How is force majeure affecting you?

Have you heard the phrase ‘jingle post’?

I hadn’t until the 2008 crash. Back then, I was writing for people in the commercial property industry, and learnt that 'jingle post' is the term for a landlord’s mail in a recession - due to the sound of tenants returning keys.

Every industry has terms that mainly come to prominence during a recession or downturn. One we’re hearing a lot in the wind industry right now is ‘force majeure’ notices. We expect speakers to touch on these in our webinar later today and, in truth, they could sustain a 45-minute discussion on their own.

Force majeure clauses are contractual clauses that alter the obligations of the parties to that contract if there is an extraordinary event or situation that is out of their control and prevents them from fulfilling one or more of their obligations. The Covid-19 pandemic, and the ensuing crisis, should qualify.

Use of force majeure

We have heard more talk from firms investing in the wind industry in the last month about an uptick in the quantity of force majeure notices.

Many developers and manufacturers started to receive them in February, when their component suppliers in key Asian markets, particularly China, wrote to warn them of delays to the production of vital parts.

These manufacturers will have received similar notices from their raw material suppliers; and most developers that received notices from manufacturers will have had to warn their customers too. You can’t build a wind farm without turbines, and the delays to project timelines will likely hit power deals too.

This means that force majeure notices will be a big part of the market this year and beyond. The Chinese government is lifting the Covid-19 lockdown in some cities, but we expect all countries with active wind markets to suffer in 2020.

Look at Spain. The ‘Financing & Investment Trends’ report from WindEurope, which was published on Tuesday, showed that 2.8GW of new wind projects in Spain secured €2.8bn of project finance in 2019. But much of the capacity where construction hasn't started is now likely to be delayed by Covid-19.

The UK’s active offshore wind market will suffer too. Bloomberg reported at the end of March that Iberdrola and Innogy were among the developers that had notified the UK government that they may need to declare force majeure to halt their contracts. The situation in the UK has worsened since then.

WindEurope has forecast that the capacity of wind farms financed in Europe in 2020 would be 25% lower than its previous forecast because of Covid-19: 13.6GW rather than 18.1GW.

It added that some of this capacity would not be financed at all in the coming years, which shows that Covid-19 will not just delay activity. It will end some projects as developers find themselves unable to cope with contractual delays.

Meeting PTC deadlines

Then there is the US, where the American Wind Energy Association has said 15GW of projects were due to complete this year, and developers also have until the end of 2020 to start building schemes so they can gain support under the federal production tax credit (PTC) regime.

The wind industry has so far been excluded from the federal support packages for Covid-19, so firms do not know if the PTC will be extended.

This can only cause further financial uncertainty for companies at a time when turbine orders and projects are being stalled, and raise the frequency of force majeure notices. Many of these notices only include scant information because none of us knows the full impact of Covid-19, when the industry will recover, and the long-term impacts on the supply chain.

Most recipients of these notices will tolerate some uncertainty, but only for so long. All companies will be looking closely at contracts and they know that at some point they’ll need to protect themselves. Nobody can wait indefinitely. We expect to see defaults that lead to project failures, and legal action.

Even if Covid-19 passes quickly, the delays will ramp up pressure on the supply chain. That 15GW of capacity to be built this year was already a big challenge.

Force majeure isn’t just a European or US issue. These clauses are being invoked in countries including India and South Africa too. Covid-19 is a global crisis and force majeure is one way that companies globally, including in wind, will seek to mitigate that uncertainty. This could get ugly.

How is your business being affected by force majeure notices? What questions do you have about them? Please let us know.

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