Troubled Waters? – Managing Risk in Floating Offshore Wind
The following article is a guest post by Jonathan Morton, Associate at the international commercial law firm Haynes and Boone.
The embrace of floating offshore wind has come surprisingly fast. There is already talk of floating wind sites with more than 100 turbines being built by 2032, and the interest and investment in the industry has rapidly globalised.
The path for the industry over the next ten years is therefore steep, potentially perilously so, and the risks are high.
While many of these risks are similar to those for fixed bottom wind projects, there are unique challenges for floating projects in respect of warranties and guarantees; operation and maintenance; and delay and disruption in particular which will need to be considered carefully.
Warranties and Guarantees
Floating offshore structures are constantly moving, every minute of every day for their entire lifespan, and are exposed to continual impact from waves and weather.
How the floating substructure performs over time and in variable conditions could dramatically affect the performance of the turbine, which is a very different scenario to that of a fixed monopile.
In light of the new and untested nature of the designs, this presents a unique and hard to predict risk profile.
The problem is compounded by the fact that such floating structures will require the use of dynamic cables which are designed to withstand this movement, and the fatiguing effects of such movement on those cables remains unknown.
The risk of cable failure is accordingly higher for floating offshore wind than fixed bottom, and the consequences of failures which could occur for multiple units could be substantial and complex to resolve.
Companies and investors will, of course, seek as much protection from these risks as possible, and will seek to negotiate contractual terms which provide wide ranging and long running warranties of performance from contractors.
Contractors will, equally obviously, seek to protect themselves from such risks where there are so many unknown and unpredictable factors which could affect such performance.
As always, contractors should be particularly wary of any “fitness for purpose” warranties, which could open them up to substantial and unforeseen liability over and above the relevant contractual standards, and companies should be careful that carve-outs are not so wide that they make any warranties useless in practical terms.
Put simply, the existing warranty systems for fixed bottom wind projects will not be appropriate for floating, and many aspects will require a different approach.
It is accordingly not advisable for companies simply to copy and paste over their existing fixed bottom contracts in the hope that minor amendments will cover the differences.
One key example would be the availability warranty ordinarily provided by the wind turbine generator supplier.
Suppliers are likely to be more reluctant to provide such warranties where the impact of the floating foundation on the performance of their turbine is unknown, though it will certainly be greater than in fixed.
They will require more carve-outs from any such warranties, or the addition of conditions where the warranty is invalidated, to protect themselves from liability where the performance of the substructure is out of their knowledge and control.
These nuances of liability will necessitate detailed and precise warranty provisions, explicitly connected to measurement or testing standards, and it may be necessary to specifically separate out some of these issues in the contract (for example, in relation to the consequences of any cable defects or the matrix between turbine performance and that of the floating structure set out above).
An added wrinkle to this area is that it is common in offshore wind projects for there to be multiple warranty periods of different duration from each of the various suppliers.
This can be particularly problematic where there is a dispute as to the real cause of any defect or performance failure andthe untested nature of floating technology will only compound this issue.
As such, careful consideration of the various defects liabilities periods is required, and their interaction sufficiently and explicitly dealt with.
The contract should also expressly deal with issues of serial defect liability, and the consequences of such defects should be clearly spelt out.
Due to the potentially high costs of dealing with such serial defects, the interpretation of these clauses are often disputed and, in particular, the nature of any liability caps which may apply will also be key.
Of course, another avenue to mitigate risk is to try and minimise the chances of defects arising which require reliance on the warranty provisions. Quality control will accordingly be key. Visibility of all levels of the project is essential, and a contractual framework should be in place to allow for monitoring of the design and construction process.
The design interface between the turbine and floater foundation is a key area for risk, so the relevant parties need to be engaged early and detailed interface obligations should be set out in the contract to ensure that compatibility is a priority.
The industry is well aware of the need for standardisation and independent certification of designs in this area, and DNV, for example, has already made important steps forward in this
respect. Where such certification exists, it should be expressly referenced within the contract and compliance with it made a requirement.
Companies are also looking at the use of multiple sensors to monitor performance and movement, including the use of artificial intelligence and complex computer software to give early warnings of fatigue.
There are also proposals for the use of ROVs to monitor the structures and give advanced warning of potential issues to prevent failures before they occur.
Such arrangements will need to be dealt with in the contract, and the precise nature of any such monitoring (including how often, and to what extent it is carried out) made explicit.
