Renewables Risk
For those of us who have been working in the oil & gas industry for most of our careers, it is both sobering and exciting to see the dramatic shift away from fossil fuels as the primary source of power generation. Huge strides are being made in the renewables sector, and for the first time on Boxing Day, more than half of Britain’s daily electricity came from wind turbines.
Wind Farms in the UK
The UK’s coastline is now home to an increasing array of wind farms, the latest of which was announced in the press this weekend at Dogger Bank off the North Yorkshire Coast. Each of the 200 turbines generates enough electricity to power 16,000 homes.
Whilst excited about the prospect of such projects for the energy sector and the jobs they should create, I’m also anxious for the contractors competing furiously to win such a prestigious project. After being the head of proposals in a former life, I read the article in The Guardian (4 Jan 2021) with possibly an undue amount of scepticism and caution. Perhaps I could draw your attention to a few quotes from that article that rang alarm bells…
“…the biggest wind farm ever built…”
“…an engineering feat that marks a step-change in the growth of renewable energy…”
“…the staggering scale of the turbines…”
“…a £6bn financing deal – involving 29 banks and advisers…”
Who takes the risk?
The Chief Executive of SSE, Alastair Phillips-Davies, said: “It will be the world’s biggest, most innovative offshore windfarm.” The question for me is who’s taking the risks on this biggest, most innovative project? What we know is that it won’t be the 29 banks or their advisers. We can be sure that they will expect the risk to be off-loaded down the supply chain, and there will be no additional funds available in the event that these risks materialise.
And it’s unlikely that SSE or their 50% partner, Equinor, will volunteer for much of this risk. The subsidies needed to make renewable projects viable will demand a fixed completion date, irrespective of the challenges faced during implementation, hence hefty damages for delay. The typical 20-25 year design life for this first of a kind (12MW, 260m high) turbine will need to be borne by the engineering contractor, as was emphasised in the Supreme Court judgement on Eon v Hojgaard, even if the project is “innovative”.
In large part, the success of this endeavour depends on the professionalism and maturity of the key players – in wanting to and having the authority to solve the challenges that will inevitably occur. Whether that’s the investor group – are they a cohesive, experienced team interested in the project’s long-term success and presumably others? Or are they a group of hired in freelancers? Or the main contractor who may be extremely experienced in offshore oil & gas, but maybe hasn’t replicated that in renewables yet?
Having tried (and sometimes succeeded) in digging contractors out of significant commercial risk and disputes in the renewables sector, it’s clear that those parties who have got to grips with these fundamental risks who make these amazing feats of engineering come to life, without losing their shirt. We’ll be watching the Dogger Bank project with interest.
Karen Cherrill – Partner Kingsfield Academy