In an article originally published in New Law Journal (subscription required), Mark McMahon and Punam Shah explain why arbitration is the dispute resolution mechanism of choice for issues distinctive to renewable energy projects, and why we can expect to see greater numbers of these disputes in the coming years in Europe, Africa and Latin America.
Renewable energy is not new. It has been around since waterwheels in 2000 BC, windmills in the 16th century and solar systems as early as the 19th century.
Technological advancements and innovation have contributed to the sophistication and commercialisation of the renewable energy industry, with many countries now having solar, wind and hydropower capabilities.
Global demand for and investment in the renewable energy sector is accelerating at an unprecedented rate, and investment in renewable energy projects continues to grow. From 2010 to 2019, investment reached over $2.6tn. Of energy spending in 2021, renewable projects attracted the most at $366bn.
There has been increasing pressure from the public for states, corporates and financial institutions to embrace renewable energy. This is due to significant factors such as climate change and the race to net-zero, and global events such as the Covid-19 pandemic and the Ukraine war’s impact on energy supplies.
Energy companies that focus on finite fuel sources such as oil and gas are now faced with pressure to transition to renewable energy. At the same time, they must continue to meet the increased global demand for energy.
Accordingly, the dispute resolution mechanism to deal with disputes needs to be able to meet the issues distinctive to renewable energy projects: arbitration is already the dispute resolution mechanism of choice.
Key features of renewable energy disputes
Renewable energy projects are large, complex and structured in a variety of ways, usually involving three phases: development, construction and operation. There is a potential for many issues to arise that may result in a dispute at any of these stages.
Potential disputes in renewable energy projects include:
- Joint venture/contractual disputes: expenditure in renewable energy projects is high and for the long term and involves numerous stakeholders. Joint venture or contract disputes may arise between stakeholders off the back of these complex arrangements, which may involve multiple jurisdictions.
- Claims arising from weather conditions: renewable energy projects, for the most part, rely on the weather, which can be erratic and difficult to predict (even more so with the increasing impact of climate change). Since weather predictions cannot go beyond a few days, the renewable industry cannot reliably plan in advance what their supply will be during extreme weather events. Accordingly, who should take responsibility for adverse weather conditions can be a source of tension between the parties. This can result in claims for delay, breach of contract, force majeure and frustration.
- Construction-related disputes: the infrastructure involved in renewable energy projects can be huge in scope and capacity (for instance, off-shore wind farms, large solar farms and hydro-electric dams). Therefore, as with any major infrastructure project, typical construction-related disputes may arise, such as delay claims, cost overruns, defects claims and claims relating to design and performance.
- Technology-related disputes: while progress has been made in the renewable industry, much of it is still in its infancy. New technologies can be untested, which increases the risk profile for parties where they fail to perform as expected. Disputes can occur where new technologies fail to perform to expectations. Parties may be faced with breach of contract, misrepresentation or even negligence claims (see the case of Mt Hojgaard A/S v E.On Climate and Renewables UK Robin Rigg East Ltd and Another  UKSC 59 BLR 477). In addition, as with any new technology, there may be disputes as to the ownership of the intellectual property and licensing rights.
- Investor-state disputes: over the past decade, states have implemented subsidies and financial incentives for the renewable industry, but the price of renewable energy has fallen. Factors such as the Covid-19 pandemic have pushed governments to pursue economic recovery policies that involve reducing and cutting these subsidies or financial incentives. Where states have changed subsidies or financial cuts on renewable energy investment, this will often lead to foreign investors bringing claims under their bilateral or multilateral treaties. Their claims will be directly against the state for breaching the investment protection enjoyed by the “fair and equitable treatment” standard.
- Regulatory disputes: the power industry is heavily regulated. Challenges to various regulators are therefore common.
Arbitration as the preferred choice of dispute resolution
Parties to construction contracts generally choose arbitration over court litigation due to its confidentiality and because it is perceived as more appropriate where the parties and project are based in different jurisdictions. Accordingly, the preferred method of dispute resolution for renewable energy projects is arbitration and contracts governing these projects will usually include clauses to this effect.
In 2020, energy disputes encompassed one of the top three industry sectors dominating the London Court of International Arbitration (LCIA)’s, International Court of Arbitration (ICC)’s and International Centre for Settlement of Investment Disputes (ICSID)’s caseload. This trend is set to continue with fresh disputes arising from the renewable industry.