Operation and Maintenance
It is inevitable, particularly where turbines have an estimated working life of 30 years or more, that maintenance will be required at some stage. The best way to carry out such maintenance, and how to deal with responsibility for it, is something the industry continues to debate.
The fundamental issue is where and how this will take place. Can maintenance take place on site, or should any problematic turbine be detached and towed back to port for repairs to take place there?
While initially the view seemed to be that the latter approach was the less risky, and a benefit of using floating turbines, concerns are beginning to be raised about the practical issues that could arise with such a process.
Disconnecting a turbine is not a simple matter, and things can easily go wrong. The process of towing to port itself could also cause fatigue issues or damage, particularly where the site is far from shore.
Arguments may arise as to contractual responsibility for any damage if it is unclear whether this occurred on-site or during transit. Weather issues or other delays could mean that valuable time is lost in getting the turbine back to work. Again, the liability nexus for all of these potential problems will need to be clearly set out in the contract.
The alternative is for heavy lift vessels, crane barges, or other technologies, to be used to carry out maintenance on-site. However, there is no established technology currently in existence which will allow this to occur, due to the difficulties inherent in the movement of the floating structure, and the fact that the water is too deep to use a jack-up.
A number of providers are developing floating-to-floating technologies which could be used for maintenance offshore, and it will be interesting to see how these evolve.
Another potential solution is to have a floating barge and crane which can couple with the tower so that movement is synchronised, and this could allow work to be done swiftly and efficiently onsite.
It is also important to remember that weather issues can also arise with on-site maintenance, and the contract will need to clearly set out the weather window conditions in which such work can take place. What happens if, during such work, weather conditions suddenly and unexpectedly worsen will also need to be carefully provided for.
There is clearly a lot of rapid technological development taking place in this area, and anything which can minimise the time and risk of maintenance is likely to be welcomed by the industry.
Of course, the risks involved in any such process, particularly of damage to the floating structure or the turbine itself, will need to be clearly delineated in the contract.
Delay and Disruption
The problems of delay and disruption, both in terms of the contract for construction of the floating structure or the turbine, and the process of installation and maintenance of the floating units, are also key risk areas.
Where there is delayed start up, for example, due to issues during construction or installation, there will need to be a clear responsibility matrix set out between the respective entities which provides for such problems.
There are likely to be extension of time mechanisms included in any construction contract, which will be particularly relevant where the floating substructures are more complex and have more in common with an FPSO or semi-sub than a monopile.
Not only will the building of these structures themselves be complex, but so will the commissioning offshore.
It will be important to clearly allocate the risk and impact of this process in a way which is fair to all parties.
While it may be possible to, for example, allocate the consequences of concurrent delay to one contractor in certain scenarios, care is needed to ensure that any related liquidated damages provisions are not so complex and unwieldy that they are ruled unenforceable.
In order to keep track of such delays, a detailed and properly prepared baseline schedule is essential, which should be developed with input from all parties at an early stage. It must be updated and regularly reviewed, and there should be a contractual requirement on all parties to provide regular updates and take part in related meetings.
Furthermore, if the parties are agreeing amendments to milestone dates (from where liquidated damages may accrue) or new incentivisation bonuses to try and catch up, it is also vital that these align with the existing contract structure and are properly, and clearly, set out in a written, formal contractual addendum.
There is a real danger that off-the-cuff agreements made on the ground for what seem like minor issues at time become a problem further down the line.
There should also be explicit contractual handover procedures in place between the respective contractors, so that they can co-ordinate early and ensure the overall structure of the project works from the perspective of all the smaller players.
This will particularly be of importance where there are newer, local, suppliers involved who may lack experience or the economies of scale to deal with issues which could arise, resulting in knock-on delays to the project.
In light of such potential risks, it may be beneficial to have a clearly set out real-time disputes resolution procedure in place which is separate from any resolution of strict “contractual” disputes, and which provides for an independent disputes mechanism to deal with issues as they come up, where these are below a maximum financial limit.
The parties could agree an individual, or organisation, in advance and have the process set out in the contract so that things can move quickly, and any delays minimised.
With appropriate preparation and carefully considered risk allocation provisions, the opportunities in the floating wind sector are great.
However, for the greatest rewards, stakeholders from all levels, from smaller subcontractors to major energy companies, need to work together in open and transparent ways for the benefit of all.
While there will inevitably be troubles along the way, risk can and should be clearly allocated to the parties best able to mitigate them. This should provide comfort to those who cannot and encourage more companies to move confidently into deeper waters.