Arbitration: An answer to disputes in the renewable energy sector?
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The growing share of renewable energy in the global energy market creates potential for more disputes, both in terms of investment arbitration and commercial arbitration.
Like conventional energy projects, renewable energy projects are typically capital-intensive, long-term and complicated ventures. Disputes can arise at any stage of the project, from the initial concept phase, through the design and engineering, construction and operational phases up to decommissioning.
Renewable energy projects often involve multiple parties from multiple jurisdictions and often new technologies. The emerging supply and value chains required to support these new technologies with raw materials and components also add to the possibility of disputes arising.
While renewable energy-related arbitrations currently account for a relatively small proportion of the arbitration market, some regions have seen more disputes activity than others.
Spain, for instance, has emerged as a hotspot for arbitration claims under Bilateral Investment Treaties (BITs) concerning renewable energy projects, while Italy has also seen a relatively high number of claims and France may soon see an increase in claims following recent changes to its solar PV feed-in tariff regime.
Most of the Spanish cases were initiated prior to the Court of Justice of the European Union's (CJEU) Achmea ruling of March 2018, concerning the incompatibility of intra-EU BIT arbitration with EU law, and the CJEU's ruling in September 2021 that the Energy Charter Treaty (ECT – an international agreement dating from 1994 that establishes a multilateral framework for cross-border cooperation in the energy industry) does not cover intra-Europe disputes.
As of September 2021, Spain was facing 50 claims by investors in its renewable energy sector, as the country has sought to amend its energy regulatory environment and retract some of the incentives offered to developers of renewable energy projects over the past two decades.
Wind and solar disputes
Wind and solar PV developments have some common features that influence kinds of disputes that tend to arise in relation to these projects.
Very often, a special purpose vehicle (SPV) is at the core of a wind or solar project. This SPV enters into all relevant contracts and procures the permits, licences and subsidies required to develop, build, operate and ultimately decommission the asset.
As such, the SPV will be directly or indirectly involved in a multitude of legal relationships with, for example, national regulators, administrative parties, financing providers, construction and civil works contractors, transport and logistics contractors, operations and maintenance providers and offtakers for the energy produced from the generating asset.
Depending on how the project is structured, it can be outsourced to an EPC contractor on a turnkey basis, or it can be a multi-contract project, where management remains with the SPV, which enters into separate contracts for every aspect of the project.
However the project is structured, disputes can arise in all these relationships and arbitration clauses will feature in the vast majority of contracts, with the exception of financing arrangements, as banks are usually reluctant to enter arbitration agreements, preferring choice of court clauses.
Disputes with administrative parties tend to be reserved for administrative courts, unless the issues concerned rise to the international law level, in which case they may be referred for arbitration under the ECT.
Another area of technical challenge in wind and solar projects is the complexity of calculating discounted cash flow forecasts, based on energy production, demand and prices over long periods.
When calculating this figure, parties need to take into account climate variables that affect solar, wind and hydro-electric power and the role of systems (grid networks), which creates a very complex model for power generation that may be too difficult to explain to project parties and potentially an arbitration tribunal.
Disputes during the construction phase
The risks that typically cause contention in the construction of renewable energy projects are similar to those that provoke disputes in any major construction project – for example, time delays in specified completion dates.
A particularity for renewable energy projects is that delays can be caused by specific factors, such as unexpected ground conditions (especially for offshore wind projects where the nature of the seabed can be unpredictable), material shortages, or other factors such as adverse weather.
Cost overruns and claims for additional payments also frequently arise, as do claims for defects in contractors' performance, differences regarding the scope of works and disputes over responsibility for the design and performance of the works.
Energy projects tend to be more complicated than other construction projects due to the participation of consortia of owners and contractors and the integrated nature of the projects.
Transport and logistics disputes are also common at the construction and operational phases. The wind energy sector in particular tends to involve highly complex logistics and transport arrangements.
For offshore wind farms, special vessels may have to be designed and manufactured to carry components out to sites and onshore wind farms often require roads to be widened or upgraded to allow large pieces of equipment to be transported to remote locations over challenging terrain.
Disputes during the operational phase
Over the past decade or so, the renewable energy market has become more competitive. When the renewable energy industry was in its infancy, projects were heavily subsidised to allow the projects to be built and enable renewable power to be cost-competitive with conventional energy.
Today, however, subsidies for renewable energy have been significantly reduced or withdrawn completely, as the cost of renewable power has achieved parity with electricity produced from oil and gas.
This winding down of subsidies affects margins of OEMs in particular, meaning they less inclined to leave any valid claims aside.
Where defective parts are concerned, for example, in the past parties would agree so-called "premium" maintenance contracts covering long periods (10-20 years). If during the term of the contract a part proved to be defective or wore out, it would be replaced and accounted for under an annual lump sum payment.
