As the energy industry evolves, owners are increasingly seeking new and creative opportunities for the development of renewable projects.
Successful negotiation of engineering and construction agreements in the renewable sector depends on the unique characteristics of each proposed project, as well as the thorough assessment and allocation of risks.
Every negotiation requires both parties to prioritize risks and to be prepared to trade low-value risks (those with a low probability of occurrence and a low impact upon occurrence) for high-value risks (those with a high impact upon occurrence).
Depending on the level of due diligence performed on the potential project, the negotiator may consider proposing alternative contract structures. Many owners prefer turnkey engineering, procurement and construction (EPC) agreements with lump-sum pricing and risks split cleanly between the owner and the contractor. However, projects with significant unknown variables—especially renewable energy projects that involve innovative design or construction methods and rapidly changing technology—may benefit from a more collaborative contract structure that shares risk, such as a cost-plus agreement or an integrated project delivery approach.
To accommodate risks unique to the renewable sector, sophisticated contractors tend to avoid conventional industry form agreements and instead negotiate customized provisions and standards. Naturally, experienced negotiators prefer to follow the favored strategy of allocating risk to the party best able to control the risk, but on renewable projects often find that challenges arise in crafting provisions allocating risk wholly outside of both parties’ control.
For example, as states and municipalities become more familiar with renewable projects, the government’s interpretation of building codes designed for traditional structures tends to evolve, and the resulting changed interpretations of code have the potential to significantly impact design and construction schedules and costs.
Tailor the Provisions
As the market for renewable energy projects continues to expand and evolve, owners and contractors have become more sophisticated in their expectations. Additional consensus may emerge around industry standards as renewable projects become more common, but until the market matures, carefully tailored provisions defining force majeure events or other excusable events to account for changes in law, changes in technology, and other unknown risks are key issues to address at the negotiation stage.
Consider Points of Exposure
Contractors also should specifically consider key points of exposure: project performance risk and residual, post-completion risk. No one wants to contemplate worst-case scenarios during the “honeymoon phase” of negotiation, but skilled negotiators focus on critical risks around payment periods, cash flow exposure and termination rights. They examine invoicing procedures and payment timing, and consider available remedies in the event of nonpayment, including notice requirements, cure periods and requirements to involve parent guarantors or sureties.
On renewable projects, this issue is often more complex due to the involvement of various lenders and financing parties, which often require the contractor to enter into consent agreements giving lenders the opportunity to pay in the event of the owner’s default. If a negotiator isn’t carefully reviewing these timelines, the project agreement may expose the contractor to months of required performance (and cash flow exposure) without payment prior to the ability to suspend work.
Renewable projects often have additional exposure post-completion, which in many aspects is similar to issues considered in traditional power plants. Skilled negotiators pay attention to proposed language specifying the “design life” of the plant (which may expose an EPC contractor to additional liability, as courts have interpreted this language, in certain situations, to impose an extended implied warranty on the plant). Contractors also should specify expected operating parameters for the plant as required conditions to valid warranty claims, especially if the contractor is not providing operation and maintenance services post-completion.
Keep Others in the Loop
Finally, skilled negotiators recognize the limits of their expertise, and are unafraid to seek additional internal or external input where needed. They use counsel familiar with the proposed project or similar projects to draft creative commercial proposals, advise on legal issues, and confirm any revisions needed relating to their assumption of risk or the laws and regulations applicable to the project agreement.
The best negotiators know that skilled project management is essential to effective execution. They brief the appropriate project management team and remain available for questions as the project moves forward, using the agreement as a resource and rulebook from construction to operation.