With net zero commitments increasing pressure on the energy industry to move away from fossil fuels, there is a race to market for renewable energy projects.
Whilst renewable energy may be part of the solution for global warming, these projects face their own problems. This can range from inflation and supply chain delays affecting project delivery, to larger disputes between project partners and even policymakers.
To mitigate risks, bespoke and highly complex contracting structures are often used – which often means arbitration is selected as the resolution mechanism should any disputes arise
The renewable energy boom has coincided with unprecedented pressure on global supply chains, caused by COVID-19, the war in Ukraine and competition for materials/components driven by technology demand.
This has highlighted the interconnectivity and fragility of global supply chains, causing huge disruption to delivery of projects around the globe. Whilst the immediate impacts of COVID-19 have now abated, that disruption is expected to continue with the finite number of suppliers and contractors who have the capacity to deliver the products and services required to scale up renewable projects prompting inflation, which is being further exacerbated by the rise in the price of key raw materials, resulting from current geo-political issues.
As these price rises lead to budget overruns and funding pressures, breaches and insolvencies will inevitably arise, thereby fuelling disputes.
Delays too 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 conditions. Additionally, as renewable projects often involve large spaces in green belt locations, they require detailed environmental impact assessments which take significant time to assess.
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.
Much of the technology, design and engineering adopted for renewable sources of energy, is either new and unproven; emerging; or 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 include those with the design development and intellectual property, whilst the testing/operational phase can suffer from defects arising from the 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.
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 unilateral state action that could imperil a project.
With the drive to net zero, we have seen countries offering investors significant financial support in the form of tax breaks and subsidies to invest in renewables projects. However, as renewable energy has taken off, countries have struggled to continue to finance these subsidy regimes. This is evidenced by the wave of claims under bilateral investment treaties across 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 disputes
As large scale renewable energy projects involve high upfront cost and plenty of project risk, it is common to see joint venturing arrangements to share 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 and 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 and/or an unclear allocation of risk in the contract.
To mitigate against these issues, it is vital for parties to allocate risk in the JV agreement by clearly setting out each party’s rights and obligations in respect of performance, defects, warranties and termination when drafting the contract and to include an appropriate dispute resolution mechanism if a dispute arises.
Many energy-related contracts contain arbitration clauses. This is largely because it provides parties with a confidential forum in which to settle a dispute, and produces awards that are more easily enforceable internationally – under the 1958 New York Convention to which more than 160 nations have signed up.
The parties involved are often domiciled in different jurisdictions which makes arbitration a neutral and preferable choice over a particular jurisdiction’s national court process, which may be unsuited and lacking in the ability to deal with complex disputes.
Similarly for claims against the state (which are common in energy sector where there are usually complex licensing and permitting arrangements and significant tax/fiscal considerations), the neutrality offered by international arbitration is essential to investors seeking relief under bilateral investment treaties or other investment protections. Foreign investors are unlikely to want to end up in the local
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 which face 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.