Renewable energy projects share many of the same characteristics as traditional construction projects. To some extent, the approach to managing risk from a legal perspective will therefore be familiar. However, in other ways, renewable projects give rise to a distinct set of issues and concerns. Most significantly, the scale and speed of technological progress, set against a still-developing (and, at times, nascent) regulatory backdrop, requires careful thought to ensure that commercial parties adequately consider and account for these risks.
As various governments worldwide pursue the Paris Agreement goal of a "net zero" energy system, there has been increasing focus on the investment, development and commercialisation of different forms of renewable energy sources. In 2022, renewables accounted for 40 per cent of global installed power capacity and saw the largest year-on-year increase (at almost 295 GW).1 This surge in investments carries with it an expectation of returns and, as such, an increased likelihood of disputes.2 The need for careful and deliberate risk allocation between the relevant stakeholders therefore will become even more critical.
In this article, we consider the current state of play in the renewables sector, review the specific risks associated with renewables projects and then assess potential steps for mitigating such risks.
The Current Renewable Energy Landscape
The focus on advancements in the renewable energy sector is more prominent than ever. Governments, investors and developers are expanding the use of existing forms of renewable energy and exploring the commercialisation of newer forms of renewable energy to increase the overall global supply. The landscape of established forms of renewable energy include the following:
- Solar: Solar power is predominantly generated through solar photovoltaic ("solar pv"), which uses solar cells to convert sunlight into electricity. Solar pv is currently the cheapest option for electricity generation in a majority of countries.3 In 2021, solar pv became the leader in power sector investment, comprising nearly half of all investment in renewables.4 In the past decade, electricity generation from solar energy has increased significantly: in 2010, 31.05 TWh of electricity was generated from solar; by 2022, this figure had grown to 1,289.27 TWh.5 The International Energy Agency ("IEA") anticipates that solar power will overtake gas in terms of installed capacity in 2026 and coal in 2027.6
- Onshore wind: The production of wind power has dramatically increased over the past decade, likely because it is the second cheapest source of renewable energy behind solar pv.7 In 2010, wind technologies represented just 3.5 per cent of cumulative power capacity; by 2023, that figure increased over three-fold, to 11.4 per cent and it is projected to reach 14.4 per cent in 2027.8 Of the 830 GW of wind capacity installed in 2021, 93 per cent resulted from onshore developments, although offshore developments are expected to increase this contribution in the coming years (as discussed further below).9
- Hydroelectric: Hydroelectric energy is a well-established renewable source of electricity. In 2020, it supplied one-sixth of global electricity generation (the third-largest source after coal and natural gas).10 As it has proven to be a cost-effective and flexible means of expanding electricity access, there remains significant demand in developing and emerging economies in Southeast Asia, Africa and Latin America. On the other hand, alternative renewable energy sources such as nuclear, wind and solar have taken priority in more developed economies. Consequently, interest in and support for investment in hydroelectric energy has waned since the early 2000s. Though global net capacity additions are forecast to decrease by 23 per cent compared with the previous decade, hydroelectric capacity is still set to increase by 17 per cent, or 230 GW, between 2021 and 2030.11
- Nuclear: Although not strictly renewable, nuclear power has been well-established for many decades as an alternative source of energy to fossil fuels. Nonetheless, while investor scepticism has grown in recent years due to cost overruns, construction issues and project delays, there are more than 50 nuclear reactors under construction at present, and around 100 reactors on order.12
In addition to these more established energy sources, investors, government-supported research units and developers are also considering the commercialisation of alternative, newer sources of renewable energy:
- Offshore wind: According to the IEA, there is potential for offshore wind generation to exceed 420,000 TWh – 18 times the current global power demand.13 This is because offshore wind farms experience stronger and more consistent winds, making energy output more stable and predictable. Turbines mounted on floating structures can also be located further out to sea, reducing the visual and acoustic impact of a wind farm, which often limits onshore developments. There has been a recent spike in offshore wind installations, which are set to reach a record 18.4 GW in 2023 and are on track to grow to 519 GW by 2035.14
- Green Hydrogen: Hydrogen has traditionally been used in industrial processes such as steelmaking.15 Traditional means of hydrogen production, which are represented by their colours (grey and blue), typically result in the generation of large volumes of carbon dioxide. In recent years, however, an alternative process has been explored: green hydrogen. This uses renewable energy to power the electrolysis that splits a water molecule into its constituent elements: hydrogen and oxygen. The result is a clean energy source that can be stored and transported over considerable distances.16 It is anticipated that demand for green hydrogen will reach 530 Mt by 2050, given its application across a wide range of sectors: heating, transportation, power generation, chemicals and primary steel manufacturing.17
- Tidal energy: Tidal power remains a largely untapped source of clean energy: since 2010, there has been just 39.6 MW of global cumulative tidal energy installations.18 Tidal energy has, however, recently been attracting significant interest and investment, particularly due to its predictability of output compared to other sources.
