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Energy crisis – business resilience

The energy crisis is feeding into the cost of living crisis, driving up inflation and escalating insolvency risk. The cumulative effect is negatively impacting business cashflows, investment plans and viability.

While the crisis stems from Europe, it is also fuelling disputes and contract failures across globally integrated supply chains.

If the energy crisis is causing you concerns at any level of your supply chain or operations, we can help. We work with businesses like yours at a national and global level to develop legally robust strategies to succeed in the most challenging circumstances.

Our incisive legal advice will enable you to understand and act on the potential business risks brought on by the energy crisis, protecting your short, medium and long-term energy procurement and broader supply chain contracts. As leaders in ESG, we also see the energy crisis through a decarbonization prism and how that can build a more robust strategy and supply chain.

We hope the resources on this hub will help deepen your understanding of the legal and regulatory issues surrounding the energy crisis. For advice specific to your particular issues, please contact one of our global lawyers today.

Regulatory updates

Get the latest European government updates regarding the energy crisis support mechanisms for businesses.

European energy regulatory & Sanctions updates

Sanctions updates

The price of global energy products has surged to all-time highs following Russia’s invasion of Ukraine. The coordination of economic sanctions against Russia from major economies, whilst crucial for limiting Russia’s ability to finance the war, has intensified disruption to global markets and the supply chains that underpin them. Russia, a major exporter of crude oil and natural gas, has been heavily curtailed in its ability to export products creating global shortages. Natural gas prices in Europe have soared further after Russia’s state-controlled Gazprom said it would indefinitely extend a shutdown to the Nord Stream 1 gas pipeline supplying much of Europe.

Find out more about the effect of sanctions on the global energy markets by viewing our sanctions resources.

Energy procurement

Businesses dealing with the unexpected, and therefore unplanned, rise in energy costs are typically in one of three energy procurement scenarios:

  1. Existing energy contract
    Every business is now realizing that they are an energy business, and all businesses will have existing energy contracts. Those who are on flexible tariffs may be looking to move to fixed rates to manage costs. Those who are on fixed tariffs may find their suppliers looking to squeeze various aspects of the contract which in ordinary times seem relatively asinine like metering, billing and tolerances. Businesses may be looking more closely at the creditworthiness and future of their energy suppliers, especially following a spate of supplier failures before the energy crisis. Those who locked long term fixes at the start of 2022 (when prices then seemed high) will benefit from that decision, whilst those whose 2019 fixes are coming to maturity may be feeling anxious about coming back to the market.
  2. Energy contract renewal
    Businesses coming up for renewal of their energy contracts may benefit from a consultation with an energy service provider to broker the best energy deal for them, and help manage a process that has gone from the back rooms of business-as-usual procurement to C-suite level conversations. They will need to consider the wider impact on their business of coming off “old world” tariffs. Energy price hedging and contracting in the current uncertain economic environment is challenging, complex, competitive and in extremely high demand. Our legal team can assist you to negotiate your new energy supply agreements and identify potential issues and opportunities, in the high pace high stakes world we now face in terms of energy.
  3. New energy procurement
    The energy crisis is primarily a price and security crisis, but the ever present climate crisis rages on. ESG-conscious businesses will still be looking to reduce their scope 2 and 3 emissions and will therefore also have one eye on securing as much green power as possible, at the best fixed rate. Renewable energy is not only green, but the world and corporates are also livening up to the fact that it is also relatively cheap and more geopolitically secure than energy from bad neighbors. There is already pent up demand and limited viable renewable energy projects who can partner on corporate power purchase agreements (PPAs). Those who move fast on securing their green power procurement arrangements will no doubt benefit. There are still many hurdles around planning and grid capacity on both the supply and demand side, that local and national governments could help to reduce. Our legal team can support you in securing your green PPA.

How can we help?

Our energy regulatory lawyers can help you manage potential risks around your current energy supply agreements and help you find the most suitable corporate PPA for your business. We can also review existing supply chain contracts to identify any potential issues.

Contractual remedies

The energy crisis combined with global instability has triggered a range of economic consequences for businesses around the world. The effects on commerce have been dramatic. As legal advisors on global trade, supply chain issues and contractual risk management, we are seeing businesses directly impacted with issues relating to contractual performance.

Echoing the supply chain issues faced by many in the early months of the COVID-19 pandemic, companies must look closely at their contracts to understand how force majeure, frustration and hardship could all become applicable arguments depending on the jurisdiction of the contract and the underlying law. Where businesses operate in complex supply chains spanning multiple jurisdictions the effect of these remedies can vary substantially.

With increased pressure on energy procurement contracts, pricing revision disputes, performance of supply agreements and other tensions continue to emerge.

