Can energy transition herald a different approach to project structures and risk?

Increased global support for the energy transition and the growing reliability of renewables technology has resulted in a shift in how renewables projects are structured and financed.

This is placing increasing pressure on owners, contractors and suppliers to deliver at a lower cost than ever before. History tells us that this can lead to an increase in disputes at all levels of the contract structure, but is there an alternative?

Below we consider the trends in renewable project procurement, the risk of a ‘race to the bottom’ and what the alternatives might look like. For a more detailed view please read the second blog in our MPA series on the energy transition.

Procurement strategies

There is a growing trend in renewables projects procurement towards a more ‘bankable’ engineering procurement and construction (EPC) contracting approach and away from the multi-contracting model.

This shift exchanges greater control and lower costs, for lower risk to owners and lenders. EPC contracting gives security as the contractor delivers the project to a ‘turnkey’ stage. With infrastructure and energy institutional investors and oil majors seeking to grow portfolios of renewable assets this approach looks like it is here to stay. But, with contractors taking on more risk this shift may open up opportunities for disputes.

Potential for increase in disputes

Intense competition for EPC contracts could result in a ‘race to the bottom’ on pricing. This leads to stringent contract management in order for the contractor to turn a profit. Such an approach can still deliver projects successfully, with robust contractual obligations. However, it can be difficult to adequately set out all contract risks at the outset.

This is especially relevant when projects rely on cutting-edge technology and are exposed to many ‘unknown unknowns’ such as extreme weather. However, as two now well known cases (Fluor Limited v. Shanghai Zhenhua Heavy Industries Limited [2016] EWHC 2062 (TCC) and MT Højgaard A/S (“MTH”) v. E.ON Climate & Renewables UK Robin Rigg East Limited [2017] UKSC 59 ) have shown even with these issues firmly in the parties’ minds at the outset, it is not always straightforward to mitigate these risks.

At this turning point in the growth of renewables projects, does the trend towards EPC contracting offer best value? For some projects the answer will undoubtedly be ‘yes’. But, for projects with newer technology, and consequently more risk, a more collaborative approach may ultimately offer the best chance for successful delivery.

What are the alternatives?

There has been discussion of a resurgence in partnering and alliancing approaches for the delivery of major infrastructure projects. This approach has its heart a fair balance of risk, reward and incentivisation

A partnering or alliancing approach can have the following benefits:

• reduction in overall cost due to contingency/risk pricing;
• encouragement of value engineering throughout the project;
• reduction in interface risk; and
• building a longer-term relationship with the contractors for future portfolio projects.

Moreover, where novel and emerging technology is involved a partnering approach can help overcome the risks of the ‘unknown unknowns’.

Overall, it is important at the outset to consider which structure is best for the project given the importance the selected partnering structure can have in aiding successful delivery and offering the best overall value.