Specific Risks for Projects in the Renewable Energy Sector
Renewable energy projects are sophisticated, long-term, require significant capital investment and typically involve stakeholders from many jurisdictions. In an industry that is undergoing rapid and unprecedented development, the risk of disputes arising during each phase of a project lifecycle is high.
Factors more unique to renewables projects, and which present risks that require active consideration and management, include: (i) reliance on novel and developing technologies; (ii) dependence on governmental support and favourable regulatory climates; (iii) reliance on predictable weather conditions; and (iv) supply-related issues.
Reliance on Novel Technologies
Renewable projects often rely on technologies that are still in their infancy, have only been tested in controlled environments or have never been deployed on the scale envisaged by stakeholders. The consequence is an increased risk of technology failing to perform as expected. This can occur during the construction phase, resulting in delays to operation, or during operation itself, impacting the performance, efficiency and productivity of the project.
Dynamic cables in floating offshore wind projects provide a useful example of how new and developing technologies can present unique problems. They are a relatively new innovation, working to transfer energy from offshore floating wind turbines. The dynamic cables must withstand the movement of the floating turbine and the significant hydrodynamic stresses generated by waves and currents.19 However, they have been known to experience failures (whether partially or fully) once a project is up and running. Given the remote and harsh environments in which the cables operate, root cause analysis can be difficult and empirical data to assist in this process can be sparse. Indeed, the full, long-term fatiguing effects caused by the movement of the floating turbine and hydrodynamic stress on the dynamic cables are relatively unknown.
The greater possibility of technical and capacity issues from new and novel technologies should form a key consideration for parties when allocating responsibility and risk at the contracting stage. The potential downsides, particularly for contractors, from relying on more traditional forms of risk allocation – such as general fitness for purpose obligations and specified design life – were demonstrated by the UK Supreme Court's 2017 decision in MT Højgaard A/S v E.ON Climate and Renewables UK and others.20
In that case, the foundation structures at two offshore wind farms failed following completion. The contractor was subject to obligations requiring the works to be free from defects and in accordance with good industry practice, along with a 20-year design life. At the same time, the contractor was also required to prepare its design in accordance with defined international standards (produced by Det Norske Veritas). However, after the contractor had finalised the design, and after construction had begun, an error was discovered in the relevant international standards. This meant the foundations would have a lower capacity than anticipated. In determining responsibility for the cost of remedial works, the UK Supreme Court ruled that the specified 20-year design life, combined with contractual references to international standards forming minimum requirements for design, meant that the contractor was liable for remediation. In simple terms, even though the contractor had followed agreed specifications and international standards, the contractual framework imposed a broader responsibility to ensure that the design was correct and ultimately would achieve the design life.
This outcome demonstrates the need for parties to carefully consider the scope of their respective responsibilities. From a contractor's perspective, it provides a reminder that wide-ranging obligations, whether on design or performance, should not be given without a full assessment of the risks. And where such obligations need to be given to satisfy key stakeholders, the added risk should be factored in when pricing the project.
Reliance on Favourable Regulatory Regimes and Government Support
Renewable energy projects have historically depended heavily on government regulatory support and subsidies.21 These favourable regulatory frameworks have encouraged innovation, incentivised private investment, and promoted the development and utilisation of renewable energy sources. The regulatory offerings have varied between countries, and can include the following: (i) feed-in tariffs, which guarantee a fixed payment rate for producers for each unit of electricity generated and fed into the grid; (ii) power purchase agreements, pursuant to which electricity is purchased at set prices for a defined period of time, irrelevant of its actual market value; (iii) investment tax credits, whereby governments provide incentives to producers, reducing their overall tax liability; and (iv) grants, including subsidised, or low-interest, loans. In 2016, the IEA estimated that government support to renewable energy development amounted to $140 billion.22
However, as the cost of generating renewable energy has declined, alongside other factors such as new budgetary constraints and shifting political priorities, certain countries have reduced or entirely phased out favourable regulatory frameworks. For example, in May 2019, the National Development and Reform Commission of China announced a policy to phase out national subsidies for onshore and offshore wind. Bloomberg has also highlighted that wind farm developers are now expected to "pay for the right to build and operate their projects rather than receive subsidies" to do so, and drew attention to recent auctions in Germany, Norway and the Netherlands that involved zero-subsidy bids for the first time.23 The risk of sudden revocation of government subsidies, on which private investors may have relied when entering into projects in the first place, can significantly impact economic viability and cause financial loss, resulting in disputes between investors, developers and states.
