The offshore wind industry is growing up.
Many offshore wind farms are reaching the end of their initial O&M period. Stakeholders are exiting and new parties investing. Defects that arose during the early years of the wind farms have now been resolved, but new issues are emerging as the assets continue through their operational lives.
At the same time, new wind farm developments are starting to take shape in ever more locations globally. The construction phase will involve new technology, bringing exciting new potential alongside new risks.
What challenges does the wind industry face as existing wind farms mature and new projects develop?
To name but a few, for existing wind farms:
- As warranty periods end under EPC and supply contracts, any defects must be identified and addressed, or at least the employer’s rights need to be safely reserved in relation to them.
- Blade deterioration and blade fabrication defects are coming to light, affecting productivity and causing serious health and safety concerns. It is essential to limit your exposure to such problems.
- The efficacy of corrosion-protection systems is another area of exposure to address, as assets age in the highly corrosive offshore environment.
- New generation O&M contracts need to be carefully scoped out to meet the needs of the maturing assets. Continuity of service is essential, so that any shortcomings in asset condition at the end of the first O&M phase are suitably addressed going into the second phase. Carve-outs can be drafted for scope that is to be dealt with by different providers. Likewise additional scope can be added so as to de-risk elements, such as vessel provision.
- Wear and tear needs to be carefully distinguished from defects, bearing in mind that what looks like wear and tear could be a defect that has taken time to manifest itself. Wear and tear tends to attract higher O&M charges.
- Performance guarantees for the next operational phase need to be tailored to current needs and the current market, with yield guarantees now a worthwhile alternative to availability guarantees. The major O&M contractors have significant bargaining power, but employers will want to maximise their protection.
As for new wind farms:
- Advances in design, such as larger blades and foundations designed for deeper waters, bring the need to consider carefully the allocation of risk in design, construction and supply contracts.
- Vessel availability may restrain projects as they enter their construction phase. You may need contractual protection for this eventuality.
These are just some of the issues that we are coming across at Eversheds – your business will no doubt have encountered others specific to its projects.
How do you face these challenges? Some case studies:
In the first phase of a wind farm’s operational life, we commonly see O&M contracts placed with the turbine supplier. This has enabled major turbine suppliers to achieve very substantial bargaining power in the negotiation of O&M terms. If their software is embedded and O&M of the turbines cannot be hived off from the rest of the assets, then it may not be practical or possible to swap O&M contractors as the wind farm moves into its second operational phase. However, where this is not the case, we are seeing more asset owners/operators appointing new O&M contractors under more favourable terms and guarantees. It then becomes crucial to address the transition of responsibilities, to ensure that there is no shortfall in maintenance of the assets at the end of phase one which triggers increased payments to the incoming phase two contractor.
Clients often approach us when their warranty period is about to expire before defects to their assets can be rectified. We help them to protect their position beyond the warranty period. This usually involves either:
(i)negotiating a “standstill agreement” with the party responsible for the defects, whereby the limitation period for commencing a formal warranty claim in arbitration or court is extended for a suitable period to allow the defects to be investigated and remedied; or
(ii)issuing warranty claims in arbitration or court before the warranties actually expire, so as to preserve the client’s rights, then securing a stay (suspension) of the procedure until the parties have had chance to address the defects.
Either way, a strong claim letter is usually needed beforehand, which we prepare on our clients’ behalf.
Design standards and risk
Care in the drafting of contractual obligations regarding quality and risk is crucial. In the case of MT Højgaard A/S v E.On Climate and Renewables UK Robin Rigg East Limited and E.On Climate and Renewables UK Robin Rigg West Limited  [EWCA Civ 407], there was a dispute over the extent of the EPC contractor’s obligations in relation to the design of foundations to two offshore wind farms.
At first instance, Edwards-Stuart J in the Technology & Construction Court found the contractor to have warranted that the foundations would have a service life of 20 years. However the Court of Appeal (composed of Jackson LJ, Patten LJ and Underhill LJ) found the obligation to be a more qualified one, to design foundations with a design life of 20 years. This meant that, whilst the foundations were to be designed to perform for 20 years, the contractor had not guaranteed this.
The scope of the obligation had significant financial consequences for the wind farm owner, when the foundations failed well within the 20 year period. The Court of Appeal came to its conclusion by interpreting the contractor’s specific design duty in the context of the rest of its duties under both the legal and technical parts of the contract. The case is now being appealed to the Supreme Court and will be heard in June next year.
The case underlines the importance of ensuring that the extent of the duties and risks that the designer/contractor is taking on is defined with clarity and consistency throughout of the contract.