02 September 2021
In the third episode of our mini-series on energy and resources disputes, we shift our focus to Renewable Energy Disputes.
David Wadham, Managing Partner of Ashurst's Tokyo Office and Global Co-Chair of Ashurst's Power & Utilities Practice, Emma Johnson a disputes Partner in Ashurst's London office and Jeremy Chenoweth, Ashurst's Asia-Pac Head of Disputes delve into Renewable Energy Disputes..
David, Emma and Jeremy discuss the key features that are driving these disputes, government involvement and regulation within the industry and how disputes are typically resolved.
The trio also share their thoughts on the future of the industry.
The special report on renewable energy arbitration for Globe Law & Business is available online.
Welcome everyone. My name is David Wadham. I'm the managing partner of the Ashurst Tokyo office and I focus on the acquisition development financing of power and renewable projects globally. This is the series of podcasts on the topic of renewable energy disputes. It's a series in which myself and others will hope to elicit from our market-leading renewable energy disputes lawyers, the lessons that they have learned from acting on such disputes and their tips and tricks for avoiding and managing the disputes.
Today, to give an overview of the topic, I'm joined by two of the best, Emma Johnson, the Disputes Partner in our London office and Jeremy Chenoweth, our Asia Pacific Head of Disputes. Emma, Jeremy, welcome.
Hi, David. Hi, Jeremy.
Great to speak to you. Now let's get to the point. We know that climate change is an urgent concern. We know that de-carbonization of the energy sector is absolutely critical to addressing it and we also know that electricity generation from renewable energy sources is one of the central pillars of any successful strategy in de-carbonization. In that context, investment is surging in all forms of renewable energy for both developed and developing economies, making this one of the most exciting, but also most dynamic, industries to work in. Now as with any fast moving industry, there is significant opportunity, but also significant legal and commercial risk and, inevitably, conflict. That much is obvious from both of your CVs and the number of transactions you're doing in this sector. Emma, if I could just start with you, perhaps, what do you think are the key features of the renewable energy sector that are driving these disputes?
Thanks, David. Well, I think the driver really depending on what technology you're talking about, but there are some common features. The first is that renewables projects involve highly complex, capital-intensive infrastructure. They involve a number of different stakeholders, complex contractual and regulatory interfaces and significant time, costs and policy pressures. And all of that means that disputes are almost inevitable. There's also no standardized suite of contracts for renewables projects as there is in, for example, the oil and gas industry. Renewables projects are based on standard construction documents and they're then heavily amended. And it's those amendments, if they're poorly drafted or made without the consequences really being thought through, that can give rise to disputes.
Another area which is a significant driver of disputes and one that we're seeing increasingly is that the renewable sector involves new technologies and technologies which are relatively untried and untested, and they may be used by themselves or incorporated into other equipment and technologies, and that can lead to problems during commissioning, or even during the operational phase of a project. And we're seeing a fair few disputes arise in that space too.
Hmm. Yeah, thanks. I certainly agree that what we see sometimes is the last contract that was used just being employed for the follow-on project, which is maybe slightly different and people not taking the time to properly adjust the contract. That's certainly an area that can give rise to problems. Jeremy, from your perspective, what sort of disputes are we seeing in the space?
Thanks, David, there are a number of sources of those disputes at the moment. One is one that arises from the very point that you made around the rush to market on these projects given some of the pressure to deliver renewable projects quickly and possibly also in reaction to the global pandemic. Apart from that, a lot of the types of disputes that we see in this industry are part parcel of any construction project. Looking at a construction project as really being broken down into several elements, a development phase, a construction phase, and an operational phase, we're seeing project risk and disputes arising across all of those phases on renewables projects and particularly in the solar, wind, nuclear and energy from waste industries.
So on the one hand, renewable projects are different to any other projects. They have the usual cluster of risk factors that emerge during the development phase which, as you'd know, David, relate to the obtaining of licenses, permissions, or consents, environmental approvals and the like. And delays in obtaining those sorts of approvals inevitably give rise to problems in execution and often they don't really materialize until the point of execution. But in addition to this, there's something really unique about renewable projects and that is the intersection between new technology and our energy market. And Emma's already touched upon that and we'll probably expand on that issue a bit further.
And the other unique feature about these projects is that they are often seen as trophy or flagship projects by governments and organizations that have given very public commitments around energy transition and energy generation targets from renewable sources. And one of my favorite commentators in the field of major project development is a person by the name of Ben Flyvbjerg who is a professor of Major Program Management at Oxford University. And he speaks of the four sublimes that underlie major project delivery, which are a political technology, technological, economic and aesthetic. And what we're really seeing is the emergence of a whole new area of project development pressure point which is a new sublime, if you like, tied to environmental ESG and social license issues, and that gives rise to a whole level of additional risk and political pressure and, importantly, scrutiny around project development.
Great. Thanks. And Jeremy, I mean, I know you operate on an international basis, but you are based in Australia. Do you think there are any sort of specific or unique features of the Australian market when it comes to renewable energy?
