ESG, Insights/17 Oct 2023

Financing Wind Power Projects Within the Finnish EEZ

In the past few years, there has been increasing interest in offshore wind farm projects in Finland. In addition to the demand for greener energy, the need to be able to produce energy domestically has become even more topical due to the war in Ukraine.

Offshore wind power offers a solution to both issues, but from a financier’s perspective, open questions remain with regard to projects involving the construction of wind farms in Finland’s exclusive economic zone (EEZ). In this article, we discuss these topics and offer potential solutions that would increase bankability and clarify the permit decisions for wind farm projects in the EEZ.

Differences between the territorial waters and projects in the exclusive economic zone

The development of offshore wind farm projects is regulated by two significantly distinct frameworks depending on the location of the project. The provisions that apply to projects executed in the territorial waters (i.e. areas that are located, as a main rule, within a maximum of 12 nautical mails from the coast), correspond to those that apply to onshore wind farms at least in theory, with the exception that the offshore projects require a water permit.

As the territorial waters are primarily owned by the Finnish State, the keys to the development of new projects in this area are mostly held by the state-owned enterprise Metsähallitus, which is in charge of managing the land and water areas of the Finnish State. In December 2022, Metsähallitus announced that it is setting up a joint venture with Vattenfall to develop an offshore wind farm project in Korsnäs as a result of an tender process. In this joint venture, Metsähallitus will lease the area to the project developer and, pursuant to the current plans, will only serve as the landlord in the operational phase of the wind farm.

Further, Metsähallitus has announced that it plans to initiate tender processes for four other offshore wind farms areas in 2023 and 2024. The tender processes of the first two offshore wind farm areas are expected to commence in October 2023. It should be noted that, in territorial waters, the leaseholds as well as the buildings and appurtenances located thereon can be mortgaged similarly to those located in the land areas.

Contrary to projects located within the territorial waters, the legislation regulating the development of wind farms within the exclusive economic zone (the EEZ, which is located beyond the territorial waters) differs greatly from the provisions that apply to onshore projects. In the EEZ, only the provisions specified in the Finnish EEZ Act apply, including e.g. the Finnish Act on Environmental Impact Assessment Procedure and the Finnish Water Act, whereas, for example, the Finnish Land Use and Building Act does not apply within the EEZ with the exception of certain specific provisions.

The Finnish Government’s consent required for all projects within the EEZ

Due to the differences in the applicable legal framework, projects within the EEZ do not require land use plans or building permits, at least not in their conventional form. Instead, all projects within the EEZ require a permit granted by the Finnish Government already in their exploration phase and later for the commercial exploitation of the EEZ area and the construction of the wind farm. As the EEZ construction permit, or any potential other permit or agreement based on the primary permit, establishes the right to use the area of the wind farm, it will de facto work as a lease agreement for the project.

As such, there are several requirements for the EEZ construction permit that need to be taken into account from a bankability perspective if project financing is contemplated for an offshore wind project within the EEZ. So far, no EEZ construction permit practice has developed in Finland nor has practice for how large-scale financing should be arranged for projects within the EEZ because no construction projects have been executed yet within the Finnish EEZ, aside from the laying of cables and pipelines, as e.g. no oil or gas has been found in Finland.

Who has jurisdiction over the EEZ?

The Finnish state does not have full sovereignty over the Finnish EEZ water areas. Hence these areas are not owned by the Finnish state or by any other entity. The EEZ is not part of the fully exclusive area of Finland but rather the international sea where the UN Convention on the Law of the Sea (UNCLOS) determines the rights of Finland and other states.

However, Finland exercises its rights and jurisdiction as the coastal state in its EEZ under international law. This also includes the sovereign right to carry out activities for the economic exploration and exploitation of the zone, such as for the purposes of producing wind energy.

The EEZ is not part of the Finnish property division

The EEZ is not part of the Finnish property division and cadastral system due to its special characteristics. The rights to establish the wind turbines and title to the other infrastructure located on the wind farm in the EEZ cannot be registered with the Title and Mortgage Register of the Finnish National Land Survey, which is the case for onshore projects without exception.

Typically project financiers require security over all assets of the project company which may have some value. This includes, for example, security over shares, bank accounts, receivables (including project agreements), floating charges and, if not most importantly, real estate mortgages over the leaseholds which have infrastructure situated thereon. The EEZ is different from the territorial waters because no conventional leaseholds can be established for projects in the EEZ, and the property division would not allow the registration of the leasehold. In addition, neither the leasehold nor the buildings (namely the wind turbine generators) or appurtenances located in the lease area can be mortgaged in the conventional way.

