Winds of change in energy and future disputes

July 2022 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

financierworldwide.com

A combination of increasing climate awareness, the deepening energy crisis and current geopolitical tensions has thrust the clean energy transition to the forefront of global policy. Wind energy, as one of the most efficient and clean energy sources, is a key pillar for this transition and its importance has been acknowledged by governments and businesses alike, which is reflected in large-scale investment and numerous government policies promoting wind energy.

In May 2022, the European Commission presented its REPowerEU Plan, with one of the initiatives being a recommendation to tackle the slow and complex permit process for major renewable projects and a targeted amendment to the Renewable Energy Directive to recognise renewable energy as an overriding public interest. The UK, through ScotWind, and the US, through New York Bight, also held successful record-breaking offshore wind lease auctions earlier this year, with lease fees amounting to just under £700m for ScotWind and $4.37bn for New York Bight. Elsewhere, the Saudi Arabian smart city, NEOM, signed a $5bn partnership with both US-based Air Products as well as Saudi-based ACWA Power to develop what will be one of the world’s largest green hydrogen-based ammonia production facilities, powered by wind and solar energy.

The rapid investment growth in wind power has led to several key developments in the sector, which are important to consider, as these affect the participants and technology behind the latest expansion as well as foretell potential disputes.

Growth in floating offshore wind

Traditionally, as wind turbines were based on fixed structures, they could not be installed in deep or complex seabed locations. Due to technological advancement, however, turbines based on floating rather than fixed structures, known as floating offshore wind (FOW), have now become a reality. This unlocks a greater number of potential locations for wind turbines, including larger and deeper offshore areas with greater and more consistent wind speeds. A recent example of a successful FOW includes the 50MW Kincardine farm in Scotland, thought to be the largest operating FOW, which became fully operational in October 2021.

Increase in investment from traditional oil and gas entities

To battle supply and regulatory pressures in recent years – some exacerbated by the coronavirus (COVID-19) pandemic or global hostilities – major oil and gas entities have turned to investing in renewable energy, particularly in offshore wind energy. This is perhaps because, unlike some newer renewable energy developers, traditional energy developers can leverage their considerable experience and knowledge in, for example, constructing floating foundations through to project management and implementing health and safety policies, to newer offshore wind projects. Further, many such entities have strong balance sheets, which is particularly relevant considering the cost of investing in a wind farm is comparably lower than building many large traditional energy projects. Notably, many successful bidders of the ScotWind auction went to consortia comprising established oil developers.

Change in design of wind turbines

To meet the increasing demand for electricity generated by renewable energy, the turbines used are getting bigger in order to increase capacity – with larger blades and taller towers. A taller turbine with a bigger rotor size can harness faster wind speeds and a larger blade gives turbines a bigger swept area, capturing more wind. In that regard, Danish wind turbine manufacturer, Vestas, announced in May 2022 that it would, in partnership with European Energy, develop, construct and put into operation three V236-15.0 MW offshore wind turbines by 2024. These turbines would be the tallest and most powerful wind turbines in the world. The current prototype of V236-15.0 MW has a height of 280 metres, with a swept area exceeding 43,000 square metres and a production output of 80 GWh/year.

Repowering existing wind projects

Against the backdrop of the first generation of wind projects coming to the end of their 25-30 year life cycle, there is now an upward trend for these projects to get repowered, rather than being decommissioned and returned to their original state. Repowering involves the replacement of the existing turbine with a newer, quieter, more reliable and efficient turbine. Relevantly, the key benefits of repowering include the ability to use existing infrastructure, knowledge of the wind capacity and a record of the conditions on site, thereby lowering overall financial outlays and risk.

Potential future wind energy disputes

There are a number of potential future disputes that may arise in connection with wind energy, which are outlined with consideration below.

Performance and design errors. Generally, wind energy disputes arise in relation to determining responsibility for performance issues and the associated time and cost consequences. Given that wind projects are often highly complex and technical, involving many different parties throughout the construction, operation and maintenance phase, it is not uncommon for performance and design errors to emerge, resulting in projects failing to perform to original expectations.

