Abstract:
This article explores the multifaceted challenges contractors encounter in the renewable energy sector. It begins with an overview of the growing importance of renewable energy projects. The article highlights the common types of claims in renewable energy projects, including delays, variations, disruptions, site condition issues, force majeure events, and payment disputes.
We then analyse the root causes of these disputes, such as unclear project scopes, miscommunication among stakeholders, changes in project requirements, delays in employer obligations, external factors like labour and material shortages, and poorly drafted contracts. They emphasize the importance of clear and precise contract terms, effective communication, and proactive risk management.
The article also discusses best practices for mitigating and recovering claims, including maintaining comprehensive documentation, conducting thorough project assessments, and employing structured project management methods. It provides detailed guidance on handling specific claims like time extensions, cost claims, and subcontractor claims, supported by case law and real-world examples.
Additionally, the article offers a comparative analysis of international practices in construction payment legislation, highlighting how different countries address payment delays and disputes, providing valuable insights for contractors operating in diverse legal environments. The focus on global best practices underscores the need for adopting robust frameworks to ensure timely payments and efficient dispute resolution in the renewable energy sector. Though we have made every effort to cover various aspects of this topic, please note that this discussion is not exhaustive. Additionally, while the article focuses on India, the majority of the issues are relatable on a global scale.
Introduction:
With the rapid increase in pollution levels, sea levels, and temperatures across the globe, coupled with the ever-increasing climate change, dependence on renewable energy, along with a transition to clean energy has become the talk of the “ton”, be it solar, wind (both offshore and onshore), hydropower, waste-to-energy, geothermal, or hydrogen. With the aforementioned issues at hand, it is of paramount importance, that our civilisation makes an attempt to salvage the situation. With the continuous usage of fossil fuels (especially of coal, oil and gas) which contributes to 75% of the Greenhouse Gas Emissions (GHGs) and in total of approximately 90% of the total Carbon emissions, clean energy comes to the rescue.
While clean energy offers solutions, it also brings challenges, including complex disputes due to the interconnected and overlapping nature of multiple contracts and scopes of work. Navigating the dispute resolution system for energy claims involves multiple stakeholders at various hierarchical levels, each with differing and sometimes conflicting interests is a daunting task. Additionally, energy as a commodity cannot be withheld for long durations, necessitating expedited project completion to ensure continuous supply, which adds pressure and intricacy. These projects also face heightened political and regulatory risks, as even favourable frameworks are subject to uncertainty and volatility due to changing political scenarios. Delays and unexpected cost increases can strain financial resources, leading to disputes over funding or cost-sharing. Integrating renewable energy projects into electrical systems originally designed for conventional baseload dispatch can also create contention, as these projects often require complex and costly grid infrastructure upgrades or modifications.
|
Name of project |
Type of project |
Delay (months/years) |
Final cost |
Reasons for delay/cost overrun |
|---|---|---|---|---|
|
Kamuthi Solar Power Project, India |
648 MW Solar Project. |
8 months |
$2.5 billion |
Evacuation Delays |
|
Muppandal Wind Farm Project, India |
Operational onshore wind farm with wind turbines ranging from 200 KW to 1, 650 KW. |
18-24 months |
– |
|
|
Block Island Wind Farm, USA |
Commercial offshore wind farm with 30 MW of installed compacity. |
Recurring; no delays during construction but regular delays after becoming operational. |
$290 million |
|
|
Sardar Sarovar Dam Project, India |
Series of large irrigation and hydroelectric multi-purpose dams on the Narmada River. |
56 years |
$8.2 billion |
|
|
Ivanpah Solar Electric Generating System, USA |
Solar-thermal power plant with a gross capacity of 392 MW. |
02 years |
$2.2 billion |
The reasons have not been clearly mentioned, however, the project faced ‘first-of-a-kind construction challenges’ which required innovative thinking and execution at every level. |
|
Nant de Drance Hydropower Plant, Switzerland |
900 MW pumped-storage power station. |
14 years |
$1.9 billion |
|
|
Cerro Dominador Solar Thermal Plant, Chile |
Hybrid Concentrated Solar Power (CSP) and Photovoltaic (PV) complex with 210 MW capacity. |
04 years |
$1.7 billion |
|
|
Walney Extension Offshore Wind Farm, UK |
Extension Offshore Wind Farm with a capacity of 659 MW. |
1.5 years |
$3 billion |
|
|
Sarulla Geothermal Power Plant, Indonesia |
Geothermal Power Project with a 330 MW capacity. |
4 years (However, the exploration began in the year 1987 and faced a myriad of challenges after being fully commissioned in the year 2018) |
$1.6 billion |
|
The above-mentioned table explains the status and allied delay for the major solar, thermal and offshore projects across the globe. Therefore, timely dispute resolution is crucial for maintaining the momentum of clean energy projects. Effective resolution mechanisms can help manage risks, align stakeholder interests, and ensure that projects are completed on schedule, thereby contributing to the urgent transition to a sustainable energy future.
