The renewable energy sector is booming. Fueled by increasing government incentives and private sector demands towards energy transition, new projects are materialising at a rapid pace. However, as with ‘traditional’ energy projects, the construction and operation of renewable energy projects can be entirely derailed by supply chain issues. In this post, we consider some of the supply chain risks that are most likely to arise on renewable energy projects, and what stakeholders can do to mitigate them.
Many of the supply chain risks that arise on ‘traditional’ energy projects can also arise on renewable energy projects. The rising cost of materials or labour shortages may delay construction and lead to disputes between contractors and employers, for example. However, certain unique features of renewable energy projects make supply chain disruption even more likely. For example:
- Concentration of raw materials: Certain raw materials that are essential to renewable energy projects are only available in a few countries or produced by a handful of companies. This greatly increases the risk of supply chain disruption caused by regulatory changes, trade restrictions, and political instability. When coupled with rocketing demand, it can also cause abrupt price hikes that may delay construction or disrupt operation.
- Limited number of players: The renewable energy boom has also created rising demand for parts and equipment. However, new entrants have found it difficult to achieve full-scale operations rapidly enough to compete with larger manufacturers, which can result in unexpected insolvencies and difficulties in accessing alternative suppliers.
- New and untested technology: Whilst the technology used in more common renewable energy projects, such as solar and wind, is now widely used and understood, as the renewable energy sector continues to develop, newer technologies are being brought to market, which are not well-tested. When these technologies are used in practice, unexpected problems can arise, which take time to resolve, resulting in construction and operation delays.
- ESG: Although renewable energy projects have a positive impact on the environment because they assist with the transition to net zero, they often rely heavily on the mining of certain raw materials and the availability of land to construct new projects. As a result, they can affect workers, local and indigenous communities, and the surrounding environment, in both the countries where the raw materials are sourced and the countries where the projects are ultimately built. Particularly where developers and contractors are sourcing materials from or operating in countries with under-developed employment, human rights and environmental regulation, supply chains may be impacted by ESG issues. These include bribery and corruption, child labour, worker health and safety risks, and pollution and environmental degradation, which have the potential to derail projects, lead to disputes between stakeholders and regulators, shareholders or civil society, and cause reputational damage. This risk has increased with the introduction of modern slavery and supply chain due diligence legislation in a number of jurisdictions, such as the UK, France and Germany, with other jurisdictions such as Norway and the EU soon expected to follow suit. As a result of these laws, developers and contractors are increasingly required to ensure that their supply chains are free from human rights and environmental abuses, or risk significant fines or legal challenges.
There is no ‘magic ticket’ that will enable stakeholders to avoid these risks entirely, but there are ways they can be mitigated:
- Developers and contractors should carefully consider which raw materials are required and factor the risk of price changes or shortages into their budgeting and timing. Contractors in particular may seek to avoid setting prices at the outset of a long project, or ensure there is a suitable mechanism for incorporating price changes into the overall contract price.
- Stakeholders should understand as much of the supply chain as possible and communicate regularly with suppliers. They should check all suppliers thoroughly, develop a contingency plan regarding alternative suppliers and put in place appropriate risk mitigation measures, such as escrow arrangements for technology and insurance policies.
- Stakeholders should also consider circular economy solutions to minimise the risk of raw materials depletion and shortage of resources. This could be done by keeping raw materials and products in use by means of effective and smart re-use strategies in refurbishing, remanufacturing and recycling.
- Stakeholders should protect themselves with contractual provisions such as representations, warranties, and indemnities, which enable them to minimise any losses that may arise due to supply chain risks.
- Stakeholders should understand the regulatory landscape in which they are operating, in particular any obligations they may have to ensure that their supply chains are free from human rights and environmental abuses. They should develop and adhere to ESG policies and procedures, which assist them to comply with their regulatory obligations, and ensure their suppliers do the same.
This is part of a series of blog posts exploring the potential impacts of energy transition and climate change on global projects. Click here to see other posts in the series.