Wind projects in Australia as part of an ongoing renewable energy transition
Wind energy generation has been one of the primary drivers of Australia's energy transition. Australia has more than doubled its renewable generation expansion over the last decade, and as of 2023 wind energy accounts for 36% of Australia's renewable energy generation, and 13% of the country's total generation capacity.
In response to this expansion, the Australian Government has recently passed the Offshore Electricity Infrastructure Act 2022 which provides a licensing scheme to enable the construction, operation and decommissioning of offshore renewable energy and offshore electricity projects.
What risks we are currently we seeing in the wind energy sector?
Many problems arising from wind projects relate to a lack of build quality and increased costs, both of which contribute to lower profitability.
For example, in June 2023, Siemens Energy scrapped its annual profit guidance and has seen its shares slump by record amounts due to expected repair costs of €1.6 billion to resolve flaws in onshore turbines delivered by its Spanish subsidiary Siemens Gamesa.
Common contractual terms that can mitigate the risks associated with wind energy projects
Set out below are nine key terms project owners need to include in their EPC contract to address the high-risk scenarios common to these types of projects:
1. Scope of work – key performance metrics
A clearly defined scope including the minimum technical and overall performance metrics is critical to minimise losses arising from design and construction defects.
2. Performance guarantee
Wind projects incorporate expensive and often bespoke technological components, so it's critical for the principal to procure a performance guarantee from the contractor guaranteeing that the facility will perform in accordance with the agreed performance metrics.
Included are the contractor obligations and warranties governing commissioning, handover, performance tests and processes to be carried out as well as the process for corrective action and remedies.
3. Liquidated damages
To be enforceable, liquidated damages must be a genuine pre-estimate of the loss suffered by the principal, and typically arise in the following forms:
- Performance Liquidated Damages – Performance Guarantees are to be backed by performance liquidated damages (PLDs) payable by the contractor in the event the performance guarantees are not met.
- Delay Liquidated Damages (DLDs) are designed to compensate the principal for loss and damage suffered due to late completion of the project.
It is important to have recourse to security in the event the contractor fails to comply with its contractual obligations. Security can take the following forms:
- Bank Guarantee – for around 10% of the contract price on standard EPC, however, due to the technological risk associated with wind projects, negotiating a higher percentage is reasonable. The ability to call upon a bank guarantee in the event of contractor delay may be limited where the parties have pre-agreed PLDs and DLDs.
- Retention – withholding around 10% of each milestone payment.
- Advance payment guarantee – an advance payment guarantee should be procured for each advance payment.
- Parent company guarantee – guarantees that the ultimate parent of the contractor will perform the Contractor's obligations where they fail to do so.
5. Tripartite agreement
Where projects are debt funded, a tripartite agreement should be executed between the contractor, principal and finance lender. Tripartite agreements commonly set out the Lender's right to step-in or assign the project and the processes involved for dealing with project loan defaults.
It is important to ensure the contractor procures appropriate equipment warranties which transfer to the principal at the conclusion of the defect liability period. Wind turbines often require ongoing original equipment manufacturer (OEM) maintenance and repair beyond project completion. Obtaining sufficiently broad OEM warranties will reduce the cost burden on the principal. Any gaps that OEM warranties do not cover are to be covered by project insurance policies.
The principal should have a broad entitlement to order variations and also set out the process for pricing a variation and adjusting performance guarantees and security as a result.
8. Dispute resolution and governing law
International arbitration is often the most practical method for dispute resolution.
The governing law of the contract should be a neutral agreed jurisdiction that minimises the legal inconsistencies between the legal jurisdictions of the manufacturer, principal, contractor, and site location.
9. Force majeure
Ensures the parties do not have to perform when an unforeseeable and unavoidable event occurs which preventing them from doing so. It is always worth clarifying with contractors the types of events that are not considered force majeure.