Securing a viable grid connection is a critical requirement for energy and infrastructure projects. However, developers are facing lengthy delays as they wait for wider reinforcement works on the network to be completed before their connection can proceed.

Ofgem and NESO are seeking to address these issues with the approval of the Gate 2 Methodologies and the removal of “zombie projects” from the connections queue. Given these challenges, developers have been considering “behind the meter” arrangements as an alternative solution for obtaining a grid connection.

Grid sharing structures offer developers the ability to collaborate with neighbouring or extension projects, enabling the shared use of the grid connection and key grid infrastructure.

GridCo arrangements are widely regarded as being a robust and bankable solution to enable multiple parties to share and use grid capability and grid infrastructure efficiently. In this article, we break down the essential steps for establishing a GridCo and share practical insights on how to structure a profitable arrangement.

What is a GridCo and when are they used?

A GridCo is typically a newly incorporated special purpose vehicle which is owned by the parties sharing the grid connection. The grid connection agreement is novated to GridCo and any grid infrastructure to be shared will be transferred to GridCo. GridCos can be utilised with neighbouring projects or extension projects.

We usually see the following agreements being entered into:

• GridCo Shareholders Agreement and Articles of Association
• Grid sharing agreement
• Novation agreement with the relevant Distribution Network Operator (DNO) to transfer the grid connection agreement to GridCo
• Asset transfer agreement to transfer the shared grid infrastructure to GridCo
• O&M contract in respect of the shared grid infrastructure

Other agreements may also be required given the nature of the sharing projects, to ensure the GridCo has all the rights that it needs.

Key Considerations

1. Voting rights and reserved matters

The shareholders agreement will set out the ownership, what happens in the event of insolvency and other matters relating to the operation of GridCo. Consideration should be given to how the voting rights should be structured and what happens in the event of deadlock. The shareholders agreement will also contain a list of “reserved matters” which require unanimous approval.

2. New parties acceding to the arrangement

Where there is sufficient remaining capacity within the grid connection, the sharing arrangement may allow future parties to accede to the arrangement. The original parties will need to agree a process for this accession and include such within the shareholders agreement and the grid sharing agreement. The process will require consideration of technical and commercial matters, and we would therefore recommend that input from a technical advisor is sought.

3. Construction risk

The parties should consider the risk of one sharing party delaying the construction, energisation and/or causing downtime risk of another project sharing the grid connection. The parties should also consider the risk of one sharing party causing outages during the construction and energisation of their project and what impact this may have on GridCo and/or the other sharing parties. Input from a technical advisor is also recommended on this point.

The grid sharing agreement will typically contain mutual indemnities from the sharing parties in respect of certain losses which may arise as a result of the grid sharing arrangement. Technical and commercial input will be required to ensure all losses are suitability considered and captured.

4. Material breach and insolvency

The parties want to avoid putting GridCo in a position where it could be in breach of the grid connection, risking the DNO terminating such. The grid sharing agreement typically includes transitional provisions which allow for a defaulting party or an insolvent sharing party to be removed from the arrangement such that they no longer have access to the grid connection and the shared grid infrastructure, without causing the grid sharing agreement to be terminated. The shareholders agreement will also typically deal with the sale of any shares the defaulting/insolvent sharing party holds in GridCo.

5. GridCo Costs

There will likely be a number of ongoing costs which GridCo needs to pay. The parties will need to evaluate what these costs are, how these costs should be shared between the parties and which agreement will document this. It is important to ensure that GridCo has sufficient working capital to pay these ongoing costs when due. The timings to make these payments should be carefully considered. A process should also be agreed in the event where a sharing party does not contribute accordingly and how this is remedied.

6. Lender protections

Early engagement with existing and incoming lenders is recommended to understand their positions and requirements. Lenders may want to consider the financial standing of the parties sharing the grid connection and whether credit support is required. We would expect the lenders to request provision for direct agreements in respect of the key contracts within the grid sharing structure. The terms of any new or existing finance documents will also need to be reviewed.

7. Tax input

Independent tax advice may also be required in respect of the grid sharing arrangement, particularly where there is a transfer of assets to GridCo. Lenders may also request reliance on this tax advice.

The above sets out typical considerations and themes we expect to be considered when discussing a grid sharing structure, this is by no means an exhaustive list.

How we can support you

Grid sharing is a collaborative solution, requiring careful consideration of technical and commercial matters. Whilst it may present some immediate challenges, Our Infrastructure & Energy specialists can work together to support clients throughout this process. Specifically, we can:

• Provide legal and practical advice and support in relation to grid sharing structures and the required agreements
• Provide commercially-focused, cross-disciplinary advice and transactional assistance in connection with infrastructure and energy developments and financings involving GridCos
• Provide training on grid connection reform and related sector horizon-scanning
• Provide risk management and effective dispute resolution strategies if/when any grid connection or related issues do arise

For further information, tailored advice, or staff training, please contact Ben Sheppard,  Laura Gordon, Sophie Linnell or any member of the Infrastructure & Energy team.