In recent years, investors have brought a considerable number of cases against states following the withdrawal of subsidies or adverse regulatory changes.24 These centred on whether states were permitted to adjust or remove incentives in the renewable energy sector to the detriment of investors, given that those investors had relied on them when contributing to certain projects. For example, in the case of Watkins Holdings Sàrl. and others v. Kingdom of Spain,25 the claimants had invested in wind farms under the expectation that they would benefit from a tariff scheme offered by the Spanish government, which was subsequently and retroactively revoked. A majority ICSID tribunal held that the dismantling of the regulatory regime retroactively was neither transparent nor reasonable. It was found that this had breached the investors' legitimate expectation that the tariff regime would remain stable throughout the course of their investment, and the tribunal consequently ordered Spain to pay €77 million in damages to the investor.26
While the investors were successful in securing compensation in Watkins, the takeaway for investors and other stakeholders is that considerable care is needed when relying on regulatory regimes and incentives in relation to renewable projects. These political and regulatory risks should be clearly accounted for at the outset of the project. This could be through investment structuring and/or as part of the contractual arrangements between relevant stakeholders. Where foreign investors are working with a host government, for instance, the risks can be mitigated through contract stabilisation clauses, such as:
- Freezing clauses: To freeze or fix the applicable domestic legislation or regulations affecting a project for the term of the project.
- Economic equilibrium or risk-allocation clauses: Alternatively, to agree that the host state government will indemnify the investors against costs associated with changes in domestic legislation or regulatory environment that apply to the project and its foreign investors after execution, in order to preserve the economics of a project. For example, if the host state imposes new emissions standards regarding a power plant, an economic equilibrium clause may require the host state to bear the investor's costs incurred in modifying its plant's design or refitting a plant to meet these new emissions standards.
The Impact of Weather Conditions
Another risk for renewable projects is the impact of weather conditions. Given that such projects are typically located in areas with significantly unpredictable conditions, weather-related delays may be more common during construction. As such, particular attention should be given to force majeure provisions and the extent to which contractors can seek extensions of time by reference to adverse conditions, as well as the allocation of associated costs.
Additionally, during operation, prolonged periods of unpredictable or unexpected weather can negatively impact output. Renewable energy suppliers can therefore risk breaching their contractual commitments to buyers. This may lead to disputes between contractors, developers and equipment manufacturers as to whether underwhelming yields truly were a result of unforeseen conditions beyond the control of all parties, or rather due to inaccurate estimates or lower-than-expected performance.
For example, in 2021, a wind farm in Texas was unable to sell and deliver the quantity of wind-produced energy it had promised its buyer due to the severe winter storms that resulted in icing on the blades of its wind turbines.27 The producer sought to rely on the force majeure clause in the parties' contract to excuse itself from non-performance, which was then challenged before the New York Courts. Notably, it was found that difficulties generating electricity due to poor weather conditions did not constitute a force majeure event.28
This case therefore provides an indication that not all unforeseen weather events may be considered force majeure. Stakeholders involved in renewables projects should ensure that their force majeure clauses are carefully drafted, in order for the agreed risk allocation to match their expectations.
Supply-related Issues
The renewables sector is also vulnerable to raw material supply issues, which can lead to disputes. The COVID-19 pandemic and the war in Ukraine have only added to considerable supply chain volatility for the raw materials essential to renewable projects.
For example, the price of polysilicon, a raw material used in the construction of solar panels, increased by 350 per cent between 2020 and 2022 as a result of various lockdowns, factory accidents and floods.29 Government-imposed export restrictions and other trade-related disputes may also negatively impact the availability and pricing of raw materials.30 Further, McKinsey estimates that by 2030 there will be a 50-60 per cent shortage of rare earth metals neodymium and praseodymium, which are essential components of wind turbine generators.31
Project delays, additional costs and cost overruns are inevitable consequences of materials shortages and uncertainties in supply that will no doubt lead to more disputes in the coming years. In fact, according to a recent study by QMUL, the "volatile price of raw materials and energy supply are predicted to be primary causes of disputes in the energy sector globally over the next five years."32
With these risks in mind, investors and parties to renewable projects have various options to mitigate exposure. These include: (i) factoring into contract negotiations the risk of price fluctuations and potential project delays caused by supply shortages and supply chain volatility; (ii) allocating contingencies in terms of construction and projected production schedules to account for the possibility of delays to renewable facilities being ‘online' and operational due to supply chain issues; and (iii) carefully considering alternative sourcing mechanisms in the event that a supply chain-related issue impacts the progress or financial viability of the project.