Sure. I think there certainly is. The renewable energy market here has probably not benefited from the same level of investment and regulatory certainty as other jurisdictions around the world. There's certainly some very good projects here getting off the ground, but by and large they've been smaller in scale compared to projects overseas. But that's beginning to change. One of the key risks that emerges as a result of some of the regulatory uncertainty is sovereign risk. There was an element of unpredictability around regulatory actions and reactions, and as a result we're finding that contractors are understandably becoming more anxious about taking traditional APC risk allocations. The particular issues that are prevalent here are delays in obtaining approvals from energy market regulators for connection to the grid, delays in the commencement of whole point testing and particularly in the solar sector, and regulatory uncertainty and changes around, for instance, relevant generator performance standards.
And taking that solar industry example a bit further, What often occurs is these delays set projects past the deadline for long periods of time, pushing them into winter months where diminished solar irradiation jeopardizes whole point testing and delivery of projects. These sorts of issues are compounded where there are other factors affecting grid stability and availability. And all of these circumstances are really compounding to create a perfect storm around the manifestation of disputes in these sorts of projects.
Hmm. That's interesting, that government reg angle, I suspect Australia is not alone. I mean, Emma, from your perspective, involvement with government and that leading to dispute, are you seeing something similar from where you sit?
Yeah, definitely. I mean, that is something that we're seeing clients increasingly concerned about, in part due to government reactions to the COVID-19 pandemic. There are some governments that will be pursuing economic recovery policies that involve promotion of renewables, particularly given drops in traditional fossil fuel demand in the pandemic and the relative resilience of the renewables industry. But other governments will be forced to pursue economic recovery policies that involve changing existing subsidies or cuts financial incentives given to the renewable industry, and that will impact projects and investors in those projects. There've been a number of high profile investment treaty claims involving European states in recent years, Spain, Italy are some of the biggest ones, and it's definitely something that we're finding clients are more alive to. And that the key thing really there from our perspective is for clients to be giving real consideration at the outset as to whether their project, the investment in projects, can secure the benefit of investment treaty protection.
Investment treaties are bilateral or multilateral agreements between two or more states. And the benefit of them really is twofold. They provide protections, standard protections, to investors who are investing outside of their home state so that the state can't, for example, nationalized the investment of project without providing adequate compensation, but they also provide a direct means for investors to pursue the states when the project starts to go off the rails. And that's typically by way of arbitration proceedings. So thinking at the outset about whether those protections can be secured in terms of how the project is structured is really, really important and something that we're seeing lots of interest from clients from.
Yeah. I mean, I certainly agree that that government interface, that regulatory one, is a challenging one for renewable projects. I think one of the particular concerns that we see is that the rapidly falling price of renewables means that it can be a challenge for governments to justify projects on a value for money basis. So what one day looked like a good project support, a couple of years later can potentially look expensive because the price of renewable technology is dropping so rapidly. And if the government is locked in a long-term support mechanism that can look out of the market quite quickly, and that tension inevitably can be a source of disputes, I think
Completely agree with everything you've just said. And it is, quite often a source of disputes. And another point really to remember is with the investment treaty protection, they can provide a useful means of leverage when things start to go wrong. Short of engaging in a full blown arbitration, it can be quite a helpful way to engage with the right people, at the right levels in government if that is what is needed to push your project forward and address issues as they arise.
Yeah, that's a good point. Thank you for that. Jeremy, just moving away for a moment from the substance and looking more at the process itself, in your experience, how are these sorts of disputes typically resolved? Is it a matter of litigation or is it arbitration or something else?
David, there's never one size fits all for these sorts of disputes. But typically what we're finding is a lot of disputes in the energy market, and the renewables sector is the same, have been resolved by arbitration. There are some key reasons for this to be discussed in a later podcast, but the main reason is that an arbitral award is more readily enforceable around the world than a court judgment. Many of the major players in the design and construct market on these projects, European contractors, often there's joint ventures between several entities, which might have assets in different parts of the world. And that's one of the reasons why we see inevitably arbitration as being the principle fallback final dispute mechanism in these sorts of contracts. And that's what a lot of contractors and contracting parties are more accustomed to. That said, in a purely domestic setting where international enforceability is not such an issue, then litigation might be entirely appropriate. And that might be the case in Australia, for instance, where the courts are independent and relatively efficient. Now both litigation and arbitration are final forms of dispute resolution.
And the other comment is, they're not always going to produce or address the sorts of issues that are arising on these sorts of projects. And to give one example, and we've spoken about this or touched upon it to some extent, these projects are generating some very significant delays often, which are putting in jeopardy cashflow and putting contractors and the contracting market under some duress. There are often supply chain issues on these projects and the forms of dispute resolution that we've just spoken about are not going to address or rectify those sorts of issues as they are emerging on a project. And therefore the parties really need to be thinking about a more active interventionists form of dispute resolution, a way through. And there are various forms that they might take. They might be embedded within the contract. There's also often, in many countries, statutory rights and adjudication processes under many contracts, and [inaudible 00:13:59] is one. Dispute boards are fairly prevalent and we're finding on government projects in Australia, dispute boards are very active. But the parties shouldn't be caught, maybe, turning their mind to addressing issues as they emerge rather than at the finalization of the project.
