Key trends to watch in project delivery: managing project delivery in uncertain times

This is the third instalment of our 'Key Trends To Watch in Project Delivery' series. In this article we look at Early Reservation and Capacity Reservation Agreements.

The grid connection reform and current geopolitical uncertainty are having a direct impact on the delivery of clean energy projects in the United Kingdom. In this environment, developers, OEMs, and investors are looking for ways to mitigate delays in project delivery, through the conclusion of Early Reservation Agreements (ERAs) or Capacity Reservation Agreements (CRAs). Used well, an ERA or CRA can enable investment. Used poorly, they can generate costly disputes, stranded capital, and misaligned incentives.

1. In more detail

An ERA allows an interested party (e.g. a project developer) to reserve plant or equipment (e.g. in the context of a large-scale ground-mounted solar pv park, solar pv modules) ahead of time and in anticipation of such plant or equipment being required in connection with a project. In a similar fashion, a CRA allows for the reservation of manufacturing capacity, thus ensuring that when the interested party is ready to place an order with the manufacturer, the manufacturer will be able to fulfil the order within the desired timeframe. 

The reservation will typically be made in exchange for the payment of an upfront fee, which would often not be refundable (although this would depend on the timing of the completion of the ERA or CRA).

2. Why ERAs matter for clean energy projects?

2.1  Capital intensity and irreversibility

Energy transition infrastructure (e.g. wind turbines, electrolysers, grid equipment) involve highly specialised plant with limited alternative uses. Suppliers are increasingly unwilling to increase manufacturing capacity without credible demand signals. ERAs and CRAs provide that signal.

2.2  Supply chain bottlenecks and allocation risk

Where capacity is constrained, suppliers may be oversubscribed across multiple customers and jurisdictions. ERAs and CRAs could be used as a way of 'jumping' the queue.

2.3  Project finance and bankability

Where the nature and scale of the project involves long-lead items, the existence of an ERA or CRA could be material considerations as part of the final-investment decision process and/or influence the availability of project financing. 

3. Issues to consider

When it comes to ERAs and CRAs there is no 'one size fits' all. It is common for terms to be dictated by the manufacturing entity and it is then incumbent on the project developer (or other interested party) to ensure that the agreed terms adequately serve their objectives.  

3.1  Converting the ERA or CRA to a supply contract

An ERA or a CRA is typically a precursor to a supply contract. The manner in which an ERA or CRA is 'converted' to a supply contract needs to be thought through and be adequately anticipated in the ERA or CRA, for instance:

• What milestones need to be met for the project developer to be able to sign a supply contract? Are these milestones linked to events that are within the developer's control? In this context, the receipt of a Gate 2 connection offer, would be outside the control of the developer.

• Does the ERA or CRA provide for a longstop date and if so, what are the consequences of such a date being missed? Would the project developer be exposed to cancellation charges if they do not complete a supply agreement by said date? Is that the point at which any deposit that has already been paid under the ERA or CRA become non-refundable?

• Assuming that the project developer is unable to progress the project to which the ERA or CRA relates to, is the developer able to unilaterally terminate the ERA or CRA and would the manufacturer be entitled to any loss of profit or loss of opportunity, in connection with such termination?

• Terms of the supply contract: It is not uncommon for a supplier to seek to negotiate the terms of the final supply contract in parallel with the negotiation of the ERA or CRA. Whilst this approach has the benefit of ironing out any issues in advance, it could lead to significant delays (which the CRA or ERA is intended to avoid). That said, it is advisable that project developers undertake an initial review of the supplier's standard terms to ensure that there are no 'deal breakers' or if they are, that these are addressed well in advance of the final negotiation of terms. 

3.2  What is being reserved?

In the context of a CRA, CRAs often refer to the supplier's obligation to 'reserve capacity' without clearly defining:

• Whether capacity is ring fenced or merely prioritised,

• What happens if the supplier rationalises or reallocates capacity internally and when is the supplier able to do so? The expectation is that a supplier would be able to reallocate capacity to the extent that such reallocation does not adversely impact on the project that is the subject of the CRA. In this context, regular communication between the project developer and the supplier is key.

In the context of an ERA:

• How will the equipment that has been reserved be ring-fenced in practice;
• What happens where as a result of a change in law, the equipment that has been reserved initially becomes obsolete? Arguably, the manufacturer's obligations under the ERA extend to the equipment that has been originally reserved and would not extend to new or replacement products. That said, this is a key consideration, particularly in projects that span a number of years.  

3.3  Pricing risk

A project developer would be keen to 'lock-in' the price for the plant or equipment at ERA or CRA stage. On the other hand, the supplier is likely to resist pricing that fails to reflect future cost escalation. Absent clear adjustment mechanisms, this misalignment often surfaces during the negotiation of the supply contract.

4. Key takeaways

4.1  Treat the ERA or CRA as a risk‑sharing instrument, not a placeholder

The starting point should be economic reality: the ERA or CRA enables investment by one or both parties before certainty exists. Drafting should reflect that shared risk.

4.2  Be precise about what is being reserved and how the ERA or CRA will translate to a fully-fledged supply agreement.

4.3  Calibrate termination and break costs

Termination payments should be linked to:

• Demonstrable sunk costs,
• Irrecoverable opportunity costs, and
• The stage of project maturity at termination.

4.4  Integrate ERAs and CRAs into the wider project contract ecosystem

An ERA or CRA does not operate in a vacuum. Consideration needs to be given to how it links into the wider project (in terms of programming and sequencing of activities) and the remaining project documents (engineering, procurement and construction contract, offtake agreement, and financing documents).

5. Looking ahead

ERAs and CRAs have a key role to play in facilitating project delivery in the clean energy space. Those who view these agreements as strategic, value‑critical contracts will be able to extract the most value. Our team has considerable experience in advising clients in this space, so please get in touch to find out more.