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Risk and the Role of Counsel: Strategic Decision-Making in the Rapidly Changing Renewable Energy Industry

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lainly put, many attorneys dislike risk. Often, attorneys are quick to identify risk and advise total avoidance of risk, resulting in guidance that is so risk-adverse as to miss the commercial realities facing a project developer or engineering, procurement and construction (EPC) contractor.   

And yet, the business world — especially in the EPC and renewable energy industry — is risk-laden. In a macroeconomic sense, risk drives markets: the more uncertain the outcome, the bigger potential return on investment. The optimistic entrepreneur sees high returns, and the pessimistic attorney sees high losses. When balanced, this is a positive dichotomy: it is in fact this very healthy tension that creates a productive relationship between the commercial and legal departments of any successful business. 

As risk management counsel, we live by the key principle that problems do not improve with time: The longer a business takes to identify, address and mitigate risks as they arise on a project, the more those risks cost in terms of schedule and money. 

In the development and operation of utility-scale renewable energy projects, this risk management philosophy is especially critical in a rapidly-changing industry. Skilled counsel is essential to choosing wise methods of innovation: we must not only recognize the risks of the market moving forward, but we must also act quickly to mitigate and become comfortable with those risks, adjusting business models accordingly. 

Honest and thorough risk assessment in the early phases of project development is key to controlling a proportionate risk-reward relationship. The project team must not only identify key risks, but must also attempt to quantify the likelihood of occurrence of any given risk and its consequences. A useful role of counsel is often to solicit varying viewpoints on a proposal's risks — and counsel certainly plays a critical role to voice concern when the team fails to adequately discuss and account for these risks. 

Counsel must also understand and accept the parties' respective bargaining power in any proposed deal. In the EPC industry, lawyers who push for "zero" or minimal risk often do more harm than good, as they unnecessarily extend negotiations trying to remove risks in ways that are not commercially viable. Effective counsel must identify risks, including distinction between risks that the company can accept in the context of the deal and the limited and selective risks that the company considers "deal-breakers." All risks must be objectively balanced against the commercial value of the deal to avoid the loss of a potentially profitable deal due to risks that can be assumed and mitigated — or, alternatively, the execution of a deal with risk that vastly outweighs any potential commercial reward.

Counsel must also understand the criticality of schedule on a project. For each risk, counsel must weigh the value of continuing negotiations to eliminate or lessen a risk against the significant risk of lost time from continued negotiation. There is value in completing negotiations as soon as possible in order to maximize float in the project schedule that allows a party sufficient time to mitigate risks as they manifest. Effective counsel balances the issues of risk, benefit, cost, opportunity to mitigate, and time when advising which terms are essential and which terms are merely preferable (where the company may accept a negotiated risk because the risk is not ultimately a "deal-killer"). 

One issue somewhat unique to the utility-scale solar industry is the modular nature of a plant's construction and resulting opportunities for acceleration when necessary. In traditional construction, projects typically follow one true critical path through which performance must progress, which makes acceleration an often difficult and expensive option. Unlike a high-rise condominium project, for example — where all trades must follow in sequence vertically from the first to the top floor and acceleration is inefficient due to premium time labor costs and decreased efficiency from increasing manpower in a limited space — utility-scale solar plants are typically built by independent units that compose the entire plant. Each unit has the same or similar design and materials, and ties into the high voltage portion of the plant prior to energization or exportation of power. This allows flexibility in acceleration: a contractor may engage supplemental crews in separate areas to complete independent units, with more efficiency in acceleration costs than traditional project models. 

First Solar's Desert Sunlight PV Plant

Pictured above,  550 megawatt Desert Sunlight Solar Farm engineered and constructed by First Solar, co-owned by NextEra Energy Resources, Sumitomo Corporation of America, and NRG Yield. Desert Sunlight provides enough energy to serve the needs of about 160,000 average California homes, displacing approximately 300,000 metric tons of carbon dioxide per year — the equivalent of taking 60,000 cars off the road.

In advising a utility-scale solar client, counsel who understands these unique industry characteristics provides valuable perspective to the commercial team. The availability and cost of acceleration in a region should factor into a party's willingness to negotiate aggressive completion dates and corresponding liquidated damages — and there may be opportunities unique to the utility-scale solar industry that allow unconventional negotiation due to the party's ability to mitigate risks in a manner that makes the deal worthwhile. 

Once parties execute a project agreement, the role of counsel shifts from negotiating the optimal risk allocation to assisting the business in losing as little cost and schedule possible by capitalizing on opportunities for recovery and even increasing margin. It is critical to note that this role should be both affirmative and reactionary.

First, in the transition from pre- to post-execution, counsel should communicate and advise the commercial team on the project agreement's key risks from the legal standpoint. This transfer of risk knowledge from the deal negotiation to execution of the project is critical to ensure the project team actively oversees and mitigates known risks. Second, counsel should advise on the best (or often, "least bad") options under the contract or at law to avoid unforeseen cost overruns, delays, and other problems that have a material impact on the project schedule or costs of performing the work. In both instances, but especially in the latter role, counsel must maintain objectivity and provide guidance on the strengths and weaknesses of any particular option. 

