Loss of electricity generation claims in new energy projects

With the increasing investment in and construction of new energy projects such as wind electricity and photovoltaics against the backdrop of the “dual carbon” initiative, legal compliance issues and disputes related to these projects have emerged. Industries like wind electricity and photovoltaics primarily generate electricity and economic benefits through project construction and grid connection.

In recent years, numerous disputes over electricity generation losses have arisen in new energy projects due to issues such as quality and project duration. Based on the engineering, procurement and construction (EPC) model, this article discusses relevant practical issues from the perspective of the project owner and the general contractor.

Claiming electricity generation losses

Lost potential profits. Project owners (also known as developers) seek compensation for electricity generation losses from the general contractors of new energy projects. This claim is based on the assertion by the project owner that they have suffered the loss of anticipated benefits due to the general contractor’s breach of contract. It’s crucial to note that such claims are subject to limitations imposed by foreseeability rules and rules on mitigating damages.

Losses caused by quality issues. Quality issues in new energy electricity plants can stem from equipment (including photovoltaic components, wind turbines, inverters and transformers) or engineering aspects (such as design and construction). Given the specialised nature of equipment and installation in new energy electricity plants, problems with equipment quality, installation techniques, incorrect usage parameters, system operation, external environmental factors and human error can all lead to lower than expected electricity generation.

Therefore, the burden of proof regarding causality becomes particularly significant in such cases. In practice, there are two common ways to deal with such issues: (1) entrusting the appraisal agency to issue an opinion; and (2) using the parties’ communication letters, minutes of meetings, maintenance reports, etc., to organise the evidence according to the specific circumstances.

Losses caused by delayed completion. Delays in the construction, completion and grid connection of new energy electricity plants may result in a loss of electricity generation to the owner. More importantly, the delay in grid connection may also result in the owner being unable to obtain corresponding government subsidies, causing further losses.

It should be noted that some courts currently opine that the loss of electricity generation due to delayed completion is a delay in obtaining rather than an inability to obtain, and the operating period of the project is unchanged. Thus, the owner’s loss should be considered as interest loss on delayed electricity revenue rather than the loss of electricity generation corresponding to the delay period.

Determining lost electricity volume. The lost electricity volume is calculated as the difference between the electricity volume that should have been generated and the actual electricity volume generated. It is easier to determine the actual volume of electricity generated, so the focus is on the determination of the volume of electricity that should have been generated.

In practice, the volume of electricity that should have been generated is often based on: (1) the contractually agreed minimum or target electricity volumes; (2) the feasibility study report of the new energy project; (3) the opinions issued by the appraisal organisation or relevant professional institutions; and (4) other relevant documents between the parties.

Responding to claims of loss

To claim the contract with the project owner is void. When project owners assert claims for electricity generation losses against the general contractor, they are essentially claiming damages for loss of anticipated benefits, implying that the EPC contract between the project owner and the general contractor is valid. If the court determines the EPC contract to be void, it denies the claim for lost profits, relieving the general contractor from compensating for the alleged loss of electricity generation.

It should be noted that the invalidation of the contract may have multiple effects, and the general contractor needs to carefully consider when deciding to dispute the contract’s validity. In the case of new energy projects, a common factor affecting the contract’s validity is the failure to meet bidding requirements.

To claim that there is no causation between the occurrence of the loss and the general contractor’s behaviour. According to article 584 of the Civil Code, when the owner claims a loss of electricity generation, implying a loss of profits due to the general contractor’s breach of contract, there must be direct causation between the loss and the general contractor’s breach. The owner should prove this causation, which is difficult in some cases. The general contractor may counter this claim by arguing that the loss of electricity generation occurred independently of its actions, thus disputing the causation.

To claim that losses are caused by the owner, or other external factors. Compared with general construction projects, new energy projects are often more susceptible to policy, climate, equipment, technical factors and other influences. When faced with a claim for loss of electricity generation, a general contractor can analyse and consider the reasons for the loss from multiple perspectives (such as the owner’s useage and other external factors) and provide evidence to reduce its own liability.

When it is unable to determine that the general contractor’s breach of contract was the sole cause of the loss of electricity generation, the court may decide the proportion of responsibility of the owner and the general contractor for the loss of electricity generation in accordance with the relevant facts and circumstances.

To claim its actual losses against downstream companies. If the general contractor has compensated the owner for the loss of electricity generation, it suffers actual losses because of the compensation and may claim such actual losses against the downstream companies according to the relevant agreement with the latter.

However, to prevent the general contractor from colluding with the owner in bad faith to the detriment of third parties, the court may review the reasonableness of the compensation for loss of electricity generation paid by the general contractor to the owner. It should be noted that while the general contractor can claim actual losses from downstream companies, it cannot claim losses related to electricity generation revenue, as it is not entitled to such revenue.

Wang Yong is a partner at DOCVIT Law Firm