Risk Management, Skilled Counsel Key in Renewable Energy

Renewable energy project developers and contractors must be prepared to negotiate novel risks in a quickly changing global market. Technological innovations in renewable energy equipment and decreasing procurement and construction costs have spurred renewable project development at unprecedented scale. This accelerated energy transition has been further spurred by tax incentives provided by the Inflation Reduction Act of 2022 (IRA), which offers significant opportunity accompanied by new compliance requirements.

Sophisticated parties value early assessment to allocate risk in the numerous project agreements necessary for successful development of renewable energy projects. Developers must navigate multiple counterparties, ranging from project offtakers (power purchase agreements), utilities (interconnection agreements), original equipment manufacturers (supply agreements), engineering, procurement, and construction contractors (EPC agreements), operations and maintenance vendors (O&M agreements) to financing parties (credit and equity investments). Project agreements fundamentally allocate risk and require coordinated analysis and negotiation to yield a successful, operational project, ensuring risks are assumed by the parties best positioned to control those risks and avoiding assumptions of risks disproportionate to their potential reward. This requires close coordination between business executives and legal counsel.

One key risk is the renewable energy equipment supply chain. Purchasers must screen suppliers to ensure they do not appear on the Office of Foreign Assets Control’s sanctions lists, and they must also ensure compliance with the Uyghur Forced Labor Prevention Act, which prohibits importation of goods manufactured using forced labor. Compliance programs focused on prevention of forced labor in the supply chain have quickly become a top priority, with the Department of Homeland Security’s Forced Labor Enforcement Task Force expanding its initial focus on polysilicon to now include batteries, aluminum, and steel. Supply chains with connections to China are often opaque, challenging global purchasers with traceability concerns. Many suppliers face component restrictions or experience withholding or intensive examination by U.S. Customs and Border Protection, which requires skilled negotiation.

Another supply chain risk concerns navigating geopolitical uncertainty to address changes in international law and import duties and tariffs. Many project agreements incorporate broad exclusions for force majeure events and changes in law that extend to worldwide events. Traditional tariffs under Sections 201 and 301 of the Trade Act of 1974, which include product and country-specific tariffs, often apply to renewable energy equipment. The Biden administration’s recent revocation of the Section 201 exemption for bifacial solar modules has materially impacted pricing. A new round of Section 301 tariffs imposed this May could continue to impact market pricing.

Allocating risks of antidumping (AD) and countervailing duties (CVD) have presented particular challenges in the solar industry. In 2022, an AD/CVD petition initiated by Auxin Solar resulted in significant imposition of duties on photovoltaic modules imported by Chinese-based suppliers from Cambodia, Malaysia, Thailand, and Vietnam. A presidential moratorium on assessment of those duties expired in June 2022, and the impacted suppliers are pursuing a pending appeal to the Court of International Claims. In May 2024, a coalition of domestic module suppliers alleged importers of photovoltaic cells from these countries have engaged in unfair trade, and a Department of Commerce investigation remains ongoing, making imported solar modules risky.

U.S. developers must also be prepared to quickly adjust for shifting domestic risks—key among them IRA compliance. Even two years after the IRA was enacted, many of its requirements remain subject to ongoing federal rulemaking processes. To qualify for the maximum tax credits available for projects, developers must comply with prevailing wage and apprenticeship requirements for “construction, alteration, or repair.” While short of the full certified payroll process applicable to federal government contracting, the IRA requires new compliance programs and thorough recordkeeping.

Apprenticeship requirements require developers to ensure a specified percentage of total labor hours of a project are performed by qualified apprentices in accordance with a stated apprentice-to-journey-worker ratio to ensure employers of four or more individuals supply necessary apprentices (although the IRA does provide for a “good faith effort exception”). Developers must ensure these requirements are satisfied for at least five years after a project is placed in service for investment tax credits, and for 10 years thereafter for production tax credits.

The IRA also provides additional tax incentives commonly referenced as “bonuses” for projects that satisfy certain criteria, such as being within energy communities, low-income communities, or that are constructed with domestically manufactured equipment. The domestic content bonus has been particularly attractive but remains subject to ongoing rulemaking and legal uncertainty.

Developers must balance all risk decisions against a primary priority for a renewable energy project: The project must be bankable. Put simply, a project’s risk allocations must be acceptable to financing parties providing non-recourse financing dependent on tax credits. If a financing party is uncomfortable with how executives and counsel have allocated risks in project agreements, the funding source could be in jeopardy.

Successful developers and contractors combine industry expertise with savvy counsel to navigate today’s renewable energy project risk environment. Guidance from experienced counsel is critical to ensure you have created a successful contracting strategy.

Republished with permission. This article, "Risk Management, Skilled Counsel Key in Renewable Energy," was published by POWER on September 3, 2024.