Addressing solar project supply chain concerns from a legal perspective
By Guy C. Smith, Partner and Co-Head of the Renewable Energy and Energy Transactions Practice Group at Stinson LLP
Today’s unique market conditions are causing unprecedented disruptions in the equipment supply chain for many developers, owners and contractors with solar projects under development or construction. Some of these disruptions can have significant and adverse effects on the successful and timely completion of such projects.
Supply chain concerns have arisen due to the COVID-19 pandemic and associated government restrictions, scarcity of raw materials, raw materials and inputs (steel, semiconductors, polysilicon, etc.), limited shipping capacity and backlogs, container shortages and port congestion. Add to that an increase in unfair trade remedies and other government-driven import restrictions and a perfect storm of supply chain disruption is the result.
So, what can be done?
Understand your contracts and related risks, especially force majeure provisions
Developers and Owners. If a supply chain problem develops or exists in connection with a particular project, developers and owners will likely learn about the problem first from the contractor whose performance has been affected. Often the contractor concerned will notify the developer or owner of any circumstances affecting the contractor’s performance under the applicable contract, citing the contract’s force majeure provisions as an excuse for the contractor’s delay in performance for caused by the event in the supply chain.
Developers and owners should familiarize themselves with the force majeure provisions in their project contracts. In some cases, these provisions can be quite broad, so that almost any event beyond the contractor’s reasonable control that affects or delays performance can serve as a basis for apologizing for delay in performance. In other cases, the force majeure provisions may be quite limited and limited to certain specifically listed events. Such provisions often list specific examples of force majeure cases, provided certain criteria are met (e.g. [i] beyond the reasonable control of the involved party, [ii] could not have been avoided by reasonable care and [iii] not the result of the negligence or negligence of the party concerned) and include certain specifically listed exclusions from the definition of force majeure.
If a contractor has invoked force majeure, the developer or owner must confirm that the development or event affecting the delivery falls within the contractual definition of a force majeure event. In addition, the developer or owner must certify that the contractor has complied with the notice provisions and other requirements that allow a valid force majeure claim. In many contracts, failure to comply with such requirements may result in a waiver of force majeure rights.
Likewise, force majeure provisions often require the affected contractor to take steps to mitigate the effect of the force majeure event on its performance and that the suspension of performance not exceed or last longer than required by the force majeure event. If force majeure is invoked, developers and owners must also confirm that these additional requirements have been met.
In addition, developers and owners should familiarize themselves with the remedies available to them if a development or event affecting delivery does not qualify as a force majeure event or if the force majeure event and its impact on the offering become protracted.
The risk analysis is easier if there is only a single construction contract for the solar energy project (an engineering, procurement and construction contract) that governs all or almost all engineering, equipment procurement, supply, installation, commissioning and construction associated with the project. If a developer or owner has separate contracts with a major equipment supplier, such as the solar module supplier, and the installation contractor’s build/balance, or if the project is subject to a power purchase agreement, the risk analysis more complex. In such cases, a developer or owner may need to invoke force majeure in one contract for protective reasons to excuse the delay, while also challenging the force majeure claim in their other contract.
contractors. Contractors generally have the same concerns as developers and owners. They must ensure that the procedures for valid invocation of force majeure are followed and that the developments or events related to the supply chain fall within the definition of a force majeure event. A contractor’s right to validly excuse the delay in performance due to a development or event in the supply chain is especially important if the contractor would otherwise be liable to pay lump sum damages for its delay in meeting certain contractual milestones that are affected by supply chain issues.
Contractors should also familiarize themselves with the scope of the force majeure provisions in their contracts with subcontractors and suppliers and the framework under such contracts, as well as other remedies that may be available in the event of contractual non-compliance. Subject to the conditions of force majeure, an interruption may give the subcontractor or supplier the right to excuse performance due to a supply chain problem under its contract, without the contractor having the same opportunity to remedy the delay. in performance to apologize under its contract with the developer or owner.
Even if a solar project is not currently experiencing supply chain issues, given the potential to experience such issues, developers, owners, and contractors should familiarize themselves with the items outlined above to help with emergency planning.
Address specific in new contracts
In new contracts, developers, owners, and contractors should each consider directly addressing supply chain issues that may arise, including concepts designed to anticipate some of the issues described above. Contractors may ultimately be required to bear more of the supply chain risk, especially if they take responsibility for procurement and subcontracting, including managing shipping and logistics.
Developers and Owners. In anticipation of supply chain disruptions (or if supply chain disruptions are already experienced), developers and owners should try to identify and maintain additional sources of supply. While this may be somewhat challenging and may incur additional costs, it is possible that backup facilities can be arranged through reservation agreements or equivalent with alternative equipment suppliers in the event of an unforeseen event. At the very least, consideration should be given to making less formal inquiries to determine the availability of alternative sources of supply, if necessary.
Likewise, if a developer or owner has a fleet of projects in development, they should consider retaining the ability to assign items to projects depending on priorities, and address supply chain issues as needed.
contractors. Contractors should also consider having or arranging alternative sources of supply if available. This can be difficult if there are costs associated with “locking in” alternative sources of supply that cannot be passed on to the developer or owner. In addition, contractors may have more challenges in reallocating items across projects due to additional costs and resource constraints.con
Awareness and monitoring of developments
Solar project stakeholders should monitor policies and other developments that affect the industry and more specifically the solar projects in which they have an interest. By being informed and proactive, timely action can be taken to address specific supply chain disruptions.
Examples include monitoring government actions affecting solar equipment imports, consulting key freight forwarders and logistics providers about shipping delays and port congestion, and monitoring developments and government action related to the COVID-19 pandemic. . Keeping abreast of such developments allows stakeholders to respond and reduce project-related impacts.
While exploiting contractual strengths or weaknesses can strengthen a party’s bargaining power in the short term, parties involved in projects under construction that have been affected by supply chain disruptions will generally need to cooperate and collaborate if they wish. that the solar energy project is realized. built and completed despite the delay. Given the magnitude and spread of current supply chain problems, many solar projects are likely to be disrupted. As such, solar project stakeholders should become aware of the steps to address or minimize the supply chain risk that may arise.
Guy C. Smith is a partner at the law firm Stinson LLP and co-head of the firm’s Renewable Energy and Energy Transactions practice group.