While the pipeline of new renewable energy projects remains strong, notable challenges to the delivery of these projects remain. In this article, we explore some of the hurdles facing the delivery of renewable energy projects and how project developers and contractors are addressing these challenges in their contractual arrangements.
Grid connection challenges
Grid connection remains one of the key challenges for delivering renewable energy projects in Australia.
The connection approvals process regulated by the National Electricity Rules (NER) is complicated by the need to ensure grid stability as an increasing number of ‘distributed’ and ‘asynchronous’ renewables projects seek to connect to a grid originally designed for a smaller number of centralised baseload energy sources. While Australia’s energy grid modernisation efforts are underway – such as the delivery of more ‘grid stabilising’ battery energy storage systems (BESS) and the Australian Government’s $20 billion investment in transmission projects as part of the Rewiring the Nation initiative – these efforts will take time to fully implement. In the meantime, the risk of project delays caused by the connection approvals process remains.
If a project cannot connect to the grid on time, revenue streams will be delayed, which may affect the financial viability of the project. As such, it is important for developers and contractors to allocate connection risks in their delivery contracts. Contractors will typically seek an entitlement to an extension of time (and corresponding relief from liquidated damages for delay) for connection-related delays to completion. While this is generally not controversial in-principle, it can sometimes be difficult for the parties to agree where to ‘draw the line’ given the contractor, by its own acts or omissions, may be responsible for delays to connection approval. As a result, we are increasingly observing the negotiation of more ‘nuanced’ contractual regimes which seek to allocate more precisely the connection-related risks borne by the developer and the contractor respectively.
Grid connection delays can also lead to degradation of plant performance, particularly for BESS projects where delays in connecting a BESS to a power source may reduce the storage efficiency of the BESS itself. Again, savvy contractors are increasingly seeking to ensure that those grid-connection risks which entitle them to an extension of time also entitle them to relief from under-performance of the BESS attributable to those grid connection delay risks.
Labour and productivity issues
The procurement of labour for renewable energy projects remains an ongoing challenge in the Australian construction industry. This is particularly the case in the renewable energy sector due to the number of regional projects and the need for skilled labour.
While there has been some positive movement in this space recently, including the Australian Bureau of Statistics identifying a 24% reduction in construction vacancies since May 2023, the view of the Queensland Major Contractors Association in its ‘Queensland Major Projects Pipeline 2024’ report is that this may be short-lived given the pipeline of upcoming projects in the residential, transport, health, and energy sectors, coupled with preparations for the 2032 Brisbane Olympics.
As a result, developers and contractors are increasingly focused on attracting and retaining workers. In construction contracts, developers will typically require contractors to bear all resourcing and IR-related risks in relation to the project, with that risk being reflected in overall pricing. Developers are also often keen to identify contractor ‘key personnel’ upfront and to include contractual mechanisms to ensure that those key personnel remain engaged on the project throughout its implementation.
A related concern is productivity in the construction sector, which has seen a significant decline in recent years. This decline is contributing to cost overruns and delays which are fuelling disputes on projects.
Supply chains and inflation
Global supply chains continue to impact the construction of renewable energy projects in Australia. Delays in developing local critical minerals (including due to lengthy approvals processes for new mining operations) and extensive competition for the international supply of critical minerals have led to delays and increased prices for essential components required in the manufacture of solar panels, batteries, and wind turbines. This issue has been further exacerbated by geopolitical tensions and trade restrictions.
In addition to the cost of critical minerals, the construction industry has witnessed the consequences of broader inflationary pressures which impact the cost of construction materials more generally, including steel and concrete.
In construction contracts for renewables projects (including project-financed projects), supply chain and inflationary risks will typically be borne by contractors. However, we have observed an increased willingness of developers (and lenders) to provide ‘targeted’ time and cost relief in relation to supply chain and cost escalation risks, provided this relief is appropriately limited and subject to obligations on the contractor to manage and mitigate the risk.
Insurance market
Procuring insurances for renewables projects has become more challenging, driven by the risks associated with new technologies and natural disasters. For example, hail damage to solar projects in recent years has caused insurers to take a more cautious approach to these developments. This can cause delays to the underwriting process as insurers undertake more detailed risk analyses, which can be an unwelcome surprise for developers and contractors who have left their engagement with the insurance market ‘to the last minute’ in the negotiation process.
As such, it is now even more important for developers and contractors to engage with the insurance market early in order to avoid delays in finalising their contractual arrangements and commencing work.
Looking ahead
As Australia’s renewable energy sector continues to expand in 2025 and beyond, we are continuing to see the contracting landscape evolve in response to ongoing and emerging opportunities and challenges. Australia’s rich endowment of renewable resources and critical minerals present a strong foundation for future growth in the sector. However, developers and contractors will need to remain agile to ensure that their contractual arrangements appropriately allocate risk while promoting best-for-project outcomes.
