Covid-19 Pandemic – Can the renewable energy sector pass the test?

Correct as of 9am, 7th April. This article is not being maintained.

As of the date of this article, renewable energy (“RE”) projects around the world including in the Middle East and North Africa (“MENA”) region, particularly solar and wind projects, are facing challenges due to:

• competitive pressure due to the crash in oil prices;
• disruptions to supply chains; and
• restrictions (lockdowns) announced by governments.

In this unprecedented situation, it is very difficult to predict how and what the impact of the pandemic on RE projects will be since the situation is impacting almost every aspect of the projects. Most RE projects that are already contracted or under construction are impacted hard through supply chain disruptions and government-ordered lockdowns. Therefore, on existing projects, we are likely to see a rise in termination or suspension of contracts, claims for force majeure and, potentially, Change in Law. In the long run, while tendering new RE projects might be delayed, we envisage that most governments would continue with their plans for RE projects to achieve their already committed clean energy and carbon reduction goals. Further, in the months to come, we are likely to see a more concerted effort to weave renewables policies into fiscal stimulus packages introduced by governments in response to the Coronavirus crisis.

RE Outlook in Cheap Oil Era

Historically, low oil price is bad news for RE. However, the cheap oil is unlikely to have any impact on the imperatives which enabled the shift to RE, particularly in the Middle East. For those governments and other stakeholders who have invested heavily in RE, it was the dangers of climate change that compelled them to take action, sooner rather than later, to facilitate the shift from fossil fuels to RE. In addition, many central banks are promoting ultra-low (or even negative interest rates) to sustain the economies of their countries under the Covid-19 crisis. This could mitigate the high capital risk of RE by making renewables cheaper to install.

In the Middle East, Saudi Arabia (KSA), as a global leader in oil production and exports, is committed to maximising the country’s renewable energy potentials. Those commitments are clearly stated the Kingdom’s Vision 2030 under which around 30% of the country’s power mix is to be supplied from renewable energy sources by 2030. Saudi Arabia has recently launched RE projects which are reportedly worth billions of dollars. The UAE, as the pioneer in investing in RE projects in the MENA region, is following the same path. It would be unlikely for these governments to move away from their plans because of the current oil price levels. Let’s not forget that before the Covid-19 pandemic, the oil industry was under immense pressure as a result of oversupplied market and increased investor scrutiny of projects that were not environmentally sustainable. Abandoning RE investment would be a backward move that most of the governments, particularly governments in the MENA region, would not be able to afford.

Covid-19 Impact on Projects

On existing projects that are currently under construction, the lockdown in places such as China, Italy, the United States, and Spain has been slowing down or entirely stopping the supply of the solar panels, wind turbines and batteries. This is likely to have a knock-on effect of delays, losses and missed milestones further down the value chain, which in turn is likely to give rise to a rise in termination or suspension of contracts, claims for force majeureRE projects may have to source parts and equipment from alternative manufacturers in other parts of the world potentially at a higher price, which in turn might hurt the project cash flows and its ability to service their debts. In this situation, the RE projects may seek to reject or renegotiate the contract price to offset the additional costs.

A claim of force majeure may not be easily upheld if the parts/panels are capable of being produced and supplied from within the country of the project as this could give rise to the counter-argument that the Project Company is not entitled to force majeure relief to the extent that it is able to mitigate the Coronavirus-related force majeure by buying suitable panels from a supplier in-country. In this situation, developers and contractors would be turning their attention to assessing their rights (if any) under their contracts to pass any additional costs to the contract counterparty. Interestingly, the Government of Iraq has declared force majeure on “all contracts and projects”. The implications of that declaration need to be closely scrutinised from Iraqi local law perspective.

Change in Law would be relevant mainly because a lockdown declared by the government in the jurisdiction of the project is likely to impact any delivery of those panels even if they are manufactured locally, as well as the ability of workers to be at the construction site. In the case of Covid-19, it is arguable that the mitigation measures available to developers are quite limited, since it is a global problem and therefore availability of parts and equipment from other jurisdictions is quite limited and delivery to the site may not be possible.

Whether or not the Project Company is able to claim Force Majeure, we are likely to see delays in RE project commercial operation dates being achieved on the basis that the necessary parts and equipment pre-ordered or proposed are unable to be supplied.

Developers and contractors are likely to try exploit by whatever means, FM and/or Change in Law claims, to ensure that they do not bear the risk of any additional time or costs associated with their RE projects.

On RE projects currently being tendered, whether we see increases in bid tariffs will depend on whether the bidders seek to factor in the situation now or take a commercial view that Covid 19’s impact will be short term and ultimately only affect construction of their project and not necessarily increase their operation costs over the term of the contract. This means developers will need to access the risk of achieving the commercial operation date. As liquidated damages are normally payable for delay in achieving commercial operation date, it could be expected that Bidders will factor in some additional amounts for the payment of liquidated damages. Tariffs will also be dependent on the availability of equipment and parts from China, being the major source of much of the necessary equipment and whether the prices previous quoted by suppliers, which enabled the tariffs recently seen in the MENA region, are sustained.

The current crisis does not only limit the ability of the Project Company to obtain equipment and parts, but also in physically having access to the construction site. Given the closure of government offices, projects may also struggle with obtaining permits and completing reporting obligations. Similarly, due to movement restriction regulations, the services of third-party experts/surveyors are not available which in turn impacts on the implementation of the project contracts.