For the purposes of this article:
The employer is the entity or organization that owns the renewable energy project. They are responsible for financing, planning, and ultimately operating the project.
The contractor is responsible for the detailed engineering design, procurement of materials and equipment, and construction of the project. They provide a turnkey solution, delivering the project ready for operation.
Subcontractors are specialized firms or individuals hired by the EPC contractor to perform specific tasks or provide specialized services within the larger project.
The terms contractors and subcontractors may be used interchangeably because their impact on a project is cascading and, thus, similar in many cases.
Causes of disputes:
With these complexities in mind, it is essential to delve into the root causes of disputes that frequently arise in renewable energy projects:
-
Ambiguity in Scope and Stakeholder Miscommunication
Establishing a distinct and identifiable tone is crucial for any project. Uncertainties in the project’s contract scope sometimes give rise to construction conflicts; specifically, vague descriptions of the scope, obligations, specifications, and payment terms can cause problems. Delays result from omissions in contract specifications since decisions have to wait for employer’s engineers to provide instructions. A contractor may incur unforeseen expenditures or face disagreements over financial responsibilities as a result of unclear risk allocation, which also contributes to misunderstanding and blame-shifting. Large-scale projects often involve multiple contractors working simultaneously on-site. While these contracts have different scopes of work, they frequently need to align due to the interconnected nature of tasks. If the scope of work is not clearly defined, it can lead to multiple issues among contractors, causing unnecessary project delays.
Changes in project scope, known as scope creep, can cause delays in project completion by causing adjustments to budgets, schedules, and resource allocation.
Enable aggregation of multiple projects into a single investment vehicle.
-
Delay on execution of Employer Obligations.
The primary factors contributing to employer delays are typically delays in handing the site to the contractor or delay in providing site access or fronts, delays in issuing work orders to begin or stop construction, and delays in approving schedules/drawings, delay in acquisition of land, delay in obtaining governmental permits, amongst others.
Project deadlines and budgets can be considerably disrupted by delays resulting from the employer’s failure to fulfil their contractual responsibilities.
An illustration is the occurrence of delayed site access, which can bring the project to a halt and need schedule extensions. The delays can create a chain reaction, affecting not only the contractor’s / subcontractor’s ability to accomplish important goals but also potentially generating delays in delivering crucial equipment or mobilizing the workforce. This might result in claims for extra costs and expenses for the contractor’s / subcontractors.
-
Labour, Equipment, and Supply Chain Delays:
Energy projects are particularly susceptible to delays due to external factors beyond the contractor’s control. Unanticipated labour issues, disruptions in the global supply chain, and adverse weather events can all contribute to delays and additional expenses. Renewable energy projects face unique challenges due to their dependence on specialized components and materials. Supply chain disruptions can lead to higher costs, increased storage expenses, and financial strain on contractors/subcontractors. Project timeframes can also be affected by the unavailability of equipment or materials, forcing contractors to procure substitute components that may compromise the project’s long-term reliability and effectiveness.
Geopolitical factors, such as the ongoing trade war between the US and China, exacerbate these challenges, raising uncertainty for projects relying on components manufactured in China. The International Renewable Energy Agency (IRENA) and the International Energy Agency (IEA) have reported on the escalating prices of essential materials like lithium and cobalt, which further heighten costs and delays. Wood Mackenzie, a global consulting firm, also highlights that renewable energy projects worldwide are experiencing delays due to supply chain limitations.
A practical example of supply chain disruption occurs when project delays cause costs to rise at different points in the chain. If a contractor needs to purchase specific raw materials from a subcontractor, the subcontractor then manufactures supplies based on the project schedule provided by the contractor. To ensure timely project completion, contractors often procure goods in advance in large quantities. However, if the project is delayed, the contractor must store these bulk-purchased supplies, increasing storage costs. Similarly, if the subcontractor produces according to the project timeline, they may have already acquired raw materials and allocated time, space, and resources for production. A delayed project can result in financial strain for the subcontractor as these allocated resources remain underutilized. Similarly, unless the contract permits, the said burden falls upon the contractor.
This scenario exemplifies the supply chain management chain reaction, where delays cause costs to rise at multiple points in the chain.
-
Site Condition related Delay:
It is possible for site conditions that are either unexpected or inaccurately reported to be a substantial cause of disputes. It is possible that the installation of the turbine base for a wind farm will require significant additional labour, such as blasting or specialized excavation techniques, if the project encounters geological formations that were not anticipated throughout the construction process. These variations from what was anticipated in the contract, which are frequently the result of insufficient geotechnical studies, inaccurate detailed project reports and might result in claims for compensation to pay the additional costs and time that are required to solve the problems that were not anticipated.
