Renewables Arbitration – A Perspective From England & Wales

Clyde & Co’s Young Arbitration Group provides a unique insight into international arbitration issues through the lens of young international arbitration practitioners working across different jurisdictions. In this series with Daily Jus, Clyde & Co explore the role of arbitration in renewable energy disputes.

In the UK, the demand for green energy continues to rise in response to national and international geopolitical events, including the government’s binding 2050 net zero targets, strategies to decarbonise the energy sector by 2030 and commitment to offset the impact of the ongoing uncertainty of the supply of fossil fuels. Significant advances in technology have led to a higher volume of the construction of renewable energy projects, which has resulted in renewables accounting for an ever-increasing share of the UK’s energy production. In its Energy Trends Statistical Release dated 27 June 2024, the Department for Energy Security and Net Zero reported that renewables provided for a record high share of 52% of electricity generated by Major Power Producers for the 3-month period from February to April 2024.

As the demand for investment in and generation of renewable energy increases globally, it is important to ensure that careful consideration is given to contractual frameworks including effective dispute resolution provisions.  This article considers the effectiveness of arbitration as a means of resolving disputes in renewable energy projects.

Why Arbitration?

Increasingly, there is an international element to renewable energy projects, whether that be because financers or investors are located overseas, or because the energy generated will ultimately be “sold” to an entity based outside of the UK. A dispute resolution clause that provides for arbitration can be beneficial in these circumstances. Arbitration not only allows for privacy and confidentiality between the parties, -meaning sensitive commercial information relating to a dispute will not reach the public domain-, it may also allow for, depending on the location of the parties and available assets against which to enforce, simpler and faster international enforcement of an arbitral award than of a local court judgment.

When considering the advantages of arbitration specifically for disputes in the renewables sector, there are several reasons why arbitration may be beneficial. Firstly, parties to arbitration have more control over the individual(s) hearing the dispute. In circumstances where renewable power projects will likely involve complex contractual arrangements, new technologies and the associated disputes may be amongst the first of their kind, arbitration may afford parties to a dispute the opportunity to select a tribunal with the requisite technical experience.  Referring disputes to arbitration may also be more expeditious. For example, the LCIA Rules provide for the possibility of expedited proceedings, and the parties can also agree to shortened timetables for the proceedings.  In 2023, the LCIA reported that 14% of its caseload related to disputes in the Energy and Resources disputes sectors.

What Are the Risks?

Whilst the renewables sector undoubtedly provides great opportunities to its participants, it also poses unique legal and commercial risks. At a project development stage, whilst some of the key risks will be akin to those inherent in any construction project such as planning, delays and supply chain issues, renewable energy projects are more vulnerable to delays caused by adverse weather conditions due to the scale, nature and location of the construction. At the outset of any project, the parties should therefore give careful consideration to accurately forecasting possible delays, force majeure provisions and extensions of time for completion. After completion of a project, to begin operations and export the power generated, a grid connection will be required. Parties should ensure that applications to the National Grid are made in sufficient time to avoid costly delays.  

Due to the long-term nature of many contracts in the renewables sector, such as long-term Power Purchase Agreements, changes in laws and regulations could have a significant impact on the allocation of risk between the parties. That risk is further amplified where the contracts include an international element. It is therefore crucial that those risks are given due consideration at the contract drafting stage of a project to ensure that the contract provides adequate flexibility to accommodate any such changes.

In today’s uncertain geopolitical environment, price volatility and its impact on the profitability of a project is a key risk. This is particularly the case in long-term contracts where prices may be fixed ahead of the production of power from the project. Again, flexibility within the contractual framework will be key, and parties should consider whether pricing mechanisms and formulae within a contract should be linked to a specified benchmark price within the market and whether certain “trigger” events should allow the parties to negotiate amendments to the contract.

Permissions and Challenging Decisions

There are key permissions that will be required prior to and during the construction of a renewable power project, as well as throughout the life of the project. First and foremost, planning consent is required before construction can take place. In England, at present, local planning authorities are responsible for renewable and low carbon energy developments with installed capacity of 50MW or less. Developments over 50MW capacity are considered by the Secretary of State for Energy under the Planning Act 2008. However, the Government is considering amendments to legislation so that all applications for onshore wind energy developments are dealt with by local planning authorities, which would ensure consistency of process and decision-making.  On receipt of a planning application, the Government or local authority will consider whether the development is acceptable for its proposed location. Projects for hydropower, solar farms, active solar technology and wind turbines are subject to particular considerations such as flood risk assessments (for hydropower developments), noise pollution, public safety, and landscape and visual impact issues.

Section 4(1) of the Electricity Act 1989 makes it an offence to generate, distribute or supply electricity unless authorised to do so by a license or otherwise exempted. Parties involved in a renewable power project who intend to generate, distribute or supply electricity in the UK will therefore need to seek legal advice to determine whether a licence or exemption is required. If a license is required, an application must be submitted to Ofgem, the energy regulator for the UK.

Under the English legal system, decisions of public bodies can be challenged by Judicial Review – a process by which a court will determine the lawfulness of a decision or action of a public body, for example a decision by a public authority to refuse an application for planning consent. The new Labour Government in the UK has committed to doubling onshore and quadrupling offshore wind capacity by 2030. To achieve this target, the Government has lifted the de factoban on onshore wind farms in England, which has been in place since 2015. The lifting of the ban has opened the doors for new onshore wind farm projects, which could result in an increase in the number of applications for planning consent. Consequently, the courts could see an increase in the number of public decisions being challenged by Judicial Review.  There will also likely be more competition for grid access, and decisions in that regard may be subject to challenge.

Conclusion

The increased demand for renewable power at a global level has led to an increase in the number of renewable projects, meaning the potential for disputes in the sector will continue to rise.

For the reasons discussed above, not least the technical complexity of projects and the novel issues that may be the subject of a dispute, including an arbitration clause in the governing contract may afford the parties an opportunity to deal with disputes expeditiously by a tribunal with the requisite technical expertise and knowledge. Further, the confidential nature of arbitration may be particularly attractive where a contract contains sensitive pricing or other commercial information.  However, with planning and other regulatory decisions being intrinsically part of renewable projects in the UK, the local courts will still have an important role to play.

The series contunues next week with a perspective from China. 

This article was originally published on Daily Jus on Thursday 19th September, with thanks to Jus Mundi & Jus Connect, and is available here Renewables Arbitration Series – A Perspective From England & Wales - Daily Jus