With this being the case, how could sponsors and financiers be comfortable with investing in and financing a wind farm project in the EEZ if they cannot secure (i.e. lease and mortgage) the project site and register the WTGs as part of their exclusive right to that area?

Could floating charges offer additional reassurance to investors?

Since a conventional real estate mortgage cannot be registered in the EEZ, the WTGs and other infrastructure on the project site, which is located outside the territorial waters, could be part of a floating charge registered over the movable assets of the project company. A Finnish floating charge can be considered as catch-all security because it covers almost every type of movable asset that is not subject to a specific security or mortgage.

However, there are downsides to a floating charge. A Finnish floating charge only gives the pledgee a priority up to an amount not exceeding fifty per cent of the liquidation value of the respective pledgor’s movable business assets encumbered, whereas a real estate mortgage could give a priority up to one hundred per cent. As the WTGs are the most valuable assets of a wind farm, they are typically registered as part of the leasehold to avoid them being subjected to a floating charge with only partial priority.

The enforceability of floating charges in the EEZ

From a bankability perspective, securing the WTGs and other infrastructure with a floating charge only creates additional comfort for financiers if such a security is enforceable. A Finnish floating charge can only be enforced through official enforcement proceedings. Pursuant to the Finnish Enforcement Code, the Finnish enforcement authorities have jurisdiction in Finland, but the Act is not clear on whether the jurisdiction of the Finnish enforcement authorities extends to the Finnish EEZ.

However, on the basis of the UNCLOS and the EEZ Act, their jurisdiction appears to be extended to cover the Finnish EEZ, and it is explicitly stated in the EEZ Act that Finnish law applies on artificial islands and to equipment and other structures as if they were situated in Finland.

Land leases and real estate mortgages covering power lines as additional support?

In onshore wind power projects, the area where the power line will be situated can be secured either by way of a redemption permit granted by the Finnish Government or the Finnish National Land Survey or by way of leasing the land area with land leases.

If a floating charge is the only option that can be used to secure the infrastructure located within the EEZ, investors and financiers could potentially get additional comfort by securing the area of the power lines built in the territorial waters and on shore (including any infrastructure situated thereon) with land leases and traditional real estate mortgages.

Even though this would make it less likely that anyone other than the project company, which owns the rights to the adjacent land area, could utilise the project site without the consent of the project company, the lease agreements should not be required as this would increase the costs of the project unnecessarily.

As mentioned above, power line areas are typically secured through the redemption permits in onshore wind power projects, and these permits could be used also in offshore projects for the route between the connection point onshore and where the territorial waters end before the EEZ. In addition, in the territorial waters, the right to use the power line area may be established under the Finnish Water Act.

What could increase the bankability of wind farm projects in the EEZ?

 As the first permits to construct wind power projects in the EEZ are yet to be issued, the Finnish Government could still impact the development of the Finnish offshore market by creating a sound permit practice that would be attractive for both domestic and foreign investors and financiers in order to ramp up the Finnish offshore capacity.

The following conditions could be introduced to EEZ construction permits in order to promote the bankability of offshore wind power projects:

  • Exclusivity should be granted to the entire project area.
  • The EEZ construction permit should be transferable.
  • The validity of the EEZ construction permit should cover the entire lifecycle of the project.

Exclusivity should be granted to the entire project area

Apart from creating the right of use itself, the exclusivity right conferred in the EEZ construction permit would constitute the securing of the right against third parties typically obtained by registering land rights. Hence, the EEZ construction permit should include exclusivity to the entire area necessary for the wind farm, including not only the area limited to the wind turbines and other wind farm infrastructure but also certain areas beyond these constructions in order to provide the project developer with sufficient security for the undisturbed operation of the wind farm.

The existing EEZ Act already enables the permit holder to establish a protection area of 500 meters from the outer edges of the building or installation constructed under the Act that stems from the UNCLOS. The Finnish Ministry of Employment and the Economy should take into account the project developers’ reasonable requests regarding the project area when determining the boundaries of the exclusive area.

The EEZ construction permit should be transferable

The construction permit granted under the EEZ Act should also be transferable, or at least the continuance of the project and the interests of the financiers should be secured if needed. Transferability is needed in order to enable the rights of the permit holder under the EEZ construction permit to be pledged as security.

For example, in a situation involving financial distress, the company taking over the business of the wind farm should have the same rights as the initial permit holder, and the transfer right could also be subject to the transferee holding the other rights to the wind farm.

