A brief overview of some of the claims associated with solar power projects
Solar power is seen as a cost-effective way of achieving net zero targets. In 2021, the UK added 730MW to its solar capacity, taking the UK’s overall capacity to 14.6GW. Solar energy is expected to more than double by 2030 and will therefore continue to be a key part of the UK’s decarbonisation strategy. The main parties to solar projects will often include the:
- Developer (employer) – who obtains planning consent and finance for the project.
- Contractor – who is responsible for building the solar plant.
- Suppliers/manufacturers – who supply key plant and equipment used in the project, including panels, inverters and transformers.
- Operation and maintenance (O&M) contractor – who is responsible for the long-term maintenance of the asset once it is constructed and handed over to the developer.
While parties to solar plant projects will try to deliver complete and functioning assets, performance issues and disputes will invariably arise from time to time. Some common examples we see include issues relating to:
- Micro-cracks to cells during module production and/or shipping;
- Degradation effects, e.g. potential induced degradation;
- Cabling and insulation resistance faults (including low riso errors); and/or
- Internal corrosion due to water ingress.
These issues can be the responsibility of various parties and we highlight some important contractual considerations to note below.
EPC contract claims
Engineer, procure and construct (EPC) contracts are commonly used in the construction of power related infrastructure projects, under which the contractor will be obliged to deliver a working facility on a ‘turnkey’ basis.
Solar EPC contracts generally provide fixed dates for project completion. If the contractor fails to complete on time, it will often be liable for liquidated damages (LDs), unless it is entitled to claim an extension of time to the completion date, thereby reducing or avoiding liability for LDs.
Previously, delayed completion could cause a solar project to become unviable due to a failure to achieve accreditation for incentive payments. In early large-scale solar projects, this failure could result in the contractor having to remove all plant and equipment and reinstate the site at its own cost. As these projects are now without such incentives, developers will commonly rely on LDs to deal with late completion (which may not necessarily provide an adequate remedy for lost generation).
The certification of completion and commissioning of solar plants will therefore likely raise questions in an unsubsidised world. Historically, solar projects saw long punch lists being produced to push through completion and accreditation. The issues identified could impede the functioning, or ability to maintain, the asset and could take a long time to rectify. While there is still an incentive to achieve completion to begin generation, we may see developers sticking more rigidly to specified completion criteria.
Following completion, the contract will normally specify a defects liability period (DLP) during which the contractor will be required to return to site to remediate any snagging and/ or defects in the works. It is common for interim acceptance tests to be carried out on or around completion, demonstrating whether the asset is performing adequately.
Ensuring that any snags and defects identified by interim testing, or during the DLP, are rectified will also be particularly important when it comes to any final acceptance testing required for the issue of the final acceptance certificate (FAC). This stage usually occurs 12 to 24 months after completion. A failure to pass such testing may delay handover and increase any potential liability for LDs further.
Other significant issues concern the extent to which liabilities may be limited or excluded under the contract. The parties may, for example, agree an overall cap on the contractor’s liability (including in respect of loss of revenue etc), or specifically LDs. The parties should carefully consider and negotiate these caps and exclusions to ensure any risk is managed appropriately.
Manufacturer warranty claims
Key plant and equipment procured for the project will often be accompanied by a manufacturer’s warranty. These product and/or performance warranties can be provided over varying lengths of time, e.g. 10-25 years, and will normally provide an ability to seek a refund, repair or replacement of defective equipment.
Many warranties, however, contain express limitations of liability – the manufacturer may look to exclude their liability for certain losses (e.g. lost revenue again), or where the equipment is modified or misused, installed or maintained incorrectly, or exposed to an abnormal environment.
Further, warranties usually contain specific notification and claims procedures. A failure to follow these procedures could result in a claim being rejected. This can be a common pitfall and it is important you consider and understand how and when claims should be made.
Consideration should also be given to where the plant and equipment is manufactured. A significant portion of solar modules are manufactured overseas. If a manufacturer rejects or fails to respond to a warranty claim, the claiming party may need to consider:
- How the claim is pursued (can formal proceedings be issued, or should it be referred to an alternative dispute resolution process, e.g. as expert determination)
- Which tribunal or body has authority to determine the dispute (commonly known as jurisdiction)
- How any cross-border dispute can thereafter be enforced.
O&M contract claims
The proper operation and maintenance of solar assets is critical to maximising energy generation. This could include the maintenance of key electrical equipment, as well as remote monitoring (on equipment failures and any drop in generation) and ground services (to ensure solar panels are not shaded by vegetation). O&M contracts often also include performance guarantees. A failure to meet these guarantees may give rise to a liability to pay LDs.
Most O&M contracts provide for a planned maintenance plan (PMP) to be carried out over the course of the year. It is important timely maintenance is carried out in order to facilitate peak generation over the UK’s summer months. If a contractor fails to carry out PMP activities, this may lead to a loss of production. Thus, the employer should, where it can, be specific about the activities to be carried out.
The O&M contractor is usually responsible for identifying or promptly responding to any equipment failures, drop in generation or other reactive maintenance needs. As supply chains have become stretched due to recent global events, we have seen significant lead times to procure replacement equipment, leading to prolonged periods of reduced performance. The parties will therefore need to consider who bears this potential risk as it will likely affect LDs arising from performance guarantees.
It is important that any maintenance or optimisation works to on-site equipment is carried out safely and in accordance with applicable health and safety (H&S) legislation. Additional issues can also arise in relation to lease rights and obligations, site access and cable rights, as well as Ofgem audits, investigations and other environmental concerns.
We have advised on the termination of several O&M contracts caused by poor performance, H&S failures and other breaches. Any termination is difficult and contentious, but due to the long-term nature of the contracts, the losses can be substantial and claims for LDs can be particularly challenging, especially if any termination takes place during a key operational period.
This article was originally published in the Chartered Institution of Civil Engineering Surveyors Construction Law Review. With special thanks to Andrew Pratten for contributing to the article.