Climate change is an urgent concern. In December 2015, 196 parties signed the landmark Paris Agreement, committing to take action to limit the global temperature increase this century to well below 2°C and preferably at 1.5°C above pre-industrial levels. Energy policy is now well and truly ‘mainstream’ in all the major economies, with a recommitment to the Paris Agreement goals by the Biden administration an evident priority after the Trump years, which saw the US adopt a position inconsistent with that of just about all the world’s leading democratic governments. Despite this global commitment, the latest United Nations Environment Programme (UNEP) Emissions Gap Report shows that the world is way off target – and is, in fact, heading for a catastrophic temperature rise of 3.2°C above pre-industrial levels by the year 2100, even if all current Paris Agreement commitments are achieved.
There is little disagreement that the decarbonisation of the energy industry is critical to achieving the “deep and urgent cuts” to emissions that are needed. At the same time, the energy industry must ensure it can meet increasing global demand, which is continuing to rise. It must also take care that reliability of supply does not suffer – that when the sun does not shine or the wind does not blow, the lights nevertheless stay on. Transition fuels such as natural gas have a major role to play but renewables are recognised as the key to the energy transition challenges the world faces. Electricity generation from renewable energy sources is considered to be one of the three central ‘pillars’ of any successful strategy to decarbonise the power sector, and the Intergovernmental Panel on Climate Change has concluded with a high degree of confidence that all pathways to limit global warming to 1.5°C above pre-industrial levels involve renewable energy sources supplying 70% to 85% of electricity worldwide in 2050.
Accordingly, the energy industry is facing increasing pressure to transition to renewables, not least from shareholders, especially sovereign wealth funds and pension funds. Many companies that have historically focused exclusively on traditional fuel sources are diversifying into the renewables sector. At the same time, the technology-driven nature of the sector offers particular opportunities for new entrants with smart ideas. The sector is expanding and rapid growth is projected to continue: in 2020, 260 gigawatts (GW) of new renewable capacity was installed worldwide and renewable capacity additions are projected to expand by 10% in 2021. Global investment in renewables capacity was US$303.5 billion in 2020 (which is an increase of 2% on 2019 figures). The cost of renewable energy is declining at a significant rate as technologies mature and mass production is enabled – it is now the cheapest source of new power generation in most parts of the world.
Increased investment in renewable energy projects is, therefore, likely to continue for the foreseeable future. The significant infrastructure required, new and developing technologies that are used and the role played by the state in encouraging investment by the use of subsidies, whether through tariff structures or otherwise, all give rise to an enhanced risk of disputes that, if not appropriately managed, could have significant adverse consequences. Depending on how a renewables project is structured, those disputes could impact, among others: (1) companies involved in the development and operation of the project and its underlying technology; (2) investors financing the project; and (3) the sovereign states in which the project is located. Stakeholders could find themselves embroiled in complex legal proceedings involving a multiplicity of laws, regulations and – crucially – business and governmental cultures.
Arbitration has long been the preferred forum for disputes arising out of international energy and construction projects and is a natural choice for disputes arising out of renewable energy projects. Understanding the unique issues that arise in such projects and the protections available both under contract and international investment agreements (IIAs), particularly against state action, plays an important role in mitigating the risk of disputes arising and maximising the prospects of success when disputes do arise. Those involved in renewables – whose background is in the oil and gas world – may be familiar with arbitration, but many – whose background is in technology – will not be. Effective use of international arbitration requires a measure of planning and forethought – the purpose of this report is to assist with that. This report is structured as follows:
- Chapter I introduces some of the main technologies and players in renewable energy projects.
- Chapter II considers the scope for renewables disputes to arise between private players and government entities and explains some of the key protections that exist at international law.
- Chapter III considers some of the unique features of renewables projects which might require special consideration in order to manage and mitigate the risk of disputes arising (or to resolve them efficiently should that prove impossible), as well as some common sources of disputes in renewables projects.
- Chapter IV explains why international arbitration will often be the preferred forum for resolving renewable energy disputes.
- Chapter V draws together some of the lessons learned from our experience regarding key considerations for parties when drafting an arbitration agreement for a renewables project.
- Chapter VI suggests some ‘top tips’, based on our experience of advising and acting in renewables arbitrations, on how the tools of arbitration can best be deployed to prevent delay and promote efficient and effective resolution.
- Finally, Chapter VII considers possible trends in the types of disputes referred to arbitration in the future, and how arbitration might adapt to address them.
Please get in touch with your usual Ashurst contact if you would like a copy of the report. We have also developed a six-part series of podcasts in which we expand on some of the issues covered in the report, which you can listen to here.
