Risk Rewired – The Energy Disputes Podcast - Episode 1

Speaker

Transcript

Jessica Evans,

Partner, Burges Salmon

Hello everyone thank you very much for tuning in and a very big welcome to this first episode of Risk Rewired the energy dispute podcast from Burges Salmon. Over the next few weeks we're going to be delving into all things relating to energy disputes we're going to be joined by experts from our energy team, as well as some of the leading industry professionals and together we're all going to be looking at the life cycle of an energy project, exploring how and why disputes arise and also looking at some of the options for mitigating and avoiding risk. My name is Jess Evans and I'm a partner in Burges Salmon's fabulous energy team where I focus on construction and engineering disputes, and I am your host for today's episode.

So in today's episode we are looking at the inception of an energy project and specifically what we're going to look at is some of the key issues that crop up during the project negotiations as well as how to go about identifying solutions for mitigating risk at that very early stage. I'm joined today by two of my colleagues from the transactional energy team we have Laura Sharples who is a director in the energy construction team and Alec Whiter who is a partner in the energy projects team. They've each acted on dozens and dozens of energy deals involving a whole host of different technologies, so they really are seasoned expert when it comes to identifying practical solutions for managing risks at the outset of a project. Laura, Alec welcome to you both.

So Risk Rewired it's the energy dispute podcast but of course neither of you are actually dispute lawyers do you want to start by telling us a bit about your particular practice areas and also what's keeping you busy at the moment. Laura do you want to go first:

Laura Sharples, Partner, Burges Salmon

Sure so I focus on the negotiation of construction and maintenance contracts for energy projects so that's Net Zero a lot of battery solar but also energy from waste biofuels etc.

Jessica

Thank you Laura, yeah so plenty going on there lots to keep you busy and Alec

Alec Whiter, Partner, Burges Salmon

Thanks very much Jess so I'm energy projects partner who specializes in the off take arrangements for energy assets so of sale of power root market agreements power purchase agreements but also the regulation and monetization of energy assets generally so that includes networks, electricity supply companies, major energy users and of helping clients across the energy sector put in place contractual arrangements to monetize their assets or manage their energy risks. Right thank you both we clearly are in good hands today.

Jessica

So this is our first episode of Risk Rewired, we are concentrating on energy project negotiations and that seems to be a pretty good place to start when we're looking at options for mitigating risk. Alec perhaps if I come to you first and then maybe Laura can feed in. In your experience what are the what are the most sort of common risks that parties focus on during their energy project negotiations and what do you do in terms of sort of supporting your clients who sort of to resolve them.

Alec

That's a really good question and a tricky one to answer I think from my perspective obviously part of the analysis around what the likely issues will be is slightly technology contingent and what that project relates to so sort of is it fuelled is it not fuelled what is it going to do in the future but I think a general theme that runs through all of the contracts that I typically advise on are certain key issues that will always be debated and that will flow right through the supply chain and those kind of I classify as delay so we will all want the project to come online by a certain time and that can be for lots of reasons but particularly where there might be a revenue flaw for a battery project for instance or another energy project and or there is a fixed price for the output of a project from a set date and or the generator has got a contract for difference that might kick in by a certain date.

One of the issues that will always rise is well what happens if they're late how does that flow through and affect the project economics and therefore how does that risk get flow down to the extent possible in the construction documents and then link to that and I think Laura might cover this on in a bit more detail is force majeure and what risks is each party taking on with regards to the force majeure do they get extension rights or not and how does that flow through the contract. I think the next one sort of is commissioning requirements and the design of the project so what's under the offtake contracts for instance does the project need to be able to do in order for it to hit the commercial operations requirements in that offtake contract and accrue either the fixed price or the revenue floor or effectively the full benefit of that off-take contract.

Now that will be very specific to the type of project and its technology but there is a lot of risk around the interface between the two contracts and making sure they talk to each other so that's sort of EPC construction as against offtake contracts and also around the that everyone is aligned on what that project should be doing now that might seem like a trite comment but in relation to solar and wind is more obviously aligned but for new and more emerging technologies such as batteries or waste energy project or other waste to PX projects etc there is a much greater importance in terms of what we're expecting that project to be able to do and the product that it is going to deliver. So another good example might be SAF and sort of those projects and the refinement of the fuel and the grade of fuel that's going to be produced and the volumes.

