Developers might be keen to jump on the renewable energy bandwagon but building a wind farm has its own logistical, commercial and legal challenges
The UK government’s renewable energy target will result in more onshore (and offshore) wind farms being built in the coming years. With other construction sectors slowing down and government incentives available in this area, wind farm construction will no doubt arouse the interest of many who are new to the renewable energy sector.
It is likely that most onshore wind farms will be built in remote environments. The logistical challenges of such remote areas are clear. But as well as overcoming them, those involved will need to devise workable contractual frameworks to deal with the peculiar legal and commercial risks that such projects entail.
The main players in the development of onshore wind farms include the landowner or developer, the turbine maker and the infrastructure contractor. In the background there are also the lender, who provides financing, and the operator of the electricity network (grid). The contractual framework that is eventually agreed will depend on the relative bargaining power of these key players, and developers will soon discover that the turbine maker is in a particularly strong position.
Only a limited number of manufacturers are able to make, supply and erect the type of turbines that can generate enough energy to make a wind farm commercially viable. As such, there is a shortage in supply and long lead times between order placement and delivery to the site are not uncommon. Manufacturers will also usually seek upfront payment of a significant portion of the price to protect themselves against any delays in the readiness of the site to receive the turbines.
The climatic and topographical conditions on the site affect the ability of turbines to generate energy. Developers should not underestimate the cost of getting the site data wrong or the potential effect of natural or manmade forces on the turbines’ ability to generate power. More importantly, developers will discover that this is not a risk they can easily pass on to the turbine maker.
Developers will soon discover that the turbine maker is in a particularly strong position
A developer will from the outset need to consider how it intends to procure the wind farms. This invariably involves the construction of major infrastructure (roads, foundations for the turbines, connections to the grid) and securing the supply and erection of turbines (which are often made outside the UK). Procuring the wind farm on an EPC/turnkey basis may appear the most attractive option. However, this is not always possible, as turbine makers are unwilling to take on risk for the infrastructure works, so a developer will probably have to let supply and erection of the turbines as a separate contract from the infrastructure works. Given the obvious interaction between the infrastructure works and the turbine supply and erection, the developer, manufacturer and infrastructure contractor may want to give some thought as to how this relationship is to be dealt with on the ground.
The letting of the turbine supply and erection contract and its interface with the infrastructure contract is likely to be challenging. Issues will include allocating the risk for the impact of the site conditions on turbine performance, managing the conflict between the developer’s right to maintain and upgrade turbines and the maker’s desire to protect their design, ensuring that turbines bought from outside the EU comply with the local environmental law and manufacturing standards, limitation of the turbine maker’s liability, and so on.
The availability of project finance proves a further complication. With less finance available and competing projects and sectors, funders will look to finance those that have the most attractive risk profile. This will add to the challenge of negotiating “bankable” project contracts.
Developing onshore wind farms poses a number of complex challenges for all involved, but if the UK is going to significantly increase the production of energy from renewable sources then those involved need to promote contractual frameworks to manage the risks inherent in such projects.
David Lloyd Jones is a partner in the construction unit of HBJ Gateley Wareing. This article was co-authored with Akin Akinbode, a solicitor at the firm
Original print headline: Farming today