The Viewpoint: Navigating Arbitration in Renewable Energy Disputes

Governments across the globe are making ambitious efforts to address the predicaments caused by the disastrous effects of climate change, particularly in the form of transitioning to renewable energy. These efforts aim at achieving the shared core obligation as decided by the Paris Agreement, of limiting global warming to well below two degrees in comparison to pre-industrial levels. The various commitments announced at the recently concluded G7, Leaders’ Summit on Climate Change, G20, and COP26 are a manifestation of a global search for greener alternatives.

The risks underlying the construction phase are similar to those presented in any construction project, with the overarching risk being possible delays to the contractual completion date, and cost overruns.

Disputes often deal with differences of opinion on the scope of obligations, or a party claiming unforeseen conditions (i.e., Force Majeure) leading to a specific delay. For instance, during the Covid-19 pandemic, Article 79 of the Convention on International Sale of Goods [“CISG”], providing for exemption of liability on account of unforeseen circumstances was often invoked, to refute claims of delays and non-performance of the contract.

In the wake of amplified pledges by states to move towards cleaner forms of energy, there is likely to be an increase in contractual disputes. This is a credible concern since renewable energy projects are characterized as long term and capital intensive, involving cross-border participants. In the quest for a greener future, mega capital flows to this sector, along with legislative changes to the regulatory regime of States, have fueled disputes. Countries such as Spain, France, and Italy have resorted to arbitration of renewable energy disputes.

There are primarily three stages of a renewable energy project i.e., the development stage, the construction stage, and the operational stage. Within the development stage, the subject matter of the dispute pertains to financing/procuring investment and obtaining permissions/licenses needed to commence the project. Under this stage, invoking arbitration is quite unusual, apart from disputes that fall under the realm of International Investment.

The risks underlying the construction phase are similar to those presented in any construction project, with the overarching risk being possible delays to the contractual completion date, and cost overruns. Disputes often deal with differences of opinion on the scope of obligations, or a party claiming unforeseen conditions (i.e., Force Majeure) leading to a specific delay. For instance, during the Covid-19 pandemic, Article 79 of the Convention on International Sale of Goods [“CISG”], providing for exemption of liability on account of unforeseen circumstances was often invoked, to refute claims of delays and non-performance of the contract.

At the operational stage, the focus is on performance and delivery, with the end goal being to achieve the maximized output of the plant to ensure optimal profitability of the project.

While renewable energy projects are a step in the right direction towards a greener planet, their peculiar and specific nature has stirred disparate legal conundrums.

Investments in green technologies are a sine qua non for the fight against climate change; however, investors view the green energy space with scepticism since such technologies are still in their nascent stage. Foreign investments, which are largely in the form of Bilateral Investment Treaties (BIT’s,) and Regional Trade Agreements (“RTA’S), are aimed at boosting investor confidence by minimising the risk of an uncertain environment. Nonetheless, Host States switching to cleaner fuels have led to major regulatory changes causing volatility and unpredictability in renewable energy markets. Such changes have been met by stark opposition, as investors have frequently claimed for a breach of minimum standards of protection such as the Fair and Equitable Standard (“FET”). ICSID figures point out that at least 20 cases in 2015 pertained to claims arising out of legislative changes made to the renewable energy sector. The increasing number of such claims could weigh down heavily on climate change considerations and have a ripple effect on domestic regulatory space. Inevitably, there is a need to balance the interests of host states at the backdrop of investor expectations.

Host States could minimize the risk of measures conflicting with investor expectations by ensuring regulatory transparency. For ensuring due regard to environmental considerations, it would be prudent for states to incorporate references to climate change obligations. The 2018 Netherlands Model BIT refers to the Paris Agreement, allowing for Host States to justify regulatory changes based on climate change considerations.

Renewable energy disputes generally involve complex and intricate considerations, and thus it would be incumbent on Tribunals to have at their disposal, technical expertise for the efficient resolution of such disputes.

Parties should adopt the procedures as under International Commercial Arbitrations for the appointment of experts, as they provide greater flexibility than national courts where independent experts are appointed by the court itself. Under the International Chamber of Commerce (“ICC”) Arbitration Rules, parties are free to appoint experts as arbitrators, or even independent experts to assist the arbitration.

Renewable energy arbitrations being inherently of an integrated nature and involving cross border, participants magnify the difficulties of subjecting third parties to an arbitration agreement. It is pertinent to note that Arbitral institutions are increasingly adopting rules to subject third parties to arbitration. For example, Article 9 of the ICC Arbitration Rules expressly allows for claims arising out of more than one contract to be made in a single arbitration. The caveat, however, is that parties would have to specify for arbitration as a recourse in all ancillary contracts.

While confidentiality concerns preclude the disclosure of information to a third party in commercial arbitration, public interest considerations trigger greater transparency requirements in arbitrations governing renewable energy disputes, which can give rise to a conflict of interest.

In light of this conflict, the industry should seek to reconcile the opposing interests using international models. The United Nations Commission on International Trade Law Model (“UNCITRAL”) recently revised its rules to allow for the publication of parties’ submissions’ and tribunals' awards, orders and decisions subject to interalia, law enforcement, integrity of the process and security interests.

Similarly, under the rules of the ICC, parties can consent to permitting public disclosure of certain information that relates to the proceedings, and this will ensure that renewable energy arbitrations remain both transparent and private.

Power Purchase Agreements (“PPAs”), currently the predominant form of contracts in the renewable energy industry, suffer from lack of uniformity in their arbitration agreements. By virtue of these agreements, state parties often contract with producers for the purchase of power at pre-determined prices. The involvement of state governments frequently leads to a clash between the jurisdiction of administrative and civil courts. In the absence of uniform arbitration clauses, parties are placed in the onerous situation of having to agitate their claims in both fora. In order to address such issues, interested stakeholders may consider setting up an industry standard with uniform arbitration clauses in PPAs. For instance, FIDIC contracts as drafted by the International Federation of Consulting Engineers, serve as a standard in the construction sector. The inclusion of such pre-determined and uniform arbitration clauses will be a crucial step to ensuring uniformity, stability and predictability in renewable energy disputes.

It is evident that several concerns plague the process of arbitration in the renewable energy space. While some of these challenges can be tackled from within the institutional framework, others may require an inherent structural change. A sceptical environment for investors would render the goal of achieving climate neutrality an exercise in futility. The number of claims due to changes in the domestic renewable energy regulatory space is testament to the fact that states must rethink and reshape policies in the energy sector. Governments must strike a judicious balance when framing renewable energy policies to entice foreign investment without undermining climate change efforts. This can only be achieved if Host States become more conscious of their commitments towards investors when designing and implementing renewable energy policies.

Mohit Kapoor is Founder & Senior Partner, Universal Legal. The author would like to thank Avantika Mehndiratta for the assistance rendered on this article.