The recent COP26 Climate Change Conference in Glasgow has reaffirmed that climate change is an urgent concern, decarbonisation of the energy industry is critical to addressing it, and electricity generation from renewable energy sources is one of the central pillars of any successful strategy to decarbonise. In that context, investments will continue to surge across all forms of renewable energy, in both developed and developing economies, making this one of the most exciting and dynamic industries in which to work.
As with any fast moving-industry, there is significant opportunity but also significant legal and commercial risk. Whether as a result of changing regulatory landscapes, adoption of new technologies, or the perennial challenge of managing time and cost on major projects, the scope for dispute between industry players is significant.
The precise nature of these disputes of course varies across different types of technology, different project structures and different project locations. That said, certain key themes are discernible. This article highlights the five most common types of construction and construction-related disputes that the authors have observed in their experience and offers some suggestions as to how these might be avoided or managed.
1. Performance issues with new technologies
Renewables projects often involve complex, and sometimes pioneering and relatively "untried and untested", technology (or, at least, existing technology being put to use in a new, larger or more arduous operating environment, or by a party to whom it might not be completely familiar).
It is relatively common on renewables projects, therefore, for that technology not to work as intended. When that happens, disputes inevitably follow. Depending on when the relevant problem is discovered, disputes might arise in respect of construction completion regimes, commissioning and performance testing regimes, post-completion defect regimes, or operation and maintenance regimes (including, for example, availability guarantee regimes). In all of these scenarios, there is scope for disagreement as to responsibility for the performance issues and the time and cost consequences. This is particularly pronounced on projects where the designers, equipment suppliers, construction contractors, and/or operation & maintenance contractors are different parties – the rush by each to blame the other's design/installation/construction/operation/maintenance is as predictable as it is on any major project.
Managing and resolving such disputes is difficult largely because of the exceptionally technical nature of the underlying issues. Discerning what caused the problem is often a matter of complex scientific or engineering expertise, sometimes in very niche or nascent areas. It is no surprise then that one of the most effective strategies for dealing with such disputes is obtaining relevant expert input as early as possible. In the authors' experience, the more independent the input the better. An honest, third-party appraisal of your position allows you to assess prospects and, if possible, encourage early settlement of the dispute. Using "hired guns" who tell you what you want to hear or internal project teams incentivised to save face is counter-productive in this context, tending only to prolong disputes.
2. Disputes over licensing, permissions and consents
Like most major projects, the development phase of any renewable energy project involves obtaining licences, permissions or consents required for the construction of the project. These might include, for example, relevant environmental assessments, planning consents, regulatory consents, land use agreements, and permits to transport large items of equipment.
Clearly the project cannot proceed without securing the required permits but this is often not a straightforward process. This is especially the case for renewable energy projects because they are typically in remote, green field locations, often require a lot of space and can have environmental impacts which may be uncertain or difficult to assess (windfarms being a prime example). Those kind of difficulties can lead to delays in obtaining approvals and, as a consequence of those delays, disputes all along the contract chain as deadlines are not met and expectations frustrated.
Those disputes become particularly challenging and complex because of the "trophy" or "flagship" nature of these projects for governments trying to meet net zero targets. This introduces a political dynamic and level of public scrutiny that often doesn't exist in other types of projects at this phase. More often than not, this prolongs rather than assists in the resolution of these disputes.
The only proactive way to address these kinds of disputes is significant forward planning and due diligence before committing to the project. Time must be spent upfront understanding what the regulatory and legal landscape is for your prospective project. That means knowing not only what permits will be required for a project but also when they can expect to be received, what conditions might be imposed upon them, and what rights you might have (and how easily those rights might be enforced) if your permits are delayed, denied or later amended.
3. Delays in connecting to the grid
Many renewable energy projects involve independent power producers (IPPs) supplying electricity to a national grid. This necessarily involves a technical interface between the IPP's power generation infrastructure and the grid (via associated infrastructure such as switchyards, substations and transmission lines). As the grid is usually owned and operated by a separate (often state-owned) power utility, this also involves a legal and commercial interface between the IPP and the power utility, usually by way of a connection and/or power purchase agreement (PPA).