Conclusion
The renewables sector is exposed to common risks faced by other conventional construction and energy projects. However, given various additional distinct risks to such projects, stakeholders should ensure that their contracts are carefully tailored for the circumstances, and based on a fully up-to-date understanding of the regulatory landscape.
1 International Renewable Energy Agency Report: "Renewable Capacity Statistics 2023" dated 2023.
2 Jus Mundi Report: "Electricity & Renewables Arbitration Report" dated December 2022.
3 International Energy Agency Report: "World Energy Investments 2022" dated June 2022.
4 International Energy Agency Report: "World Energy Investments 2022" dated June 2022.
5 International Energy Agency Report: "Tracking Clean Energy Progress 2023 - Solar pv".
6 International Energy Agency Report: "Renewables 2022 – Analysis and Forecast to 2027".
7 International Energy Agency Report: "World Energy Investments 2022" dated June 2022.
8 International Energy Agency Report: "Renewables 2022 – Analysis and Forecast to 2027".
9 International Wind Energy Report: "Wind Electricity Analysis – Technology Deep Dive" dated September 2022.
10 International Energy Agency Report: "Hydropower Special Market Report – Analysis and Forecast to 2030" dated July 2021.
11 International Energy Agency Report: "Hydropower Special Market Report – Analysis and Forecast to 2030" dated July 2021.
12 White & Case Article: "Going Nuclear – Managing Claims and Disputes During the Construction of New Build NPPs" dated 05 May 2023.
13 International Energy Agency Report: "Offshore Wind Outlook 2019" dated November 2019.
14 World Forum Offshore Wind "Global Offshore Wind Report 2022" dated February 2023
15 PwC Strategy& Report: "The Dawn of Green Hydrogen" dated 2020.
16 PwC Strategy& Report: "The Dawn of Green Hydrogen" dated 2020.
17 PwC Strategy& Report: "The Dawn of Green Hydrogen" dated 2020.
18 Ocean Energy Europe Report: "Stats and Trends 2021" dated March 2022.
19 Power Magazine Article: "Dynamic Export Cables Help Unlock Potential of Offshore Wind Power" dated 1 October 2021.
20 MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another [2017] UKSC 59.
21 International Energy Agency Report "Fossil-Fuel Consumption Subsidies Are Down But Not Out" dated 20 December 2017.
22 International Energy Agency Report "Fossil-Fuel Consumption Subsidies Are Down But Not Out" dated 20 December 2017.
23 Bloomberg Article: "Wind – 10 Predictions for 2022" dated 28 January 2022.
24 International Chamber of Commerce Report: "Resolving Climate Change Related Disputes through Arbitration and ADR" dated November 2019.
25 Watkins Holdings S.à r.l. and others v. Kingdom of Spain, ICSID Case No. ARB/15/44.
26 Watkins Holdings S.à r.l. and others v. Kingdom of Spain, ICSID Case No. ARB/15/44, Award, [531] – [538].
27 JP Morgan Ventures Energy Corp v Miami Wind LLC, 179 N.Y.S.3d 892.
28 JP Morgan Ventures Energy Corp v Miami Wind LLC, 179 N.Y.S.3d 892, p.11.
29 McKinsey & Company Report: "Renewable Energy Development in a Net-Zero World: Disrupted Supply Chains" dated 17 February 2023.
30 OECD Trade Policy Paper "Raw Materials Critical for the Green Transition" dated April 2023. Raw materials critical for the green transition: Production, international trade and export restrictions | OECD Trade Policy Papers | OECD iLibrary (oecd-ilibrary.org). Also see: Solar power: Europe attempts to get out of China’s shadow | Financial Times (ft.com); Solar trade dispute impacts PNM power supplies | News | abqjournal.com.
31 McKinsey & Company Report: "Renewable Energy Development in a Net-Zero World: Disrupted Supply Chains" dated 17 February 2023.
32 Queen Mary University London Survey: "Future of International Energy Arbitration Survey Report 2022" dated 2022.
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