Arbitration is perfectly poised to handle disputes in the renewable industry for several reasons:
- Arbitral proceedings and awards are confidential, which preserves the information and data behind the new technologies at the heart of these projects. This is a significant factor in a growing industry and will assist with keeping positive change on track to encourage public and private investment in the renewables sector.
- Arbitral awards are generally regarded as easier to enforce than court judgments, and decisions tend to be final. A robust enforcement mechanism is in place under the New York Convention (regarded as the most successful treaty in private international law adhered to by over 160 nations). This is a key consideration for international stakeholders.
- Renewable energy projects typically involve joint ventures between investors or contractors from several jurisdictions. Arbitration provides a neutral and final dispute resolution forum. Also, given that projects involve long-term relationships, arbitration provides a less hostile form of dispute resolution with a faster resolution.
- Parties have flexibility in choosing a panel of arbitrators that have the most relevant technical expertise in the subject matter. In complex disputes involving highly technical evidence, this is critical.
- In cases involving multiple stakeholders, there is scope to consolidate cases in multi-party arbitration either under the terms of the arbitration clause or under the rules of the arbitral institution. This avoids the risk of competing tribunals and inconsistent awards.
- Investor-state disputes are typically by way of arbitration, and bilateral or multilateral agreements will be structured in this way. These agreements protect investors investing outside their home state. If, for example, the state nationalised the investment of a project, they are compensated, which constitutes the fair and equitable treatment (FET) standard.
Specific jurisdictions we can expect to see disputes in are Europe, Africa and Latin America:
- Spain has become the epicentre for arbitration claims under the Energy Charter Treaty (the international agreement from 1994, which established a multilateral framework for cross-border cooperation in the energy sector). The influx of cases against Spain arises from its amendments to its energy regulation and the retraction of financial incentives to renewable energy project developers. As of June 2022, 51 claims were filed against Spain at the ICSID, the Stockholm Chamber of Commerce (SCC) or before tribunals under the United Nations Commission on International Trade Law (UNCITRAL) rules by renewable energy investors. Other similar arbitration proceedings have been brought in Romania, the Czech Republic, Italy and Ukraine in response to these countries’ changes to incentive regimes.
- Africa’s renewable energy market is underexploited and is a potential powerhouse for renewable energy and investment, particularly given its strong supply of sunshine, wind and hydropower. Lead by countries including Egypt, South Africa, Kenya, Namibia and Ghana, Africa has shown great progress in the development of its solar energy markets over the recent years. Despite bearing the least responsibility for the world’s energy-related CO2 emissions to date, Africa is already facing more severe effects of climate change than most other parts of the world. Therefore, growing the use of renewable energy is key to combat the effects of climate change and provide affordable access to energy for the continent as a whole. According to the International Renewable Energy Agency a quarter of Africa’s energy could come from renewable energy by 2030, and over half by 2050.
- Latin America is home to some of the most dynamic renewable energy markets in the world, with more than a quarter of primary energy coming from renewables, twice the global average. Low carbon hydrogen is at the forefront of Latin America’s renewable energy sector with Chile having the ambition to produce and export the world’s most competitive hydrogen from renewable electricity. However, regulation of the industry poses some potential issues in the region. For instance, Mexico, having initially experienced significant levels of increased investment and capacity in renewable energy over the last decade, now faces the prospect of increased state interference in the sector, which could undermine potential for investment on projects.
As the sector rapidly expands and develops, countries continue to invest in the sector and countries’ regulatory landscapes change, there is a significant risk of related disputes arising. The ability of stakeholders to plan for and predict potential disputes is critical in order to effectively transition and avoid the risks that renewable energy projects face.
Decarbonisation of the energy industry is vital to ensure the effects of climate change are stymied. The transition to renewable energy is a positive development and one that provides numerous opportunities.
As energy transition experiences unprecedented momentum and the move into renewable energy increases, the types of associated risks discussed above will increase.
Despite these risks and the significant potential of disputes that can arise, arbitration appears to be well equipped to deal with these disputes.
You can find further information regarding our expertise, experience and team on our International Arbitration page.
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