Caught in the Crosswinds: Capacity Reservation and Early Works Disputes

The wind power industry has a key role to play in the future of energy. But it has experienced well-documented growing pains over the past few years.

The "Caught in the Crosswinds: Navigating the Surge in Wind Energy Disputes" article series is written to review common types of disputes on wind power projects in the current economic climate, and offer some practical tips on how to avoid and manage them effectively.

This first article addresses Capacity Reservation and Early Works Disputes.

It is well known that onshore and offshore wind projects involve very long lead times. These are typically 3-5 years for onshore projects and 5-10 years for offshore projects (in each case, from project initiation to commissioning). Supply chain bottlenecks and capacity constraints extend lead times and force developers to enter into arrangements with wind turbine generator (WTG) suppliers, and other specialist contractors, earlier and earlier. This is especially the case for offshore projects. Chief among these arrangements are capacity reservation agreements (CRAs) and early works agreements (EWAs).

Significant and costly disputes are now arising under these agreements. In this article, we share 5 observations on the disputes that arise, and 5 tips to avoid – or at least manage – them.

Why do disputes arise under these agreements?

A key driver is the inherent commercial tension that underlies them. Developers typically seek maximum certainty. Their priorities include locking in the availability of turbines and other equipment, securing a fixed or predictable price, and establishing clear delivery timelines. This is crucial for project planning, financing, and meeting regulatory or grid connection milestones. On the other hand, WTG, and other suppliers, operate in a volatile market, where input costs (such as steel, copper, and logistics) can fluctuate dramatically, and global demand for turbines and other equipment can shift rapidly. Suppliers, therefore, seek flexibility in their commitments. They often ask for price adjustments, changes in delivery schedules, or even the ability to reallocate capacity in response to market conditions.

Lessons from these disputes abound, but few seem to be sharing them. We hope to change that.

Five observations on capacity reservation and early works disputes

The nature of these disputes varies depending on the project type and location, the parties and their position in the project chain. The point in the early development process at which the dispute arises is also relevant. That said, certain recurring themes are apparent:

1. Sow the wind, reap the whirlwind: in the rush to market, parties are papering over the commercial tension noted above. They write agreements that are either deliberately vague on key terms and risk allocation, or simply defer those decisions for later "good faith" discussion. Recent macroeconomic shocks are exposing this approach and generating disputes about how the parties intended to deal with these events. This is particularly the case under contracts governed by common law systems (like that of England), which typically revere the words on the page, do not have the luxury of civil codes to fill major gaps in the drafting, and struggle with enforcing "agreements to agree". This ambiguity is playing out in a number of areas.
2. Postponing price: The first area where parties have been "kicking for touch" is whether, and to what extent, suppliers can pass on increased materials costs to developers, and the mechanisms for calculating price adjustments. One recent case involved a CRA which, while having an index-linked trigger for a price review, failed to follow through with a mechanism for reaching the revised price. The parties were merely to discuss in "good faith" with no clarity on the negotiation process, or how the price would be reached if the parties could not agree. The result, unsurprisingly, was complete deadlock and a stalling of the project.
3. Is my capacity really yours? The second area where parties have been less than clear is in the scope of capacity reservation obligations themselves. Another recent dispute turned on whether the supplier was obliged to prioritise the developer’s project over others and/or fully "block out" its capacity during the purported reservation window. The parties also disagreed on whether the supplier was able to change the chain by which they supplied the project in light of constrained capacity and increased costs. The wording was purposefully vague to appease the parties' competing interests of certainty versus flexibility. Ultimately this helped neither party when the dispute arose. The result? Again, deadlock.
4. How long is too long? Delay on major wind projects is expected. That is why the main construction and procurement contracts provide detailed mechanisms to assign risk, responsibility and consequences for that delay. CRAs and EWAs – while only interim or transitional arrangements – can still be severely impacted by delay. But they often lack the necessary level of detail to deal with it. The supplier in a recent CRA dispute complained about the developer's delays in advancing the project but found itself without real recourse for the financial impacts of this delay. The CRA lacked clear milestones and rights to terminate, renegotiate, or claim additional cost when that delay reached a particular level. A longstop date for concluding final contracts many years in the future was insufficient protection.
5. Acts of God (and other powerful figures): Cyclones, hurricanes, typhoons and other "Acts of God" are relatively well-understood in the wind industry. Tariffs, export and import controls, sanctions, and other rapid regulatory change wrought by humans less so. While force majeure and change in law clauses (among others) can help allocate risk for these events, they don't always find their way into CRAs and EWAs. Even when parties do include them the drafting may not be adequate to cope with such events. A recent EWA contained a change in law clause but defined "law" by reference to the jurisdiction in which the project was being built. That did not account for tariffs and counter-tariffs coming from elsewhere that nevertheless drove up material prices.