With regard to wind, two very common failures concern cabling and foundations. In the case of offshore wind, as more sites continue to move away from the shorelines, longer transmission cables will be used, increasing the likelihood of defects or damage to the cables. It is therefore important for contracts to include considered risk allocation regarding seabed conditions in relation to cabling-related defects, as the nature of the seabed might dictate the installation routes, techniques and cable-protection solutions.

Similarly, as turbines in a typical wind farm generally use the same design, a foundation-design defect would normally affect a large number, if not all, of the project’s turbines. Notably, the UK’s Supreme Court in MT Højgaard A/S v E.ON Climate & Renewables UK Robin Rigg East Limited and another considered the failure of the foundation structures of two wind farms. The miscalculation of the strength of the turbines’ foundations resulted in €26.25m of remedial costs, which the Supreme Court found the contractor liable for, despite conflicting design standards being referenced in the parties’ contract. To avoid the risk of inconsistency in contractual obligations, particular care needs to be taken in the drafting of contractual warranties that do not take account of the technical standards also in use by the parties.

Supply issues – raw materials, labour and the rise in shipping costs. Similar to other sectors, the wind energy sector has not been able to escape supply chain disruptions caused by the COVID-19 pandemic and the associated recovery. Supply chain delays have created a shortage of gearbox bearings and turbine components, such as blades, as well as basic logistical items like cranes.

Liability and available relief from supply chain disruptions will likely depend upon the specific wording of the supply contract, particularly those clauses in relation to force majeure, hardship or change in law. To avoid surprises during the term of a supply contract, it may be prudent to consider the addition of clear price escalation or price review clauses in such a contract.

Disputes over licensing, permissions and consents. Wind project development is never a straightforward process, as numerous consents and planning permissions must be sought, often from various governmental bodies, and such projects usually garner a large amount of public attention. Consequently, projects are often delayed or stymied due to strict procedural requirements or local concerns about the impact the project may have. Disputes of this nature may be particularly tricky to navigate, as it is often the case that both legal and political engagement is required to obtain the necessary permission. It is therefore important to ensure these steps are coordinated and consistent to achieve a positive result.

Navigating government subsidies and concessions. As renewable energy projects usually require substantial upfront financial investment to be recovered over many years, governments will often offer some form of financial support in order to incentivise the development of wind energy plants. This may take the form of subsidies or concessions, which are public policy based and therefore may be susceptible to change during the lifetime of any plant.

In such an event, investors may wish to bring a claim against the relevant state, pursuant to contractual stabilisation clauses in long-term contracts or under state investment treaties following a potentially negative change in the state support mechanism. Notably, Spain has faced many claims following the modification of financial subsidies that it introduced in the 2000s to facilitate investments in the renewable energy sector.

The key, therefore, from an investor’s perspective, to mitigating these types of disputes is to structure an investment appropriately from the outset to mitigate any risks arising from a change in state financial incentives. Where investment in a foreign country is involved, it is always important to undertake investment-treaty planning, including considering whether the project could be covered by an investment treaty and whether related treaty protections apply, such a fair and equitable treatment and the protection of legitimate expectations.

Continuing technological developments in wind energy, as well as the shift in global policy and national regulations geared toward the clean energy transition, have together increased the pace and complexity of change in the wind sector, foreshadowing a potential increase in disputes. Nonetheless, through early reflection and careful consideration of these evolving issues, disputes may be avoided at an early stage, or minimised in the event they do arise.

Adam McWilliams is a partner and Catherine Lai is an associate at Quinn Emanuel Urquhart & Sullivan UK LLP. Mr McWilliams can be contacted on +44 (0)20 7653 2052 or by email: adammcwilliams@quinnemanuel.com. Ms Lai can be contacted on +44 (0)20 7653 2049 or by email: catherinelai@quinnemanuel.com.

Adam McWilliams and Catherine Lai

Quinn Emanuel Urquhart & Sullivan UK LLP