-
Poorly Drafted Contracts:
Misinterpretation and conflicts are more likely to occur in contracts that are either unclear or poorly drafted. Uncertain specifications, for example, concerning the technical requirements can give rise to disputes in the event that circumstances that were not anticipated develop during the construction process. In a similar vein, imprecise risk allocation can contribute to disputes in the event that unanticipated obstacles materialize.
In India, many projects use FIDIC Silver or Yellow Book standard contracts without fully appreciating the specific nature and requirements of the projects, leading to misaligned risk allocation, inadequate provisions for local conditions, and potential legal and compliance issues. These standard contracts often fail to address the unique complexities and challenges of individual projects, resulting in misunderstandings among stakeholders, financial strain on contractors, and project delays.
-
Pay If Paid Clauses caused Delay:
Projects who have contracts that include “pay-when-paid” terms may experience difficulties with their cash flow, which may hamper their capacity to fulfil their financial obligations and may also have an effect on the completion of the project. The terms in question dictate that the contractor will not be paid until the employer has been paid by a third party, such as a utility company before the contractor actually receives payment. It is possible for the contractor to experience financial strain as a result of delays in payment from the third party, as well as potential disputes surrounding late payment penalties or interest charges that have developed as a result of these delayed receipts. There is a similar cascading impact on the subcontractors as well.
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Imbalanced Bargaining Power Leading to Unilateral Clauses/Red Flag Clauses:
Imbalanced bargaining power in contracts can result in unilateral or “red flag” clauses that heavily favour one party over the other, often disadvantaging the contractor. These one-sided provisions can greatly disrupt the implementation and financial feasibility of a project. For instance, a changes clause may allow the employer to make unilateral changes to the project’s scope without consulting the contractor. Contractors might lack suspension rights, meaning they cannot halt work even if significant issues arise or they don’t receive timely payments. If the employer causes delays, the contractor might only receive an extension of time without compensation for additional costs incurred. Employers may also possess broad termination powers, including termination for convenience, where contractors are typically denied claims to anticipated profits for incomplete work. The final payment to the contractor can vary based on the termination reason invoked by the employer. Notice to proceed may be delayed by the employer without remedies for the contractor. Furthermore, employers often do not take responsibility for the data they provide for the project, despite it forming the basis for the entire project design.
These clauses collectively place the contractor at a significant disadvantage, highlighting the need for balanced and fair contract negotiations. This imbalance can force contractors to bear unexpected costs or incur penalties for failing to meet deadlines due to owner-initiated adjustments.
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Delay by other Contractors On-Site:
Energy projects can entail a diverse array of contractors, each accountable for a specific facet of development. Regrettably, the actions or lack thereof of a single contractor can create a chain reaction, resulting in substantial delays for other parties involved.
The London Array Offshore Wind Farm in the UK, initially estimated at £1.8 billion but ultimately costing £2.2 billion, faced significant delays and cost overruns due to issues with subsea cable installation. The contractor responsible for laying the cables encountered technical difficulties and adverse weather conditions, leading to delays that cascaded through the project, affecting turbine commissioning and overall schedule coordination. This necessitated extended contracts and additional resources, further escalating costs and pushing the project timeline from its original completion target. Effective project management and better coordination among contractors were essential to mitigate these risks.
The Tehri Dam and Hydro Power Project in India, initially estimated at ₹1,000 crore but ultimately costing ₹8,392 crore, faced significant delays and cost overruns due to issues encountered by contractors on-site. The contractor responsible for the diversion tunnel faced unexpected geological conditions and water ingress, delaying the tunnel and main dam construction. These delays caused a cascading effect, disrupting the schedules of other contractors and leading to extended use of machinery, additional labour, and increased material costs. Despite efforts to mitigate these issues through extended deadlines and renegotiated contracts, the project completion was significantly delayed beyond the initial target.
The Ivanpah Solar Electric Generating System in the Mojave Desert, initially estimated at $1.6 billion but ultimately costing $2.2 billion, faced significant delays and cost overruns due to issues encountered by contractors on-site. The contractor responsible for installing and aligning the heliostats faced technical difficulties and logistical challenges, delaying the project timeline as these mirrors were crucial for focusing sunlight on the power tower. This delay disrupted the schedules of other contractors, leading to inefficiencies and further cost increases. Despite efforts to manage these issues through extended deadlines and renegotiated contracts, the project completion extended beyond the initial target.
