How can power-sector asset managers prepare for a global supply-chain crunch?

Supply chains for power generation and metering assets are under immense strain at the moment – and they are going to get worse before they get better. These problems are already having an impact on the operation and maintenance of assets, and the improving financial returns on these assets are at risk.

Global events

Multiple global events are at play. The war in Ukraine is creating supply shortages and rising prices due to the sanctions against Russian-related parties. The Covid-19 pandemic continues to have an impact globally. And the race to net zero is placing pressure on supply chains as suppliers seek to adapt to the changes demanded by climate-conscious businesses.  

There is a shortage of parts, components and raw materials, which are essential to the operation and maintenance of renewable energy assets. This is exacerbated by the fact that they are only produced by a small number of companies worldwide or available in a limited number of countries; for example, the global shortage of computer chips is affecting the solar and metering industries. Some of this disruption relates to Covid-19 closures and global inflation, but geo-political events – including the possibility of further tension between China and Taiwan – are also having an impact and may get worse.

Take control

There are some things that cannot be controlled. But asset managers need to take control where they can to protect against the risks of supply chain disruption. This includes ensuring that legal protection is in place and being ready to utilise them.

• Indemnities. When entering into supply agreements asset managers should try to negotiate indemnities from suppliers which are as broad as possible in order to protect against all potential liabilities, costs, expenses, damages and losses. Asset managers should resist express financial caps on liabilities, where possible, or, failing that, they should ensure that any cap will cover all potential losses.
• Warranties. Similarly, it is important to ensure that supply contracts provide adequate warranty protection. A breach of warranty gives rise to a claim for breach of contract, for which damages are the main remedy. For example, asset managers could try to obtain warranties to confirm certainty of supply which, if breached, could give rise to a straightforward damages claim.
• Representations. These are factual statements (often made during contractual negotiations) which persuade the receiving party to enter into a contract. Where a representation is found to be false, the receiving party may claim misrepresentation, which if successful would allow them to terminate the contract and claim damages. Where an asset manager is dealing with a supplier which has not complied with its obligations it is worth considering what, if any, representations have been given by the supplier   and whether those representations might have been untrue.
• Force majeure. Broad force majeure provisions can give suppliers plenty of opportunities to limit or avoid their obligations. But equally, force majeure provisions can provide suppliers with limited protections in other cases. For example, an asset manager should consider whether  a defaulting supplier has genuinely been prevented or delayed from performing its obligations by something out of their control, or whether in fact it has just become more expensive for the supplier to comply with its obligations? An important question will be what as a matter of fact has caused the issue for which relief is being sought and does that fall within the scope of the force majeure provisions. A force majeure clause should not be used to protect a supplier if a contract becomes uneconomic or unprofitable (for example, as a result of rising energy prices or increased raw material costs).
• Frustration. If a supplier cannot rely on force majeure, they may argue that they can no longer supply the goods and that the contract is 'frustrated'. A supplier should only be able to rely upon this if the relevant events have made it physically or commercially impossible to fulfil the contract, or the obligations have become radically different. The scope for this protection is very narrow and in most cases a supplier will not be able to rely on the concept of frustration (though may still try to do so).  

Osborne Clarke comment

Even if you have contractual protections in place, there are times where you just cannot get a supplier to perform their contract. Sometimes this involves shouting louder than everyone else to ensure that the supplier puts you at the top of the list. This will require the application of legal arguments and commercial persuasion. Sometimes, shouting and threats are not enough and the last resort may be to involve a court or tribunal to order the supplier to comply. Legal proceedings should be the last resort, but may be necessary to protect your assets.