In many jurisdictions, achieving connection to the grid is a complex process and one of the biggest sources of delay in getting any project up and running. Attempts to connect are often beset by delays in regulatory processes, difficulties in obtaining the modelling information necessary for design and connection, delays in the construction of connection infrastructure (often the responsibility of utilities), mandates by power utilities to modify or upgrade equipment, and consequent delays in commissioning processes. This often produces disputes as to who bears the time and cost consequences of these events, particularly where risk allocation for them has not been specifically or clearly addressed in the construction contract and/or PPA. These issues can be exacerbated in some jurisdictions by concerns about the negative repercussions of seeking to enforce rights under a PPA with a state-owned entity.
The risk of such disputes is something that should be front of mind at the time of drafting the relevant construction and connection/power purchase agreements. Understanding the risk of these events and very clearly defining roles and responsibilities in relation to them is crucial.
4. Raw material price/supply disputes
Another area in which we area fielding inquiries is equipment suppliers demanding increased prices on the back of alleged increases in the price of raw materials, typically arising out of supply chain disruptions.
Some supply contracts may have a price escalation or price review clause which operates where there has been an increase in input prices. The operation of these clauses is usually straightforward and including them in a contract is one way to avoid surprises during the term of the contract (and avoid disputes). However, in the absence of a price escalation or price review clause the question is whether there might be some other way for a supplier to pass on a price increase.
One way might be if a force majeure, hardship or change in law clause in the supply contract is engaged. This will obviously depend on the reasons for the price increase and the relief available under the relevant clause. Another way might be if there is some applicable sale of goods law that applies in the relevant jurisdiction and permits the price increase to be passed on.
In practice, though, we typically are seeing parties willing to take a pragmatic and amicable approach to resolving supply disputes arising out of supply chain disruptions, perhaps reflecting the repeat nature of business in this sector and the resulting need to preserve relationships. Whatever the scenario, early engagement and open discussion of these issues is to be encouraged.
5. Adverse government action
Renewables projects generally require very significant upfront capital investment. To attract that investment governments have offered a variety of support mechanisms, primarily in the way of subsidies/attractive tariff arrangements. Subsidies and other support mechanisms, however, are inherently political and therefore renewables projects over their lifetime become very vulnerable to changes in the political wind and resulting changes in regulation. These changes are not uncommon and may be prompted by the decreasing cost of new technologies over time (affecting the level of support that governments can reasonably offer) or as a result of financial circumstances (such as happened in the wake of the 2008 global financial crisis, with numerous European countries retroactively reducing the financial support afforded to investors in solar PV projects).
Changing these support mechanisms can very easily alter the economics of the project, making a project that was initially very attractive, completely unattractive. States who have done so have very quickly found themselves defending claims from investors, whether under bilateral or multilateral investment treaties (like the Energy Charter Treaty) or pursuant to contractual stabilisation clauses in long-term contracts between the investor and the state or a state-owned entity such as a concession agreement or PPA.
The key to managing these disputes from an investor's perspective is effective investment structuring from the outset. As well as pushing for contractual stabilisation clauses in contracts with states or state-owned entities, this means proper investment treaty planning – things like establishing a chain of ownership to an entity registered in a jurisdiction that is a signatory to a relevant treaty, considering which particular corporate nationality and treaty offers the best investment protection, checking specific wording of the relevant treaty to ensure that the protections will apply, and investigating whether it is necessary to establish more than a brass plate or a shell company. All of this should be done before the investment is made. Changing nationality or inserting a company in the chain of ownership part way through the investment risks arguments from the state that the dispute was foreseeable or on foot when the change was made and the claim is therefore an abuse of process.
Rob Palmer - Office Managing Partner, Ashurst Singapore
Michael Weatherley - Partner, Ashurst Singapore
Note: This article is adapted from Ashurst's renewable energy disputes podcast series (available here) and its Special Report on 'International Arbitration of Renewable Energy Disputes' published by Globe Law and Business (available here).