20 September, 2016
FOCUS: Offshore wind will be vital in helping to decarbonise Asia-Pacific power generation capacity, but there are considerable risks to address across the region.
Expectations for offshore wind power are high in the Asia-Pacific region, particularly in China where wind power installed capacity is expected to more than treble from approximately 149GW in 2015 to over 495GW by 2030. China has the highest wind power globally by far, accounting for a third of cumulative wind power capacity worldwide in 2015. Other Asian countries such as Korea, India, Japan and Taiwan are also promising markets for offshore wind.
However, there are serious issues that can arise during construction and these should be tackled if projects are to be successful.
Weather
Offshore wind power generation requires quite specific combinations of wind, waves and currents. It is therefore vital to ensure that there is sufficient "float" within the programme to account for adverse weather conditions. It is also important to consider any possible force majeure events during the negotiation phase.
Delay
Contractors who run into significant delays can cause serious problems for employers. The amount that can be recovered under "liquidated damages" is generally capped, and is seldom enough to cover the losses that are caused on these types of projects.
It is important to look carefully at any such caps during negotiations, and to look at other possible remedies. An employer will usually, for example, have the right to terminate the relationship with the supplier if it is in serious breach or delay, but this is an extreme step that is unlikely to be commercially attractive once the project has begun.
Design life
It is important to be clear on the distinction between 'service life' and 'design life'. Designing for a 20 year 'design life' does not guarantee that the design will last for 20 years, just that it is designed to last for 20 years. A one in 100-year storm may occur in the second year, for example, leading to the failure of the structure. A 'service life' on the other hand requires that the structure be in service and functioning for 20 years.
Installation vessel selection
Initial negotiations should clearly specify the vessel requirements for the job, and the extent to which the contractor will take on the risk of the vessel being correct for the job. This should be done with consideration to the geotechnical data, as this will affect the suitability of different vessels, and specifically who bears the risk in relation to the geotechnical data.
Programme float must be factored in for vessel unavailability, as vessels will often be delayed on other projects. It is unlikely that alternative vessels will be available at short notice if a vessel does become delayed elsewhere or is found to be unsuitable, so options need to be considered in advance.
If a substitute vessel is required, there should be an agreement in place as to how this will be managed and who is liable. In most cases the contractor should find and pay for the replacement. If the employer does have to engage the replacement vessel themselves, it should be done on express terms that the contractor will pay for it.
Conflicting contractual requirements
Offshore wind contracts generally include a large number of provisions such as fitness for purpose, design or service life, requirements on specific standards, and requirements to use good industry practice and exercise due skill and care. Problems arise when these provisions conflict with one another.
Fitness for purpose obligations, for example, may 'trump' obligations to comply with industry standards if the latter are found to contain errors.
There can also be conflict between a guaranteed end result and compliance with any standards. If a contractor is being asked to guarantee a particular result, it may be necessary to give full control over the design and methods. Doing so allows the contractor to choose the design life, and the risk level that he or she considers appropriate in light of the guaranteed service life.
However, this does make it more difficult to assess tenders, as each will differ. It also puts more risk onto the contractor, and is likely to increase prices to compensate for that risk.
Defects liability period
The contract must clarify the full extent of a contractor's obligations to rectify defects, the extent of the repairs expected, and any documentation and other information that is required.
The extent to which the employer can reject a proposed solution should also be included. Can the employer prescribe how a defect should be fixed, or specify an alternative repair if it is not satisfied with what the contractor suggests?
Parties should also consider periodic inspections throughout the liability period, to reduce the impact of any defect.
National policies
Different countries have their own policies that will bring increased costs and delays. The German Environmental Ministry, for example, imposes noise reducing requirements, and fishing and environmental concerns in other countries will force vessels to take longer routes.
The contract should allow programme float to cover delays caused by such policies, and specify which party will be responsible for obtaining and maintaining relevant permits, and for monitoring whether obligations are met.
Communication
Dependency dates can be set for reaching project milestones, so as to clearly set out the logical interrelationships between activities.
The contract must also state who is responsible for controlling and communicating changes in design that affect other contractors' designs, causing delays and additional costs.
Similarly, responsibility for defects should be laid out where components are supplied by one party and installed by another.
Financial considerations
Parties can check one another's credit worthiness through parent company guarantees, performance bonds and letters of credit. Further, the contract should set out payment schedules and security, particularly in respect of advance payments.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
