The offshore wind industry in the US is booming but fast growth could bring problems if developers are not fully aware of the legal regime governing the supply chain and contracting
Developers putting supply chains together in the fast-growing offshore wind market in the US face a much greater degree of difficulty than they would encounter in contracting in other industries, and a leading law firm has advised caution and a risk management approach to avoid potential pitfalls.
“Offshore wind developers setting up their supply chains need to be prepared to navigate a complicated regulatory scheme involving overlapping federal and state laws, and adequately protect themselves with contracts that reflect the unpredictability of building wind turbines in the ocean,” say Emily Huggins Jones and Sarah Rathke, both partners at Squire Patton Boggs, and Marissa Black, an associate at the firm*. They also highlighted that, in their view, offshore wind projects in the US could face environmental opposition, despite their clean energy status.
“A complex framework of laws and regulations has shaped the development of US offshore wind,” they say. “Federal laws are the primary legal regime governing project development, but state laws also contribute significantly.
“Section 388 of the Energy Policy Act of 2005 gave the US Secretary of the Interior authority over offshore energy facilities on the outer continental shelf (OCS). The Interior Department’s Bureau of Ocean Energy Management (BOEM) then issued the final regulations establishing the offshore renewable energy programme in 2009.
“BOEM issues permits for projects on the OCS – which is exclusively federal jurisdiction. However, the undersea export cables that bring power to onshore substations cross state territory and trigger state laws and regulations.”
On average, they said, developers should expect to spend seven to 10 years in the planning and construction process before commercial operations begin, much of it focused on, and directly impacted by, their supply chains.
Major components of the federal environmental review process include compliance with the National Environmental Policy Act, Endangered Species Act and Migratory Bird Treaty Act, among others. “Failure to adequately comply with any of these regulations can result in significant project delays,” the lawyers say.
As they also note, the Jones Act requires that transporting construction materials or passengers from the US to a construction vessel considered a point in the US, use only ‘coastwise-qualified vessels.’
Coastwise-qualified vessels are those built in the US and never rebuilt abroad; are primarily owned and controlled by US citizens; have primarily US crews; are US-flagged; and have coastwise endorsements from the US Coast Guard.
However, there is an important exception to the coastwise-qualified vessel requirement for installations that remain stationary. “This distinction may affect supply chain operations as well,” they say.
“For example, offshore wind developers will need to use coastwise-qualified vessels when shipping building materials to wind turbine building sites from US ports. However, the actual construction vessels that remain at the sites to build the wind turbines need not be coastwise qualified as long as they remain stationary.”
The law firm also highlights that developers need to be mindful that offshore construction and operation involves seafarers, maritime employees and other non-maritime employees and this requires insurance tailored to each subgroup of employees.
“For example,” they explain, “most commercial policies do not cover liability to seafarers, so specific Jones Act coverage is necessary. Offshore wind employers should be aware of how each employee is classified to effectively mitigate employer liability.
“In addition, with many major components manufactured abroad, there can be significant issues regarding transit risk of loss, marine cargo insurance, shipping logistics and uncertainty surrounding current US customs and tariffs.”
Squire Patton Boggs says developers can navigate these risks by clearly defining which party controls delivery arrangements and bears the risk. Although they may be tempted to sweep US customs and tariff issues into general force majeure provisions, the better practice is to treat tariffs as a component of pricing, subject to changes in the law. This will help avoid any potential delays if tariffs change from the time of contracting to the time equipment arrives at the customs port – a risk that has become the norm.
They also highlight that supply chain contracting practices in offshore wind differ from normal manufacturing supply chain agreements in a number of material respects. For maritime contracts, contract law is dictated by federal admiralty law, not the Uniform Commercial Code (UCC), the set of laws that provide legal rules and regulations governing commercial or business dealings and transactions, that govern most US-based supply chain contracts on land.
There are two primary sources of federal maritime law: common law developed by federal courts exercising the maritime authority conferred by the Admiralty Clause of the Constitution, and statutory law enacted by Congress exercising its authority under the Admiralty Clause and the Commerce Clause.
“Federal common law often follows the UCC, but some differences exist,” says the law firm. “For example, oral contracts are generally regarded as enforceable by maritime law, whereas the UCC’s statute of frauds generally demands that normal supply chain contracts be (at least in part) in writing.
Furthermore, a party that breaches a maritime contract is only liable for the damages caused by its breach, not consequential damages. For UCC contracts, this is not the case, unless consequential damages are expressly disclaimed.
“As a practical matter, offshore projects are often more ‘experimental’ than normal, dry-land manufacturing, so it may be important to structure offshore supply chain contracts around more frequent milestones and ‘revisit’ points,” say Squire Patton Boggs’ experts.
Growth Partnership issues call to industry
The Offshore Wind Growth Partnership (OWGP) in the UK has released its first funding pot, totalling £400,000 (US$514,000), for projects that aim to improve the competitiveness of the existing UK supply chain and encourage the development of new products and services for the sector.
The OWGP is part of the Offshore Wind Sector Deal between industry and government. Funded by the Offshore Wind Industry Council (OWIC) and delivered by the Offshore Renewable Energy Catapult, it has a budget of £100M over a 10-year period and will promote closer collaboration across the supply chain and facilitate shared growth opportunities between developers and the supply chain.
The funding is available to all UK companies for submissions in two specific areas: cost reduction from advanced manufacturing techniques, and developing advanced sensors, internet of things and communications solutions for offshore wind.
The first call is seeking submissions that identify potential cost reductions from advanced manufacturing or fabrication techniques. The aim is to encourage and support UK companies to explore new manufacturing methods and techniques that could improve productivity and facilitate cost reduction, with successful applicants learning from specialist delivery partners.
The second call focuses on developing advanced sensors, internet of things and communications solutions for offshore wind, supporting existing supply chain companies to expand their range of products and services to meet the future needs of the sector and is aimed at UK-based SMEs exploring the use of innovative technologies, products and services to improve communications at next-generation offshore windfarms.
In October 2019 an industry-backed technology accelerator programme was also launched by the Catapult designed to support innovative SMEs to commercialise new technologies that will enhance the UK’s offshore wind supply chain, enabling greater UK content, while supporting cost reduction. The ‘Launch Academy’ initiative will focus on ‘near-to-market’ solutions and is supported by eight industrial and business support specialists. The nine-month programme will see a cohort of eight companies being given access to a package of support from delivery partners.