Power projects usually contain a period of time, prior to completion and taking over, where power is being generated and can be sold into the grid or to an offtaker. Earlier this month, the Supreme Court of Victoria ordered an EPC Contractor not to prevent power generation for an onshore wind farm project during such a period.
Early generation revenue during a power project can provide a significant income stream in the early stages of a power project, and is therefore sought after where available. But it can never be assured, due to the many variables affecting the process of designing, constructing and commissioning a project. The Lal Lal Wind Farms case considered a project where early generation revenue was imperilled due to a contractor's proposal to stop generation for an unspecified period of time in order to rectify defects.
Lal Lal Wind Farms Nom Co Pty Ltd v Vestas – Australian Wind Technology Pty Ltd [2020] VSC 875
The relevant facts were as follows:
- In 2018, Lal Lal Wind Farms (the "Employer") engaged Vestas – Australian Wind Technology Pty Ltd (as "Contractor") to engineer, procure and construct 60 wind turbine generators ("WTGs") at two sites in the State of Victoria, Australia. The EPC Contract was complemented by an O&M Agreement between the parties. Once operational, the WTGs would have a maximum generation capacity of 228MW.
- The EPC Contract required practical completion of the works in July and September 2019 respectively for the two sites. The project was (and is) running late, with the Contractor making claims for extensions of time, all of which were rejected. Nevertheless, the project had been generating power and therefore revenue since mid-2019.
- The EPC Contract contained provisions regarding early generation revenue, i.e. power generation prior to practical completion, including the following:
"To the extent that it does not interfere with, or limit, the Contractor's ability to comply with its obligations under this Agreement, the Contractor must, in consultation with the Principal and to the extent permitted by, and in accordance with, the Contractor's obligations under this Agreement, maximise ‘sent out' generation and Green Benefits from the Works prior to the Practical Completion Date — Elaine or the Practical Completion Date — Yendon (as applicable) so as to maximise Early Generation Revenue".
- If there was "Early Generation Revenue", the revenue was to be shared between the parties in accordance with a contractual mechanism.
- On 1 December 2020, the Contractor notified the Employer that the continued operation of the WTGs was preventing the Contractor from fulfilling its obligations under the EPC Contract, and the Contractor therefore proposed to put the WTGs into "pause mode", so that the Contractor could carry out necessary repair works on the WTGs (to address issues such as chordwise delamination affecting 87 blades – a defect for which the Contractor was responsible). The Contractor did not indicate how long the WTGs would be put into "pause mode".
- The immediate consequence of the WTGs being put into "pause mode" was that the wind farm would not be able to generate power, and therefore there would be a "pause" in Early Generation Revenue.
- The Employer sought an interim injunction against the Contractor to require it not to impose a constraint on the WTGs, so as to pause their operation. The Employer relied, in particular, upon the early generation revenue clause, quoted above. It said, among other things, that if the WTGs were paused, it faced a loss of revenue of AUD$13.6m, plus it would be put into breach of its borrowing covenants for the project, and it would suffer reputational damage.
The Supreme Court of Victoria granted the injunction, thus preventing the Contractor from stopping power generation at the wind farm.
- In reaching its decision, the court took into account the fact that the Contractor was under a duty to maximise "sent out" generation.
- The carve out in the clause, quoted above, only applied to the extent that maximising "sent out" generation would interfere with the Contractor's ability to perform its obligations under the EPC Contract.
- However, the Contractor was seeking to put the WTGs into "pause" mode so as to address defects, and wear and tear, for which the Contractor was responsible. The Court reasoned that these sorts of measures did not constitute the types of obligations which would exempt the Contractor from being required to maximise "sent out" generation.
- Despite the Contractor being prevented from (in effect) shutting down the wind farm for a period of time, the Court's order permitted the Contractor to carry out periodic inspection, rectification and upgrading of affected blades.
Commercial Implications
Although courts will rarely order a contractor to carry out construction or engineering work, there is greater scope for a court to grant pre-emptive relief to prevent a contractor from taking actions which may amount to a breach of contract. The Lal Lal Wind Farms case provides an example of this latter approach. The Contractor's express obligation to maximise "sent out" generation therefore curtailed the usual ability of a contractor to organise and perform its works in the manner of its choosing, prior to those works being completed and handed over.
A further feature illustrated by this case is the capacity of the courts to provide urgent relief to protect economic interests, and give the parties an authoritative statement as to where they stand from a legal perspective. Early generation revenue may provide a huge "value add" to the income stream of any power project, and when enmeshed into the contractual structure of an energy project can produce financial benefits to the Employer and the Contractor alike (where revenue sharing is contemplated). The Victorian Supreme Court's order provided a rapid response to break the parties' deadlock and thus preserve the financial benefits of early generation.
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