Out-Law Analysis 4 min. read
28 May 2020, 9:19 am
Although it is highly unlikely that any renewable energy independent power producers (IPPs) will be able to recommence significant construction activity immediately, the announcement is good news for those that have been in limbo since Eskom, South Africa's public electricity utility, issued them with force majeure notices in response to the lockdown.
Following Eskom's decision to issue force majeure notices to IPPs, South Africa's Independent Power Producer Office (IPP Office) confirmed that it had "engaged with Eskom and Eskom have indicated that they will, subject to any Government Notice that may be issued to the contrary, acknowledge the 21 days of nationwide lockdown as an event of Force Majeure under the [power purchase agreement] for projects in construction" (IPP FM Notice).
South Africa's lockdown, imposed by way of regulations published under the Disaster Management Act, 57 of 2002, commenced on 27 March 2020 and ran for an initial period of three weeks. The lockdown was later extended.
In essence, the IPP Office acknowledged that the lockdown constitutes a force majeure event for the purposes of the PPA, and confirmed that developers would be receiving relief for the 21-day period of the initial lockdown: from 27 March to 16 April 2020.
On 29 April, further regulations were published allowing construction activities in relation to "public works" to recommence. This caused much confusion in the market as it was not clear whether renewable energy projects were included in the definition of public works. However, on 15 May, the regulations were amended to specifically include these projects.
In order to assess IPPs' position under the PPA with regards to the lockdown and the regulations, we need to distinguish between three periods:
First period: the force majeure event
Eskom appears to view the force majeure event as a "blockade or embargo" within the definition of "force majeure" in the PPA. Although neither of these terms is defined in the PPA, a temporary ban on commercial activities imposed by the lockdown regulations would appear to fall within the commonly understood definitions.
However, two further issues must also be considered.
Firstly, the IPP FM Notice requested sellers to confirm that "no deemed energy payment and/or costs will be claimed that is directly linked to the delays caused by the 21 days lockdown". This appears to be an attempt by Eskom to persuade IPPs to accept the offer of 21 days' time relief in the form of a force majeure event, and to waive any claims that the IPP may have for unforeseeable conduct or otherwise for any additional costs as a result of the lockdown. The PPA entitles IPPs to time relief should a force majeure event occur, but no cost relief. However, if an IPP was able to successfully claim for an event of unforeseeable conduct, it would be entitled to time and cost relief under the PPA. It remains to be seen whether the lockdown amounts to unforeseeable conduct under the PPA.
Secondly, the wording of the IPP FM Notice seems to indicate that a 21-day delay results in a 21 day extension. However, the situation is a little more nuanced than that. Each project must be analysed on its own merits to determine, amongst other things:
The full effect of the lockdown on the construction schedule must be determined and claimed under the PPA. Developers should notify Eskom that the effect of the lockdown is not merely a day for day delay.
From 17 April to 15 May, IPPs were in the same position as during the first period in that they were not allowed to recommence construction activities, but with the important distinction that they do not have the comfort of Eskom acknowledging the existence of an event of force majeure for this period. Such an acknowledgement was only extended to the initial 21-day lockdown period.
Developers should therefore notify Eskom that each extension of the initial lockdown period amounts to an extension of the original event as per the IPP FM Notice, or an additional force majeure event on the same basis as the IPP FM Notice. Eskom would be hard pressed to deny claims for any extensions to the initial lockdown period as being force majeure events, as it has already acknowledged that the initial lockdown period would entitle developers to relief in the form of force majeure claims.
Under the amended regulations, IPPs are permitted to continue with construction from 15 May 2020.
It is highly unlikely that any IPPs will be able to immediately recommence construction activities at the rate at which such activities were conducted immediately prior to lockdown commencing. Contractors should now notify Eskom of the timeframe to remobilise at the site as well as any challenges that may be encountered as a result of the lockdown which may lead to further delays - such as the restriction on foreign nationals entering the country and any restrictions or delays to the import of equipment.
In addition, contractors executing IPP construction work should ensure that they strictly adhere to the social distancing and health and safety aspects of the lockdown regulations on recommencement, so as to avoid being the cause of delays by not complying with the regulations.
02 Apr 2020