Transfer clauses in the exploration permit practice

Existing legislation remains silent on transferability. However, somewhat surprisingly, it seems that the matter has not been an issue previously in connection with EEZ exploration permits. On the contrary, it has been stated in these decisions that the holder of the permit, the owner of the project, and the substitute / transferee thereof (in Finnish: Hakijan, hankkeen omistajan tai näiden sijaan tulevan seuraajan) must comply with the rules set out in the permit.

This reference to substitute or transferee could indicate that the right to transfer the permit might exist. It is not, however, clear whether the intention behind this choice of words was to enable transfers or merely to highlight that any possible transferees must also comply with the permit conditions.

The requirement of Government approval for transfers should be avoided

In fact, as the Government has considerable discretion over the decision of who can obtain a permit under the EEZ Act (likely including an assessment of the suitability of the developer as well and not merely of the project), the baseline may well be that EEZ construction permits cannot be freely transferred unless explicitly allowed in the permit.

Without an explicit right to transfer, a prior approval would be needed from the Government for the transfer to be implemented, and in principle, the Government is not bound to the same criteria as in the case of the initial permit holder.

As such, in order to promote the financing of EEZ projects, the permit should clearly allow for transferability or the EEZ Act should be amended so that the permits are transferable directly based on legislation so that their transferability is not dependent on the terms and conditions of the permit. It is realistic to expect for the transferee to be subject to some minimum requirements, but these should not impose significant restrictions on the transferability of the permit.

The Finnish mining industry as an example of permit transferability

The legislation that applies to other industries can offer some useful guidelines for the EEZ permit regime. For example, in the Finnish mining industry, both exploration (ore prospecting) and mining activities require a permit, and these permits are transferable if the transferee meets the requirements for a permit holder set out in the Finnish Mining Act.

The exploration and mining permits can be cancelled by the permit authority if the permit holder no longer meets the requirements of a permit holder, but if the situation can be remedied, the permit holder must be given some time to fulfill the requirements again. Most importantly, the Finnish Mining Act includes a provision explicitly allowing the permit holder to pledge certain rights pertaining to the exploration permit and the mining permit as security.

Implementing similar rules for the governmental consents required for developing wind farms in the EEZ could be one way to solve some of the legal issues and bring some clarity into the Finnish offshore legal environment, which could then make the Finnish market more interesting to foreign investors and financiers. The Finnish Ministry of Employment and the Economy could administer a similar register for pledges regarding the rights under the construction permits for offshore wind farms in the Finnish EEZ as they do for the security over the rights under the mining permits.

The validity of the EEZ construction permit should cover the entire lifecycle of the project

The EEZ construction permit must be granted for a sufficient period so that the financiers and sponsors of the project can be certain that the validity of the EEZ construction permit is secured for the entire lifecycle of the project.

Under the existing EEZ Act, the EEZ construction permit is granted for a fixed period or until further notice. Financiers may find the fixed period permit sufficient if the fixed period extends beyond the maturity of the financing. However, project developers might prefer to at least retain the primary right to use the area or to be allowed to extend the fixed period if it turns out that there are commercial reasons to continue the energy production in the area even after the fixed period of the permit expires.

The EEZ Act currently includes a provision stating that the EEZ construction permit (i) may be withdrawn or (ii) its conditions can be changed if the circumstances have significantly changed after the permit has been granted. The provision has not been further explained in the preparatory works of the EEZ Act and its background remains unclear, which thus leaves room for undesired interpretations.

At least at first glance, the possibility that an EEZ construction permit could be withdrawn or amended by the Government may be seen challenging from the perspective of investors and financiers interested in investing in and financing a wind farm in the Finnish EEZ.

The legal principles of administration that apply in Finland, especially the permanence of decisions, should provide protection against possible changes by the Government. In the end, EEZ permits are subject to the discretion of the Government and its expediency consideration, but the broad wording of the provision makes the validity of EEZ permits less predictable especially in the event of unforeseeable changes in circumstances.

What comes next?

As this article seeks to highlight, certain very important matters must be taken into consideration when setting out the applicable conditions for the EEZ construction permits of wind projects insofar as investors and project financiers are concerned.

The Finnish offshore wind power market is still in its early stages but has great potential and could bring a lot of investments to Finland. The responsible ministries should engage in open dialogue with stakeholders to cover all aspects that may negatively affect the possibility to create a vibrant market for offshore wind farm projects in the Finnish EEZ. 

Share on LinkedInTweet about this on XShare on Facebook


Additional information

Ben Fallström

Senior Associate


Iida Mäkimattila

Senior Associate