Bloomberg Law
April 6, 2020, 8:01 AM

INSIGHT: Waste-to-Energy Projects Not Immune From Covid-19

Kevin  Johnson
Kevin Johnson
Stoel Rives LLP
Eric Martin
Eric Martin
Stoel Rives LLP

As the nation continues to grapple with the Covid-19 pandemic, the waste-to-energy (WTE) industry will also likely be impacted in ways that extend beyond continued social distancing and navigating related government orders.

The pandemic may well affect feedstock, offtake and other agreements supporting existing and near-term WTE projects across the country.

Broadly defined, WTE facilities include the approximately 75 municipal waste combustors around the nation that produce steam or electricity from municipal solid waste (MSW), anaerobic digestion facilities that process organic waste such as food waste, animal manure or wastewater sludge to produce renewable natural gas (RNG), and landfills that produce electricity from the methane they generate. RNG from landfills, agricultural wastes, wastewater, and other sources has increased about 30 percent annually over the last few years.

The impacts of Covid-19 and the federal, state, and local government orders addressing the pandemic are very likely to: (1) extend project development and construction timelines, and (2) reduce and alter the generation of MSW and other types of non-agricultural waste around the nation in the near future, and potentially over the longer term.

Contractual Schedule and Delivery Obligations

For example, there are over 100 RNG-focused WTE projects across North America that are currently either under construction or in substantial development. Feedstock and offtake agreements often contain development and construction schedules that the project developer is contractually obligated to meet.

Notwithstanding that these projects themselves may fall outside state and/or local governments “stay at home” or shut-down orders, those orders may delay project permitting and affect material and equipment supply, which could make it difficult for project developers to satisfy those contractual schedule obligations.

In addition, reduced MSW generation will impact WTE facilities that rely on a consistent and sufficient supply of MSW to meet any minimum output requirements in their agreements to supply electricity, steam or RNG to their offtakers.

Waste generated by commercial entities, which is typically at least 60% of the MSW stream, has already decreased owing the shut-down of offices, restaurants, bars, shops, certain manufacturing facilities and other enterprises throughout many areas of the nation.

This is particularly true in the large metropolitan areas responsible for significant economic activity and corresponding significant waste generation. Further, reduced waste generation may continue for the duration of the economic downturn caused by Covid-19.

As a result of these likely Covid-19 impacts, many WTE facilities could soon be looking to their energy offtake agreements to determine whether they can be excused temporarily or permanently for not satisfying those obligations. They could also be assessing the ability of their waste suppliers to do the same in meeting feedstock delivery obligations.

Force Majeure Concerns

While the specifics of all such agreements will vary, much attention is likely to be focused on whether a force majeure provision exists in their agreements, and if so, if it could be exercised and enforced.

Force majeure means “superior force” in French and refers to an event or effect that can be neither anticipated nor controlled, including both acts of nature and third parties. In general, a force majeure contract provision allocates risk when performance is impossible or impracticable because of external factors.

Such provisions usually identify several different types of events that qualify as force majeure, require notice from the affected party to its contract counterparty of the exercise of the provision, excuse performance for a period of time or permanently, and require efforts to mitigate the effects of the force majeure event.

A key issue now is whether the Covid-19 pandemic qualifies as a force majeure event under the specific contracts in place for WTE facilities. If the provision specifically identifies “pandemics” or “government orders,” the argument for enforcement of the provision is clearer.

If the provision is more general and simply references “acts of God,” as do many force majeure provisions, the ability to excuse or suspend performance could result in a dispute resolution process under the agreement or be decided by a court.

If either party assumed the risk of a pandemic or government order, courts are likely to uphold the parties’ prior allocation of risk. Whether the Covid-19 pandemic qualifies as an “act of God” will vary by the law of the governing jurisdiction. In these cases, courts are likely to assess whether the non-performing party could have performed but for the Covid-19 pandemic. If not, invocation of force majeure will be less likely to succeed.

Courts may also assess whether the Covid-19 pandemic was foreseeable, which would be problematic for very recent contracts that did not specify “pandemics” or “government orders.” Courts will also look to the type of performance to be excused and whether efforts have been made by the non-performing party to mitigate the impacts of non-performance.

If a contract does not contain a force majeure clause, a non-performing party may also make common law arguments involving the affirmative defenses of “impracticability of performance” and/or “frustration of purpose.”

In any event, it will be important for WTE facilities to be in frequent and clear communication with their feedstock suppliers and energy off-takers to mitigate the effects of the Covid-19 pandemic on their operations and to maintain good relationships with their contracting partners going forward.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kevin Johnson, a partner in the Stoel Rives LLP Minneapolis office, advises and represents companies and local governments on environmental and energy issues. He has specialized experience with bioenergy and biofuels projects.

Eric Martin, a partner in the Stoel Rives LLP Portland, Ore., office, focuses on natural resource development with an emphasis on property issues and transactions. He advises project developers, off-takers, and utilities on renewable natural gas transactions and pipeline interconnection matters.