A well-structured team with internally-designated roles and responsibilities as part of a project execution plan allows a business to move forward with project development and construction as a cohesive unit focused on project delivery and contract compliance. Ultimately, commercial decision-makers will decide how to proceed based on a variety of factors — but all risks and rewards must be balanced against an accurate assessment of legal opportunities, limitations and exposures. Counsel should be careful not to lose perspective in this process: while we should always support the pursuit of recovery and defense of claims, we cannot become too invested in one position. Instead, the more appropriate role of counsel is often that of a handicapper, providing independent odds of success or failure based on the facts without being a cheerleader for either position.

The renewable energy industry in particular presents unique challenges, including rapidly-evolving technology and an expanding geographic footprint. As utility-scale solar developers move into new jurisdictions, the unique nature of this construction often presents licensing and permitting regulatory challenges. State and local governments interpret and apply traditional regulations in widely-varying and unpredictable ways. Skilled counsel will address the many different facets of this challenge, requiring (for example) an understanding of the authority making the interpretation, the schedule and cost implications of alternative options, how to mitigate potential delay claims from downstream parties, and whether any provision in the project agreement could provide relief or recovery for the impacts of a changed interpretation or application. A one-dimensional approach to this problem could be disastrous, and so counsel must see all dimensions of the problem and advise accordingly.

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With more than 10GW installed worldwide, First Solar's advanced solar modules have set the industry benchmark for utility-scale PV.

Although not unique to the renewable energy industry, this is where one unique feature of EPC and construction agreements becomes especially relevant: the change order provision. Unlike a typical commercial agreement, in which the parties establish an allocation of risk with the reasonable expectation of little variation, an EPC agreement recognizes that projects almost always encounter anticipated and unanticipated risks that materially change the time or cost of completing the project. In the EPC context, the execution of an EPC agreement is merely the beginning of a long risk process of execution, and experienced counsel becomes extremely valuable in the project management process. 

One key to counsel's effectiveness in post-execution risk management is an open and immediate level of trust and dialogue between commercial leaders, counsel, and the project team executing the work. The success of any risk management effort is based on open communication. Problems do not improve with time, and counsel cannot provide advice if we aren't aware of the problem. Many agreements contain strict notice provisions that may be waived if not followed immediately upon identification of an issue. This team structure requires meetings and introductions early in the project (before problems arise) to introduce the entire team and build relationships to foster an environment of trust and communication. The time and expense of early introductions and discussions among commercial leaders, counsel, and the project team is some of the best risk management money spent (it's certainly more efficient than any fees paid later in litigation because this communication link was not fostered). 

Once a project is complete, the business team moves forward to the next project. Company-wide risk management, however, shouldn't begin and end with individual projects. The successful business is the one that translates individual project losses into organizational lessons. 

To do this, counsel should be part of an effort to evaluate and assess what went well and what went poorly on each project. Were the losses attributable to self-inflicted wounds that may be prevented in the future, and how can we do that? Or should the company consider different contractual risk allocation in the next similar project to protect against losses outside of its control? Did a particular communication tool work well for a project, and should the company consider expanding the tool across its larger portfolio?

Among the interesting characteristics of the utility-scale solar industry are that (a) the designs across projects tend to be similar and (b) the construction process is often repetitive, i.e., trenching miles of cable, or installing hundreds of thousands of posts. While this repetitive nature can realize great efficiency and economies of scale when performed properly, conversely even small failures or design flaws not fixed early and across a portfolio can have dramatic impacts on cost or schedule for completion of projects.  From this standpoint, implementing a "lessons learned" protocol following completion of each project is crucial to future success.

Counsel should be a critical player in this corporate lessons-learned model of risk management, including assistance with corporate communication. Counsel able to critically analyze failure and translate this analysis into practical lessons learned for the benefit of the wider organization are immensely valuable. Also, an attorney who assists in developing a corporate environment that values improvement over blame, resulting in constant process improvement, is an asset to the wider business team and the business' culture of continued innovation. 

At all stages of a project, the most valuable risk assessment tool is an honest and open dialogue between individuals most knowledgeable of new and evolving risks (often the "boots on the ground" at the project site), commercial leaders, and counsel who must evaluate and decide how to proceed based on micro (project-specific) and macro (portfolio-wide) concerns. 

Many businesses are concerned with the cost implications of engaging outside counsel early in the project process. Although this is an understandable and real concern, the up-front fees of early engaged counsel must be weighed against the value of avoiding or mitigating back-end litigation or arbitration costs. As with all client/attorney relationships, the client and its lawyer must work out a fair compensation method in advance (which may include "fixed fees" for certain items of risk management work) to ensure a fair service for a fair fee. That being said, at least in the authors' experience, clients find it much easier to accept fees where they can contemporaneously see the attorney helping to mitigate a loss or support recovery, as opposed to the fees that come in monthly over an extended period of time in litigation/arbitration as necessary often to get that client back to (or close to) where it could have been originally if it had reached out for solid and objective legal advice. A well-developed risk management process requires early strategic advice, and experienced counsel can play a valuable role in the overall team with the goal of continued long-term commercial success.

About the Authors


David H. Bashford
is general counsel, Global EPC and O&M with First Solar, Inc.

Monica L. Wilson is an attorney with Bradley Arant Boult Cummings LLP who advises utility-scale energy developers and contractors on EPC projects throughout the United States and internationally, focusing on risk management and claim avoidance.


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