Real Estate, Power & Renewables and Climate Change teams are actively engaged with solar, wind and other renewable projects in Alberta. If you have any questions about the real estate aspects of a project or development in the renewables sector, please contact us.