In certain industrial, agricultural, and livestock-related economic activities, an environmental restoration guarantee is required to ensure the safe and controlled decommissioning of facilities in order to prevent environmental risks and manage waste appropriately.
Specifically, to obtain a construction license for a renewable energy plant, many regional governments in Spain require the deposit of a decommissioning guarantee. This is established as a commitment from the facility owner to dismantle or remove the installation at the end of its useful life in accordance with specific regulations and standards.
In this article, we will explore this type of guarantee, the cases in which it is required, and the best option to comply with it in the renewable energy sector.
What is a Decommissioning Guarantee?
The decommissioning guarantee is a financial instrument required to ensure that the project developer has the economic means necessary to carry out the dismantling of the facility and the environmental restoration of the site at the end of the installation’s useful life.
It is mandatory for renewable energy generation projects, which are often built on non-developable rural land.
When a developer applies for a building permit for one of these installations, they must submit a decommissioning bond to the corresponding Town Hall. As already explained, this serves as a financial guarantee that the developer will assume the costs related to dismantling the installation and restoring the affected area.
By accepting the decommissioning guarantee, the Town Hall ensures that the project has the financial solvency required to return the environment to its original state. This helps prevent potential environmental impacts and guarantees that developers fulfill their obligation to restore the land once the facility has reached the end of its operational life or ceases activity.
This financial guarantee may be deposited with the competent public authority in several forms:
- Cash
- Bank guarantee
- Surety bond
- Public debt instruments
What is the amount of the decommissioning guarantee in the renewable energy sector and when does it end?
The environmental restoration guarantee for the energy sector depends on the legal framework of each Autonomous Community where the installation is being developed. Below are some examples of regional regulations published in official bulletins:
- Castile and León: A guarantee covering the dismantling cost must be established by an independent third party and updated every 5 years based on CPI. It must be indefinite and can only be canceled upon proof of dismantling. (Decree 46/22 of November 28, art. 17)
- Castile-La Mancha: The guarantee must equal 3% of the total construction cost of the renewable energy facility. (Art. 63.1.2º.d TRLOTAU – Legislative Decree 1/2010 of May 18)
- Murcia: The technical bond must be 10% of the installation’s value.
- Andalusia: Also requires a 10% guarantee, as in Murcia, but additionally covers potential non-compliance with authorizations. (Law 2/2007 of March 27 on promotion of renewable energy)
- Catalonia: Requires a guarantee in favor of the administration to ensure the dismantling of equipment and land restoration once activity ends. (Art. 31 of Decree 147/2009 of September 22)
- Valencia Region: The guarantee is calculated based on the cost of converting the land surface used by the installation. (Order of November 3, 2008 from the Ministry of Environment)
These are just a few examples. We recommend contacting the relevant Town Hall to request updated information, as the regulation is still under gradual development across all regions and may change during the year.
Most guarantees must be reviewed every 5 years, and only once the decommissioning has been completed can the guarantee be returned to the owner.
Content of Interest: Uses and Applications of Surety Bonds: A Multisector Guarantee
Obligations and Exemptions in Environmental Restoration Insurance
The specific obligations and exemptions of an environmental restoration insurance policy may vary depending on local laws and the terms outlined in the insurance contract.
Generally, the main obligation is to restore the natural environment to its original or agreed condition prior to the activity that caused environmental impact. For example, if a solar park is installed, the insurance should cover the dismantling of the park and the environmental restoration of the land.
As for exemptions, the policyholder may be relieved of liability in cases of force majeure, such as natural disasters or acts of war. Example: A sudden flood that damages the environment and is beyond the control of the policyholder.
Surety Bonds for Environmental Restoration in the Renewable Energy Sector
The best form of environmental restoration guarantee is the surety bond, compared to other modalities set out in the regulations, as it offers financial advantages for the company.
If the guarantee is deposited in cash, financial resources are tied up for long periods and in large amounts. From a financial standpoint, this is inefficient and negatively impacts the company’s liquidity.
Using public debt instruments is complex and less common.
Typically, companies choose between a surety bond or a bank guarantee, both of which are issued by an insurer or a bank.
From a company’s perspective when it comes to guarantees, using a surety bond is clearly more advantageous than a bank guarantee. Surety bonds do not count in the Bank Report Risk and therefore do not consume bank debt, nor do they tie up liquid resources, unlike bank guarantees. This way, without increasing banking risk, the company’s solvency position remains intact, allowing access to better and more favorable financial conditions.
Choosing surety bonds is a smart and strategic option. That is why we always recommend that companies use surety bonds to provide guarantees while turning to banks for financing.
At Sammy Free, we specialize in surety bonds. We have deep knowledge of the market and its dynamics and are committed to providing efficient solutions to meet your project deadlines.
Need help with your project? Contact one of our advisors to resolve all your questions.