Five tips for avoiding (or better managing) these disputes

You have probably thought by now that these disputes could have been avoided or, at least better managed, by relatively simple fixes. In our view:

1. Take the time to get the drafting right: Forcing a quick deal is often a false economy. A lack of clarity in obligations creates conflict and ultimately impedes progress. Take the time to ensure that CRAs and EWAs are as clear and detailed as possible, particularly regarding price adjustment mechanisms, capacity allocation, and the treatment of external events. Avoid vague commitments and ensure that all key terms are defined appropriately.
2. Price must be prioritised: Explicitly allocate risks associated with cost increases, supply chain disruptions, and regulatory changes, particularly as they impact price. Either be clear that the price will not change in response to these events or consider using price indices or escalation formulas to provide a transparent basis for adjustments. Things to think about include whether upward and downward price movements are permitted and caps and floors for resulting price changes. Do not forget a deadlock resolution mechanism for actually arriving at the price (or, alternatively, allowing parties to walk away if price cannot be agreed).
3. Milestones matter: Set out clear milestones and the consequences of failing to meet them, including any rights to terminate, renegotiate, or claim additional costs. Alternatively, consider decision-gates at which the parties can re-assess project viability and mutually decide on whether to proceed.
4. Your rights mean nothing without an effective DR clause: Getting the substantive clauses right in CRAs and EWAs is not enough. You need to be able to enforce them. Keep your dispute resolution clause simple; if the parties wish to select arbitration as their method of dispute resolution, then often a basic arbitration clause, drawn from the model form of your preferred institution, will do the trick. Sometimes the parties include layers of pre-arbitral procedures, for example, requiring senior representative negotiations or mediation, before arbitration. These can be counter-productive if not carefully drafted, and disputes about how to resolve disputes are not uncommon. In the disaggregated procurement models common to offshore wind projects it is also important to think about coordination of dispute resolution provisions across related contracts. Expert advice should be obtained on whether the joinder and consolidation provisions of your preferred procedural rules will suffice or whether more careful and coordinated drafting is needed. This will often turn on where in the contractual chain you find yourself. Project developers are often most incentivised to achieve consistent and cost-efficient outcomes across the various packages.
5. Governing law matters: Concessions on governing law are often made at the last minute with little appreciation of the significant impact this can have on a party's rights. Differences between common law regimes and civil law regimes, in particular, can be stark. As we note above, common law typically favours the words on the page whereas civil law favours flexibility, importing in concepts from a civil code (e.g. obligations of good faith). A capacity reservation obligation, for example, may look quite different through a civil law, good faith lens compared to a common law one. Be clear from the outset what the governing law will be and draft accordingly. Do not trade this away without knowing the consequences.

Ashurst has extensive experience advising on wind (and other renewable energy) disputes, including helping clients reach negotiated solutions as well as acting as advocates in formal proceedings. We work as a single cross-border team and alongside our transactional energy lawyers to provide a seamless and informed service to clients. Our experience and industry knowledge ensures we avoid, mitigate, manage and resolve our clients’ disputes in the most efficient, commercial and cost-effective manner possible. For more detail on our experience and global capabilities see our international arbitration page.

Other author: Yoshi McGeary, Associate