The green energy transition: Clouds on the horizon?

Construction disputes

Supply chain disruption

The renewable energy boom has coincided with COVID-19, the war in Ukraine and competition for materials/components driven by technology demand, all combining to create unprecedented pressure on global supply chains. This has highlighted the interconnectivity and fragility of global supply chains, triggering huge disruption to delivery of projects around the globe. Whilst the immediate effects of COVID-19 have now abated, that disruption is expected to continue. For example, finite suppliers and contractors have the capacity to deliver products and services required to scale up renewable projects, causing inflation and further exacerbating price rises of key raw materials. As prices rise, these cause budget overruns and funding pressures, breaches and insolvencies. The inevitable result is disputes.

Project delay

Delays are a familiar characteristic of complex infrastructure projects and, in the renewable sector, can arise for a number of reasons, such as supply chain disruption and unsuitable weather or ground conditions. As renewable projects can involve development of green belt, they can need detailed environmental impact assessments that can take significant time to evaluate. This can lead to delays in the developmental phase of projects as it is necessary for parties to obtain the requisite permissions, regulatory consents and permits. Delays in securing land and right-of-way rights, as well as financing and engineering and commissioning problems, also have the potential to trigger events of default under the PPA and other project agreements. Another common factor that causes delay to a project is connecting to the electricity grid – a complex process in many jurisdictions.

Technology disputes

Much of the technology, design and engineering adopted for renewable sources of energy, is either: (i) new and unproven; (ii) emerging; or, (iii) is being adapted from a small to a larger, untested scale in a more demanding operating environment. This increases the risk profile of a project, as unforeseen technical issues can arise during the construction phase and performance targets for the operational phase may ultimately prove unsustainable and/or unrealistic. During the construction phase, issues with new technology often arise in the context of design development and intellectual property, while defects emerge in the testing/operational phase as a result of the as-built design not being fit for purpose. These issues can lead to claims of breach of contract, misrepresentation and, in cases which relate to inadequate installation of the technology, negligence.

Investor and state disputes

Due to high upfront costs and the considerable construction and operating risk, critical national energy infrastructure is often backed by private finance, including from foreign investors. International investment agreements, such as bilateral investment treaties, offer foreign investors a framework of protections against state action that could damage the investment. With the drive to net zero, some states offer investors significant financial support in the form of tax breaks and subsidies to invest in renewables projects. However, as renewable energy has taken off, some states have struggled to continue to finance these subsidy regimes. This is evidenced by the wave of claims under investment treaties by investors against states in southern Europe when governments rolled-back or amended climate legislation and policies which supported green energy. These polices were originally introduced to enable renewable energy providers to be cost-competitive against the more traditional energy sources.

Joint venture (JV) disputes

As large scale renewable energy projects involve high upfront cost and significant project risk, it is common to see joint venturing arrangements as a means of sharing that risk. This has always been common in the oil and gas sector and is being brought across into the renewables space as fossil fuel companies diversifying their portfolios look to partner with smaller established renewables providers to benefit from their expertise in the market. In turn, the renewables companies benefit from the investment larger energy companies can offer and the transferable aspects of their long history in the energy sector. Some of these partnerships are inherently unequal and therefore prone to disputes as a result of differing expectations between parties or an unclear allocation of risk in the contract. To mitigate against these issues, parties should allocate risk in the JV agreement by setting out each party’s rights and obligations in respect of performance, defects, warranties and termination and include an appropriate dispute resolution mechanism.

Why arbitration?

Many energy-related contracts contain arbitration clauses – this is for a number of reasons.

• It produces awards that are more easily enforceable internationally under the 1958 New York Convention to which more than 160 nations have signed up. No similar enforcement regime exists for court judgments.
• The parties involved in renewable energy projects are often domiciled in different jurisdictions which makes arbitration a neutral and preferable choice over a particular jurisdiction’s national court process, which may lack impartiality or expertise.
• Claims involving state parties are common in the energy sector, where there are usually complex licensing and permitting arrangements and significant tax/fiscal considerations. The non-state party will often have misgivings about submitting to the courts of the state party, whereas the state party is often reluctant to submit to the courts of a neutral third state.
• the neutrality offered by international arbitration is essential to investors seeking relief under investment treaties.
• The civil procedure in local courts may be unsuitable for technical disputes. Arbitration allows for the parties to choose an expert tribunal with appropriate technical expertise. This is particularly important in relation to technology and construction disputes involving complex scientific and/or engineering evidence required.
• Arbitration can parties with a confidential forum in which to settle a dispute.
• Arbitration affords parties the flexibility of choice of arbitral institution, enabling parties to find suitable rules for managing their particular type of dispute. In the Queen Mary University Energy Arbitration Survey for 2022, 72 percent of respondents gave arbitration a score of at least 4/5 in terms of suitability, showing that arbitration is seen as the most suitable forum for resolving energy disputes, with London and Singapore the most popular seats of choice.

Conclusion

The necessity of the energy transition will continue to drive investment in renewable energy projects, which we can expect to see proliferate around the globe. These projects face headwinds from the current geo-political challenges and the race for resources - human, material and technological - to support the transition. When coupled with the issues that any major international infrastructure project can face in terms of costs overruns and delays, it is inevitable that renewable energy disputes will arise. International arbitration will often be the selected forum for the resolution of these disputes given its neutrality, enforcement advantages and ability to flex to the particular nature of the dispute.

With thanks to Bea Byrne Hill.