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Three contract tips for the nimble renewable energy developer
24 February 2016
Confidence is returning to the renewable sector in Australia, with a record number of projects being actively pursued in the current development pipeline.
The focus to date has been on large-scale solar and wind projects, with northern sites favouring solar due to their higher solar irradiation and the southern sites generally focussed on wind.
Meanwhile, all project developers are working hard to maximise their yield, minimise their costs and consolidate buyers.
However, as with many complex engineering projects, renewable development requires the successful completion of a number of key milestones which must combine under a profitable business model. The milestones include:
- Land agreements;
- Development approval (planning, environmental controls);
- Power purchase through a long-term PPA, or opt to go merchant, or a combination;
- Construction, Operation, Warranty, Maintenance agreements (that comply with the DA and are aligned with the PPA and financing model);
- Grid connection; and
- Financing model or opt to sell the development right.
If you are a developer of a renewable project, you would have learnt to nimbly manage the ups and downs of reaching these milestones and regardless of whether you have in-house counsel or not, you are required to manage the key contracts and legal instruments, the outcomes of which can make or break a project.
During these times, the challenges to bring those matters to a desirable outcome are often significant. In the process other considerations can be left behind.
Many projects ‘drop the ball’ over three contract issues. They do so more often than not for two reasons:
A. the issue is seen as less important or minor during negotiation; or
B. parties don’t want to open a can of worms. It can be difficult during negotiations to keep counterparties engaged and often an imbalance of commercial priorities between negotiators prevents these clauses from being fully developed in a contract.
Regardless, the key three contract items developers should not avoid are:
1. Exclusion clauses – it is common in contracts for a party to relinquish certain remedies or to put restrictions on enforcing rights which, absent the ‘exclusion clause’, the party would have had.
Regret (or argument!) ensues when the excluded rights or remedies would have proved commercially valuable. Exclusion clauses are often found within Termination, Defects, Delay or Performance Guarantee clauses. Although some are more complex than others, exclusion clauses generally follow a three stage construction. The first stage defines the trigger events relevant under the exclusion. The second stage details the available remedies for the events listed in stage one. The third stage eliminates all other remedies.
Simply put, if you think that contract law allows you a certain right or protection, ensure that an exclusion clause doesn’t deliberately, or by poor drafting, take that right away.
For example, exclusion clauses may interfere with liquidated damages. This can be detrimental, as liquidated damages are often relied on in preparing a project business case. If liquidated damages are implicated in an exclusion clause, it might limit or prevent their enforcement, with serious adverse consequences for project economics.
The lesson is to read the contract carefully and appoint experienced legal advisors to review all exclusion clauses. It is worth spending the time understanding the logic and checking it works. For developers with an engineering background, it may help to convert the clause into logic notation and test a few scenarios (i.e. If not X, and Not Y, then A….).
2. Alternative dispute resolution – there is a tendency in Australian renewable contracts for mediation and arbitration clauses to be one absent, or two loosely drafted so that in the event of a dispute, the contract on this point is practically unusable.
However, and particularly if one of the parties is a foreign entity, it is advisable to consider detailed mediation and arbitration options. A detailed alternative dispute resolution (ADR) clause increases the likelihood of reaching a resolution, without exluding a Party’s right to pursue appropriate court proceedings.
An arbitration clause should cover the three basics:
- location: where the parties agree to hold the dispute;
- the language in which the dispute will be conducted; and
- the rules nominated for the arbitration (for example IAMA, ICC Rules etc.).
An arbitration clause should also detail the process for managing the parties; this includes timeframes, the number of arbitrators, their method of selection, and the applicable rules of law.
For example under Art 21 of ICC (2012), if the parties do not agree on the applicable rules, the arbitral tribunal is free to make its own determination. In a transaction that is under time pressure, often thinking through the finer details and having agreement at formation can increase the likelihood of a successful outcome.
3) Measured guarantees – it took the oil and gas industry many attempts to get performance and availability targets right – much of this experience can be adapted to contracting for the renewable energy industry. One of the riddles of contracts is how performance is measured practically.
Bearing in mind the differences in technology and global standards, it is astute to agree on the precise method of calculation.
For example, when calculating availability, ensure you walk away with a percentage you are happy with and also how that percentage will be calculated.
This is certainly an exciting time for developers.
Contacts: Jon Simpson, Principal; Stephen Byrne, Principal; Sally Torgoman, Senior Associate.
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