Now, increasingly, operators will try to reduce costs by taking on responsibility for maintenance once construction of the project is completed. In these circumstances, it makes a difference to the relationship between the contractor and the operator whether a part needs to be replaced because it is defective, or whether it is simply wear and tear.
Consequently, claims are increasingly being brought in respect of defective parts, specific performance, replacement or damages if the energy output designed for is not met.
These types of claims were relatively rare 10 years ago when the market was more cooperative and there was less pressure on margins. Recently, with the influx of new players into the renewable energy development and financing spheres, and the entry of conventional energy producers into the renewables industry, the atmosphere has become more litigious.
It is anticipated that the sector will see more warranty claims that go down the entire supply chain, where OEMs seek redress from tier 1 suppliers, who will in turn claim against their tier 2 suppliers. And as supply chains become more sophisticated and global in nature, there are likely to be more international cases.
Alternative fuels
Biofuels are still a relatively nascent area of the renewables market and the evolution of investment treaty disputes in this area will largely depend on the regulatory treatment of biofuels.
In addition to the traditional sources of commercial disputes around construction and infrastructure that are likely to affect biofuels projects, there are some specific issues relating to biofuels supply chains that could generate new kinds of disputes.
The qualification of biofuels as a source of green energy varies according to different regulatory regimes and is highly dependent on the circumstances of production. These are more difficult to audit than solar, wind or hydro-electricity projects, as the fuel is shipped as liquid or solid cargos rather than being distributed from the generator to the offtaker via a direct connection or grid.
Buyers and investors are therefore wholly reliant on contractual representations and protections covering the sourcing and production of these fuels.
The emerging hydrogen industry presents similar issues, where the circumstances of production affect the designation of its "cleanliness" as a form of energy and transporting the fuel is more convoluted and opaque than the routing of electricity from a solar or wind installation via a grid network.
Arbitration: The natural forum for renewable energy disputes?
Arbitrators cannot take for granted that arbitration will remain a natural forum for clean energy disputes as it has been for conventional energy.
The arbitration market will need to adapt and may need to make adjustments to the way arbitration is conducted to suit the needs of the renewables industry.
For corporate power purchase agreements (PPAs), which have become one of the dominant forms of contract in the renewable energy industry, it has so far been difficult to adopt arbitration clauses in a uniform manner in contracts, due to the large numbers of parties involved and the fact that offtakers are frequently state entities.
Where the offtaker in a PPA is a state entity, there tends to be a clash between administrative courts and civil courts over which court has jurisdiction, and parties may end up having to pursue their claim in both fora.
Uniform acceptance of arbitration clauses would help solve this issue, however this will be challenging to achieve. An alternative solution could be the introduction of FIDIC-type contracts, which are designed and agreed by the industry and become the norm.
Future disputes in this area may touch on climate change considerations, which could negate the advantage of confidentiality attributed to commercial arbitration in particular, as greater transparency may be expected.
In response to demands for greater visibility of arbitral proceedings, the International Chamber of Commerce (ICC) is incorporating policies to enhance transparency conducted by the International Court of Arbitration, including publishing (largely anonymised) information about some of its cases on its website.
The ICC also intends to start publishing arbitral awards, provided the parties involved agree.
The United Nations Commission on International Trade Law (UNCITRAL) and others are also pushing for more transparency and certain tools that exist within the UNCITRAL rules (and the rules of other international arbitration organisations) may provide useful tools for renewable energy disputes.
Importantly, arbitration offers (in principle) a uniform international forum for renewable energy disputes, which may be particularly valuable in cases involving climate change considerations.
Arbitration practitioners will need to work out how to best present renewable energy disputes to arbitral tribunals to help them understand these complex cases, rather than relying on independent experts appointed by court whose technical evidence may lead to misunderstandings.
One of the major advantages of arbitration is the ability to use party-appointed experts who can be integrated into the proceedings at an early stage and help move the case along.
On the other hand, given the multi-party nature of most renewable energy projects, a significant downside of arbitration is that it is difficult to extend the binding effect of the arbitration on third parties, make a third party notice or join a party to the proceedings.
Arbitral institutions increasingly provide for mechanisms in their rules to make it easier to bring in third parties, however this typically relies on the existence of back-to-back contracts with similar arbitration clauses.
At the recent COP26 conference in Glasgow, lawyers put pressure on delegates to discuss the use of arbitration as a mechanism for resolving energy disputes and introduce this provision into the COP agreement.
While the COP26 agreement stops short of specifying arbitration as the preferred dispute resolution mechanism, it does provide for implementation of voluntary measures by national states that require contracts between states and industry, which can accommodate arbitration agreements.
This article was authored by Marily Paralika, international arbitration partner at Fieldfisher Paris.
