Force Majeure: COVID-19 Pandemic Issues That Could Impact Electricity Contracts
- As the current health crisis from COVID-19 grows, electricity market participants may benefit from developing strategies to assess their risks and protect from potential disputes.
- Parties should address force majeure provisions to address issues in power purchase agreements (PPAs), engineering, procurement and construction (EPC) contracts, vegetation management, finance, leases and interconnection agreements.
- It is suggested that you stay in close communication with business partners and regulators, review applicable precedent in your jurisdiction to form legal strategies and monitor legislative and regulatory changes that may impact your contracts.
As the current health crisis from COVID-19 grows, electricity market participants may benefit from developing strategies to assess their risks and protect from potential disputes.
All parties may benefit from a deal that addresses the current crisis and includes solutions if the parties predict future performance issues, such as workforce loss, loss of construction materials or loss of labor.
Most contracts require force majeure events to be:
- outside the reasonable control of the party seeking to have its obligations excused
- a result of circumstances other than that party's negligence or willful misconduct
COVID-19 is unique in that the disruptions may be twofold: the pandemic itself and various governmental responses (e.g., travel restrictions and shutdowns). For example, the public health departments of six counties in the San Francisco Bay Area recently issued "shelter-in-place" orders, preventing individuals from leaving their residences except to perform essential services. Other jurisdictions have followed. While residents providing energy services are frequently exempt from such orders, many orders remain unclear as to whether all or some of energy service providers are exempt (e.g., only linemen or operations workers and not corporate employees, or only power plants?). "Pandemic" or "quarantine" should be expressly included in the definition of force majeure.
Electricity Contracts At Issue
As the current crisis continues to evolve, the following are force majeure issues that parties should consider to assess their risks and formulate legal strategies at this time:
- Power Purchase Agreements (PPAs): For projects under construction, COVID-19 may present workforce shortages and supply chain disruptions, as well as construction delays from regulatory/permitting agency shutdowns. Operational projects under existing PPAs are susceptible to an impaired ability to make payments or renegotiation for lower rates if an off-taker's customer load changes (e.g., office shutdowns, industrial and manufacturer shutdowns or commercial business closures).
- Construction and Operations and Maintenance (O&M) Agreements: Similar to PPAs, a project's construction and O&M agreements may fluctuate if supply and worker shortages occur. Chinese solar panel and battery manufacturers subject to shutdowns already have experienced supply shortages and issued force majeure notices to customers.
- Utility Interconnection and Distribution Agreements: Although utility operations are "essential services" that will likely continue, workforce and equipment shortages may delay electric interconnection and distribution processes as new projects are seeking to come online.
- Project Finance: Project delays and shutdowns could disrupt payments from project debtors and obligors to lending institutions that finance energy project developments.
- Solar and Wind Land Leases: Project delays and shutdowns could cause financial drains on developer-lessees' obligations to pay rent to landowners.
- Vegetation Management and Grid Hardening Contracts: Utility vegetation management and grid hardening delays could lead to difficulties complying with state wildfire mitigation regulations for regulated utilities.
- Permitting Delays: As federal and state agencies temporarily close down or move to a remote workforce, project proponents may experience permitting delays that could push out a project's completion date.
Know Applicable Precedent Governing Your Contract
Given that pandemics in the United States are rare, case law is scant on the extent to which pandemics and government-mandated quarantines constitute valid grounds to suspend performance under energy contracts.
However, some jurisdictions have offered helpful insight. For example, in Gulf Oil Corp. v. FERC, 706 F.2d 444 (1983), the U.S. Court of Appeals for the Third Circuit considered litigation stemming from the failure of the oil company to deliver contracted daily quantities of natural gas. The court held that Gulf – as the nonperforming party – needed to demonstrate not only that the force majeure event was unforeseeable but also that the availability and delivery of the gas were affected by the occurrence of a force majeure event. Similarly, in Aquila, Inc. v. C.W. Mining, 545 F.3d 1258 (2008), now-Supreme Court Justice Neil Gorsuch authored an opinion for the U.S. Court of Appeals for the 10th Circuit, which excused a coal mining company's deficient performance under a coal supply contract with a public utility only to the extent that partial force majeure, namely labor dispute, caused deficiency. The Gulf Oil Corp. and Aquila cases suggests that a party seeking to invoke force majeure should concretely demonstrate how COVID-19 directly led to the failure to perform.
State commission precedent also provides some guidance. The California Public Utilities Commission (CPUC) allows extensions for project delays in its state due to force majeure events under its Qualifying Facility (QF) standard offer contract, but only in the duration of the force majeure itself, and as long as the QF notifies the utility and takes steps to overcome the effects of the force majeure using due diligence. (CPUC D.88-10-032 (1988)).
Case law and commission precedent may vary depending on the jurisdiction, so when interpreting a force majeure clause, courts look to the intentions of the parties in all the circumstances. In particular, they focus on what (objectively) appears to have been intended on the basis of the express words of the contract.
As the COVID-19 pandemic continues to unfold, it is critical that energy companies assess their risk exposure under existing contracts and contracts under negotiations. To do so, companies should develop plans that include:
- communicating clearly and often with your business partners and customers and regulators (if applicable) to alleviate potential contract disputes
- reviewing energy contracts and force majeure provisions with legal counsel
- staying informed of legislation and regulatory guidance. For example, in a letter submitted to the U.S. House and Senate on March 19, 2020, renewable and battery storage trade associations requested "prompt repair and extension of critically important tax incentives to help the clean energy sector surmount the impacts of the COVID-19 pandemic." The letter calls for extensions for start construction and safe harbor deadlines to qualify for renewable tax credits. In California, the CPUC ordered its regulated utilities to report on how they plan to protect their customers and employees in response to COVID-19. Companies should proactively formulate plans to protect their businesses and communicate with regulators to minimize disputes.
If you have any questions regarding COVID-19 and the energy industry, please contact the authors, who are members of Holland & Knight's Energy Team.
DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.