Renewable energy projects and construction disputes: how to prevent and mitigate the new risks?

27 August 2024

Construction disputes involving offshore renewable energy projects share similarities with conventional construction disputes, including reliance on standard forms, which provide for the option to arbitrate (among other dispute avoidance and resolution tools). Yet, these projects entail new and/or distinctive risks that create unique dynamics and require tailored approaches to dispute resolution. In this blog post, we review those risks and how to mitigate them.

New technologies, uncertain physical conditions, supply chain disruptions – what is the impact of industry-specific risks?

Offshore windfarm projects, for example, rely on relatively nascent technology that has not yet been deployed at scale, or tested in the difficult environments for which it is intended. Parties can allocate technology risks in their contracts through, for instance, clauses dealing with guarantees and defect protections. However, these clauses are often subject to factual and legal interpretation when confronted by new technology, thereby causing disputes.

Where new technologies run into difficulties whether they are design, operational or otherwise, employers and contractors typically bring various claims including delay liquidated damages, defects claims and performance damages claims and cost/time extensions (respectively) and, ultimately, commence formal arbitration proceedings if no settlement can be found. Employers and contractors are sometimes reluctant to go to arbitration due to a fear that arbitration may damage their relationship, especially given the limited number of players in the offshore windfarm sector. However, arbitration remains a powerful tool that offshore wind players should keep in mind, notably when confronted by an unreasonable counterpart.

While these disputes may appear similar to 'classic' construction disputes, the new technologies and more uncertain physical conditions in offshore renewables projects give rise to increased risks. The following 'site risks' common in offshore wind power plants illustrate this point:

Conducting a comprehensive survey of the seabed, for rock and soil characteristics is notoriously difficult, and even when conducted, there remains the possibility that seabed conditions may change. As this directly affects cable-laying locations and methodologies, disparities between the expected site conditions and the actual conditions on the seabed can cause delays, increase costs, and ultimately lead to disputes.
Likewise, offshore wind projects face heightened risks from adverse weather conditions such as strong waves, heavy wind, and rain.
Another example is enhanced regulatory risk arising out of measures to protect marine life. Installing offshore windfarm piles usually requires multiple layers of 'bubble curtains' that dampen the noise in compliance with regulators' concerns. However, establishing these can be costly and/or cause delays, thereby leading to disputes as to which party should bear the additional costs.

These circumstances may have an exponential effect, where a delay causes a specialised construction vessel to miss a pre-designated seasonal weather window, in circumstances where the vessel is unreserved or unavailable for the following weather window. This impact is exacerbated by the current global shortage of the required installation vessels due to the boom in offshore windfarm projects.

More generally, persistent supply chain disruptions across the globe create difficult market conditions for the procurement of raw materials. For example, the Russia-Ukraine war has caused the price of the steel used to make wind turbines to escalate.

Accordingly, parties to renewables projects are advised to provide contractually for a clear allocation of the risk for those contingencies. Further down the line, parties should also not shy away from arbitrating their claims if the other party is not willing to abide by contractual terms. Claim management techniques (e.g. identifying key individuals and collating relevant materials early, drafting correspondence carefully, etc.) may prove essential in that context.

State promotion of renewable energies – what are the sovereign and regulatory risks and how to mitigate them?

Renewables projects are like conventional construction projects, in that they require significant upfront capital investment, but they tend to be more heavily regulated and driven by State policy and incentive regimes than conventional construction projects. Subsequent changes in tax, tariff or subsidy regimes can thus significantly alter the economics and the profitability of the project.

Regulatory regimes designed to attract investment have included inter alia feed-in tariffs with a fixed payment rate for each unit of electricity produced, purchase obligations at set prices independent of market price, tax credits, and subsidised financing. Investors may bring claims against States where these regimes are fundamentally altered after the investment has been made, where remedies (most commonly arbitration) are available to them.

Spain alone has faced more than 50 treaty-based arbitration claims from foreign investors due to changes in renewable energy incentives. Most recently, the arbitral tribunal in Canepa Green v Spain held Spain liable for breaching the investor's legitimate expectations that a tariff regime established in 2007 would remain available for the operational lifetime of certain wind farms owned by the investor. Likewise, Germany is currently facing two investment claims by offshore wind farm investors, arising from the replacement of a fixed feed-in tariff regime with a tariff auction system whereby the investor offering the lowest rate for consumers would be successful.

In addition to treaty protection, project owners and investors should seek to mitigate regulatory/sovereign risk through contractual means as well. This is typically achieved through a stabilisation clause which could either freeze the regulatory framework applicable to the project or indemnify the investor for losses/costs associated with changes in regulation.

Finally, the development of renewable energy projects often requires enhanced environmental risk management. For example, wind farms may cause disturbance to bird habitats and migration patterns, and offshore construction is subject to noise limits set by regulators as discussed above. This exacerbates litigation risk over delays, conditional approvals, and possible withdrawal of environmental licenses as the project develops.

Investors are thus well advised to conduct proper due diligence on the regulatory landscape, while keeping in mind what remedies either contractual (vis-à-vis project contractors) or treaty-based (vis-à-vis the State) may be available to them.

Conclusion & takeaways

Navigating the complexities of renewable energy projects requires careful consideration of specific risks, ranging from uncertainties tied to new technologies and the environment to the challenges posed by supply chain disruptions and regulatory changes.

As the renewable energy sector will likely grow further to meet climate targets, stakeholders are advised to consider the broad range of legal tools that are available to them at the different stages of their projects (subject, in each case, to the specifics of each region/jurisdiction):

On the prevention side, contract drafting must contemplate industry-specific risks that often call for special provisions, notably on risk allocation for unexpected physical conditions, or tariff adjustment mechanisms.
Once risks have materialized, stakeholders should not be afraid to make an efficient use of the dispute resolution tools available, including international arbitration. In our experience, well-crafted demand letters can go a long way, especially in an industry of repeat players. The same goes for emergency arbitration (assuming it is contractually available, which must be ensured at contract drafting stage), especially when there is a need to secure works in the make-or-break situations that are often encountered in renewables projects.
Finally, investors in the renewable energy sector are encouraged to recognise the enhanced sovereign risks they face (notably due to the importance of tariffs and other incentives). They should consider all potential protections including (but not limited to) investment treaties, thereby mitigating potential disputes, and ensuring the long-term viability of renewable energy projects.