Thanks Jeremy. Turning now perhaps to some concrete examples of how these things have played out. Emma, what's the most interesting or challenging renewable energy dispute that you've been involved with recently?
I'm actually involved in a dispute at the moment involving renewables. And the really interesting part of that is that we've been navigating our way through that dispute in the middle of the global pandemic, which to say has provoked a number of challenges would be a bit of an understatement. But not challenges that we've not been able to overcome. Obviously that involves all of the normal limits on face-to-face interaction with our clients, witnesses and experts and to a degree that's easier than enough work around now that we can use Zoom and other video conference platforms.
The one thing that we found particularly tricky, and it's in the context of a dispute which is about some pretty complex technology, is how best to educate the tribunal in advance of the hearing on how that technology works. Now, what we would normally do is have a site visit when the tribunal turns up at the plant. They see everything in place, they see it working, they're given technical explanations by the people who actually work the equipment and technology day in day out. That just wasn't possible in circumstances where various parts of the world are locked down at various times and there are bans on travel. So what we instead had to do was move that to a virtual format. And actually it worked, surprisingly, really, really well. It really is quite impressive what you can do on Zoom these days. Virtual visit, a definitely by no means a replacement for an in-person one, but what we found is that using the right technology and an effective structure in terms of how that technology was presented, the explanations that were given and who they were given by, left the tribunal in just as good a place as it would have been had it actually been at the plant itself in advance to view it. So that was an eye-opening recent experience for me.
Yeah, absolutely. Thank you for that, Emma. Jeremy, what about on your side?
David, unfortunately a common story in, in Australia relates to the still to poor risk allocation and risk awareness and no doubt in part due to the fact that we're dealing still with an emerging industry, to some extent. And it in part relates also to the issue that you raised in the beginning around the adoption of templates or off the shelf contracts and their application to an industry and a technological risk that is really different to traditional delivery of energy projects. We're seeing some spectacular failures of large reputable contractors, unfortunately, in this market that have taken on way too much risk than they can manage or risk that's too uncertain. And a common feature of some of the early contracts in this space would involve, for instance, milestone payments tied to the achievement of certain testing and commissioning and outcomes. And where there are ongoing and significant regulated delays, it's often resulted in contractors having to absorb prolongation costs whilst not receiving cashflow and incurring, at the same time, a liability to pay liquidated damages.
Now, of course, the contract's the first port of call on these issues and evaluating how those sorts of issues should be managed. But irrespective of that, it's always a difficult issue to confront and that often gives rise to a real dilemma in contract administration. I do hope to see that change as we get better at understanding how risks emerge on these projects and how they should be treated.
Thanks, Jeremy. Perhaps just one final question for you, Emma. I know that you've recently, co-authored a report for global law and business on the subject of renewable energy arbitration. It's got a chapter entitled Looking Over the Horizon. Perhaps you can just give us a flavor of what to expect in terms of the future in this space.
Thanks for the plug David. I definitely recommend the book to anybody interested in knowing more of our tips and tricks for avoiding and resolving renewable energy disputes. You can get a copy online, or you can contact us directly if you're interested in receiving a copy.
In terms of the future, I think COVID is going to continue to have an impact in the sector. It's probably not news to anybody, but in terms of what that actually means I think we're looking at more claims involving suspended contractual performance, allegations of force majeure, frustration and hardship, depending on whether civil or common laws are involved. I think we're going to see more companies unfortunately affected by insolvency and that having an impact on project delivery, supply chains, and also all of the similar delay and extension of time and cost claims that Jeremy's been talking about.
I think just to pick up on a point that we raised a bit earlier, the global government response to the pandemic is also going to result in disputes there. I mean, there will inevitably be changes to the existing financial support mechanisms for renewables projects. Some of them will be positive for players in the market, some will be negative and inevitably give rise to disputes or at least the needs to engage on a governmental level that might not be something that clients have had to do previously. And I think to go right back to the very first point that we made, technology and the pace of technology change is going to continue to drive disputes in this sector. And ensuring that contracts keep up the pace in terms of what they provide for, and how that fits in with changes that have happened since the contract on which the project is based was last used, will be really, really important. So really I think there's an array of challenges on the horizon. But from my perspective at least, that's what makes this a really exciting space to work.
Absolutely. Well, thank you, Emma. Thank you, Jeremy. That's all we've got time for. If any of our listeners want to get in contact with Emma, Jeremy or myself, then our details are on the Ashurst website, ashurst.com. If you'd like to learn more, look out for the next podcast in the series where my partner, Michael Harrison, interviews Georgia Quick and Harsh Hari Haran about the common pitfalls in renewable energy projects and how to avoid disputes.
To ensure you don't miss any future episodes, do subscribe now on Apple podcasts, Spotify or your favorite podcast platform. While you're there, please feel free to keep the conversation going and leave us a rating or a review. Until then, thanks for listening.