Related articles

Force majeure, hardship and frustration

The law on force majeure differs from country to country, not least between common law and civil law jurisdictions. How and when should you serve a force majeure notice? What remedies are available? Are there other contractual remedies such as frustration in a particular jurisdiction?

This guide provides some preliminary advice on those issues and more across 32 different jurisdictions.

Construction

Rising energy prices, combined with inflation and a forecasted global recession, are having a huge impact on the construction industry which typically relies on materials manufactured using energy-intensive processes and has a high energy usage during the carrying out of works.

We know that our clients will face significant challenges as a result of the current energy crisis, both on existing projects and those in the procurement and negotiation stages. There have been ongoing challenges for the construction industry since early 2020 which we anticipate will be further exacerbated by the energy crisis including: price increases in the industry of nearly 25% up to July 2022 (the fastest rate in the UK for 30 years) and an expectation of a continued rise; shortage in materials such as steel, which is already in short supply given COVID-19 and the war in Ukraine and, therefore, significantly more expensive; and, supply chain disruption and insolvency , the former remaining an ongoing consequence of COVID 19 and the latter an ever increasing problem in the construction supply chain, both having severely detrimental impacts on projects.

Commercial and contractual remedies

In these times it is paramount that you safeguard your business, where at all possible, against the potential issues outlined above both on existing and future projects.

There are a number of ways that we can assist our clients with this by providing advice in respect of the following:

Existing projects:

Risk assessment – this requires identifying the key risks on a project and the potential associated delays and/or cost increases. The overall assessment should be made within the context of the wider project structure under which the project is being delivered, to provide a better understanding of the parties’ respective positions and likely commercial drivers. By doing this and identifying the key risks, their likely value, the party liable for a risk and the remedies available, a party is then best positioned to proactively develop and execute the most effective strategy to mitigate its risk.

Develop and implement a strategy – having carried out the risk assessment, identifying and implementing a strategy is far more likely to result in a better commercial position than doing nothing. The strategy may involve having full and frank discussions with the key parties on the project to see whether certain risks can be shared, re-allocated or managed pre-emptively in order to ensure the project progresses, or seeking to assert rights or rely on remedies available under the contract. Where compromises amount to variations to the contract, these should be documented properly and in accordance with the terms of the contract.

Due diligence –be alert to rumors of supply chain issues and investigate appropriately. Be aware of and use the contractual levers available to best ensure the performance/supply under those affected contracts, if not, other customers will be prioritized. Supply chain solvency can be monitored through credit checks and there are publicly available searches to check for insolvency proceedings. Acting quickly in terms of exercising termination rights may well be required, however ensure that the contractual termination procedures are followed to avoid any accusations of wrongful termination.

New projects:

Front end negotiation and drafting - fluctuation provisions in contracts can help deal with price/cost increases, as they include a mechanism whereby the actual cost can be calculated as the project progresses adjusting the contract sum accordingly. Such clauses typically benefit contractors but, in the current energy crisis, may also benefit employers by reducing supply chain cash flow issues and insolvency risk. Other forms of contract with flexible pricing mechanisms (reimbursable, re-measure etc.) may also become more popular with contractors. There may also be opportunities to specify certain materials with a lower carbon footprint or provide the ability to source alternative suppliers where there are issues.

Advance payment – such payments are usually agreed at the outset of the project. They assist with cash flow and allow a contractor to secure materials earlier on in the project and/or at a certain price. This can be particularly helpful where there is supply chain disruption or material shortages leading to long lead times. Employers should ensure they obtain adequate security in the form of an advance payment bond (noting that such bonds come with an additional cost) or a vesting certificate if payment relates to off-site materials. A retention of title clause should be included to ensure that the title to the goods/materials passes upon payment rather than upon delivery.

Alternative energy sources – as a wider and longer term consideration, companies may want to consider whether there are different ways to source energy to ensure that projects are more affordable and sustainable such as use of solar, wind and hydropower. As part of their ESG strategy, businesses may insist that their supply chain has robust environmental considerations, including the use of energy saving measures and strategies whilst undertaking the works. In addition, energy saving and efficiency measures will be a key feature in the design of new projects, with KPIs and performance monitoring included in supply chain contracts to ensure these are met.

How can we help?

We have a global team of experienced contentious construction lawyers ready to provide strategc advice in relation to existing projects being impacted by the energy crisis. We’ll work closely with you to determine your right strategy and assist in its implementation to mitigate risks and keep projects on track.

Our skilled transactional construction lawyers can advise on and assist with the procurement, drafting and negotiation of contracts for future projects with mitigation of energy crisis risks at the forefront of their mind.

The depth and breadth of capability across our firm means we are well placed to support you during this tumultuous and uncertain time.

If you are concerned about your current project or the viability of future ones and need some advice, our contact details are below.