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Misuse of on demand bank guarantees by employers:
Bank guarantees are often employed financial tools in construction contracts. These guarantees serve as a means of ensuring the employer’s financial protection in the event that the contractor fails to fulfil their contractual responsibilities. Nevertheless, unscrupulous employers have the ability to exploit these assurances, transforming them into a tool to harm the contractor. This can have a catastrophic effect on the contractor’s liquidity. An abrupt and unforeseen need for a significant amount of money can endanger their capacity to fulfil financial responsibilities to subcontractors and suppliers, perhaps initiating a chain reaction of financial pressure throughout the project. Under such circumstances, contractors may be compelled to initiate legal proceedings to contest the improper utilization of the bank guarantee and seek reparation for any losses suffered as a result of the employer’s conduct. A contractor facing the wrongful invocation of an on-demand bank guarantee by the employer, is confronted with significant challenges due to India’s high legal standards an injunction. The law typically has a very high threshold to allow injunction globally.
For example, in India – the law requires clear and incontrovertible evidence of blatant fraud to even consider an injunction, making it exceedingly difficult to stop the wrongful invocation. Additionally, proving irretrievable harm, a criterion strictly interpreted by courts, adds another layer of difficulty. These stringent conditions and judicial caution create substantial barriers to obtaining timely and necessary relief.
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Absence of escalation provisions in the contract:
Energy projects typically have a long duration, spanning multiple years, and the costs associated with construction are vulnerable to changes caused by factors such as inflation and fluctuations in material prices. Contractors may face financial vulnerability if the contract does not include “escalation clauses”. Envision a project involving the installation of a substantial number of solar panels, characterized by a contract with a predetermined and unchanging price. Throughout the construction process, there is a substantial increase in pricing due to a worldwide scarcity of silicon, which is an essential element in solar panels. The contractor, obligated by the predetermined price, is confronted with significant financial losses as a result of unplanned cost escalations.
This situation not only risks their profit margins but also jeopardizes the overall financial viability of the project. In the absence of escalation clauses, contractors are compelled to take risks on the stability of material prices during the course of the project.
The National Solar Energy Federation of India (NSEFI) published a report in 2022 that recognizes the difficulties arising from fluctuating material prices in the solar sector. The report specifically emphasizes the significant disruption created by the worldwide silicon scarcity and its consequent effect on project expenses. The lack of escalation provisions can also result in conflicts with employers who may refuse to cover any extra expenses caused by price variations. As a contractor working on a renewable energy project, rising steel prices might drive up project expenses. This is because a significant percentage of the project’s budget is set aside for the procurement of steel components such as wind turbine towers, nacelles, and foundations, as well as solar panel mounting structures and frames. When steel prices rise, the contractor may need to renegotiate the terms of the contract with the project owner to cover the increased expenses. This might cause delays in project completion or even contract cancelation if the project owner refuses to accept the higher expenses.
Unfortunately, these fluctuations typically do not permit frustration of contracts.
Under Indian law a mere rise in the price of raw materials or other such costs, even if the rise is drastic, does not lead to the frustration of the contract. Impossibility under Section 56 of the Indian Contract Act does not mean literal or physical impossibility but also impracticability and futility from the perspective of the object and purpose of the parties. However, Indian courts have occasionally provided some respite in such circumstances.
The threshold for frustration of contract generally involves the occurrence of an unforeseen event that renders the performance impossible or radically changes the nature of the contractual obligation, making it unjust to enforce the original terms. This doctrine is recognized in various jurisdictions, with similar principles as outlined in Section 56 of the Indian Contract Act, 1872, found in the common law doctrines of the UK, the US, Australia, and Canada.
Lately, the notion of “equitable adjustment” in specific situations has been given recognition in the Indian Legal regime. This approach permits modifications to the contract price to accommodate unexpected cost escalations that were not anticipated at the time of entering into the contract. It is to be noted that effectively asserting a fair modification relies significantly on the contractor’s capacity to prove the unexpected nature of the cost escalations and the degree to which they affected project expenses.
Another aspect that causes issues in contracts even if the escalation formulae maybe mentioned, is the index referenced in the escalation formula may sometimes be discontinued or become redundant. If no alternate index is specified in the contract, this can lead to disputes between the parties on arriving on a mutual agreement for an alternate index. The parties often find it difficult to arrive at a consensus due to difference in opinion on the new index’s alignment with the project’s specific cost components, historical consistency with the discontinued index, stability and predictability of cost trends, credibility and acceptance within the industry, geographical relevance, frequency of updates, and the transparency of its source and methodology. These disagreements perforce Cos delay and causes an unnecessary financial strain on the contractor and depletion of contract margins.
Authors
Mehak Oberoi is the Legal Head (Hydro – APAC) at GE Vernova. Additionally, she also serves as a mediator and arbitrator; and Abeer Tiwari is a 5th-year B.A. LL.B student at Balaji Law College, Pune.
Disclaimer:
The views expressed by the authors are personal.
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