Mitigating and managing project challenges 4 min read
Achieving the target of net zero remains at the forefront for the energy industry. As we increase investment in renewables and look for ways to improve efficiencies, new challenges emerge. Helpfully, there are a range of mitigation and management strategies that can be put in place to reduce risk and smooth the transition.
In this Insight we outline some of those practical steps, including ones specifically geared towards managing or avoiding potential disputes during the development stages of a project.
- The transition to renewable energy is creating new challenges for Australia's transmission network.
- While the industry works hard to meet those challenges, there is ongoing uncertainty for renewable generators seeking to connect, register and generate.
- Project sponsors and their financiers can manage and mitigate the impact of this uncertainty by early engagement, appropriate risk allocation and a proportionate response to any resultant disputes.
The renewables revolution is well and truly underway in Australia. Having already achieved our goal of 33,000 gigawatt hours of renewable energy almost a year ahead of its scheduled target date,1 the trend looks set to continue and accelerate.
The transmission network was not originally designed to accommodate this growing influx of intermittent power from renewable sources, but it is adapting and will continue to do so for the new generation mix. In the meantime, the resultant focus on system strength by the market operator has, in some cases, had a negative impact for renewables projects.
Increasingly, this impact is being seen in disputes between the parties involved – notably generators and contractors – which can have an impact on off-take and finance arrangements. In December 2020, the Clean Energy Council identified concerns related to the grid connection process and technical requirements as the number-one business challenge facing the renewable energy sector.2
Fortunately, there are a number of steps that industry participants can take to help mitigate and manage the challenge.
When preparing project documents, the impact of these issues can be considered at an early stage to account for:
- flexibility in the registration and commissioning process;
- the risk of possible output constraints or delay to commercial operations; and
- general uncertainty arising from network conditions.
The primary question when drafting key project documents (including EPC and operations & maintenance contracts) is: who should bear (or share) the risk? In this regard, particular attention should be paid to provisions concerning:
- regulatory impact;
- network constraints;
- registration and commissioning deliverables;
- extensions of time;
- revenue adjustment clauses; and
- limitations on liability.
Attention should also be paid to relevant definitions, including 'change in law', 'variation', 'good industry practice', 'force majeure' and 'dispatch instructions', as well as the dispute resolution process. These clauses should take into account the different ways in which governmental or regulatory conduct might affect the profitability of a project, including formal and informal policies and practices adopted by regulators. The COVID-19 pandemic has also highlighted other means by which events beyond the parties' control can lead to project impacts, increased expenses and consequent loss of revenue.
Frequent engagement with regulators, the market operator and the network service provider throughout the life of the project can assist to:
- keep all parties appraised of any change in circumstances at the earliest possible opportunity;
- accommodate those changes; and
- inform an approach to managing stakeholder interests and third party risks.
Furthermore, as we see enforcement actions increasingly being pursued by energy regulators with a renewed focus on system security, maintaining a level of engagement can reduce the risk of becoming the target of unexpected regulatory action.
Third party engagement
If network issues impact a project, early engagement between principals, contractors, off-takers and lenders can help avoid escalating cost, confrontation and possible delay.
Where practical solutions are not feasible and relationships begin to sour, proactive steps can be taken to manage disputes early, efficiently and to the satisfaction of stakeholders.
In particular, it can help to promptly:
- identify contractual notice and dispute resolution requirements, including those relating to timing;
- capture knowledge of the factual and technical challenges that have arisen on site, and how all parties to the dispute have responded to those challenges; and
- consider settlement options, any commercial drivers for counterparties and any hurdles to reaching a satisfactory resolution at an appropriate time.
Despite the challenges being faced across many renewables projects, proactive steps can be taken to place a project in the best possible position, no matter if, how or when these challenges arise.