Sorry Alex sorry I'm interrupting you immediately can you just remind me and also our listeners what we're talking about when we talk about SAF yeah apologies three acronyms are a bane of this industry SAF means Sustainable Aviation Fuel, and is an area that others within the energy projects team are doing an awful lot of work on at the moment and it is a key area of government policy interest but around that what is what is coming to the floor is effectively try to make sure that people are happy not just with when the project is going to be operational and what we need for it to be operational classified as operational under the contracts but also effectively long term what it's going to do because if there is a gap there that can have quite material issues separate to what I'm going to come on to which is around things like performance availability and performance guarantees.

So then the next point is then performance guarantees and performance availability so commonly we will have in any off take contract a a concept of a liquidated damages regime around effectively the availability of that energy asset to either generate electricity or produce sustainable aviation fuel or produce heat whatever the energy product that is intended to be produced by the generation asset. There will be the off-taker will want some sort of certainty or comfort so that asset is going to produce over the long term a sufficient volume of the required product to reflect how it is priced that contract and if there is a shortfall that will commonly be dealt with via in the short term potentially some imbalanced payments but kind of longer term there will usually be principles within the contracts dealing with effectively liquidated damages or compensation to top up the off-taker for the lost product it would have got if the generation ass was fully performing and equally that will then flow down into the construction contracts and be a key area of sort of negotiation and interface risk.

Then the final one for me and apologies I've been talking too long is change in law and sort of I think that's one of the common areas at the moment that we are really discovering particularly in the energy sector in Great Britain mainly because of the constant and evolving regime from a regulatory perspective we have got numerous reforms being proposed to grid connections and actually as a result of REMER so the review of electricity Market Arrangements at the kind of the complete review of markets in Great Britain and how the electricity Market in Great Britain works that is leading to a lot more contemplation of change in law clauses and crudely and borrowing from Donald Ronfield dealing with the known unknowns and also the unknown unknowns and allocating those risks between the parties because it is incredibly important for both the developers but also limited recalls funders who are starting to ask questions around this and probe the certainty of those projects.

Jessica

Thank you Alec it's really interesting in terms of the points that you see as um going to be key do you do you feel that your clients and you are aligned in terms of what they anticipate are going to be the risks or is there frequently sort of an education piece for both sides so clients saying yeah but this is the commercial point which lawyers need to be very aware of in a drafting and this is the legal points that you're then sort of turning to the clients for. I would say in most cases clients and lawyers are typically aligned but what we are seeing and sort of try be trying to reflect that in the drafting but what we are seeing is the continually evolving picture of that that kind of the regulatory change.

Therefore it is a really live topic in terms of changing the drafting or changing that risk allocation and the other thing that we're seeing is just the level of innovation in the energy sector and the technologies that are coming through and the constantly changing proposition of some of the technology providers means that there are always a level of debate and discussion between the lawyers and clients around things like availability guarantees and what people are prepared to offer because effectively the security of the technologies as they mature is becoming greater and some of the contractual terms are becoming better but equally what we're seeing is there is an awful lot of competition in the market and therefore some contractors are taking a more robust approach to what they prepared to offer thank you okay so interesting times in there we really um it's interesting that you are see sort that evolution.

Laura anything to add sort of on the construction side of the documents.

Laura

Sure so I guess a lot of the a lot of the issues are the same a lot of the the most negotiated points are the same simply because in order to achieve the results that are needed for the off-take agreements you need to be considering the same issues and flowing them down to a third party and including that in the construction document so that's what are you going to do with your thing and when do you want to start doing that thing. Well that's you know that's your starting point and you're flowing it down into your construction contracts and the tension there is that employers are wanting to cover off as much of their risk as they possibly can in terms of the liquidated damages that Alec talked about the penalties for late delaying start up etc so they're trying to flow it down to the construction contracts or the technology providers and the technology providers are saying look I know hang on I said I'd give you this piece of kit and it would do these things but I'm not here to underwrite your project by way of bankrolling your liquidated damages so it's you have you have the argument once in your project docs and then you have the same argument but from a different angle in your construction contract so a lot of those issues are the same.

I guess there's also construction phase risks which wouldn't have been touched upon and actually Alec mentioned force majeure and we do see a lot on force majeure and you see kind of other allocation of risk for other uncontrollable events and that might the flavour of that might change but the discussions often stay the same and so you know a couple of years ago it was what do we do about disruption caused by Covid, that's fallen away a bit more now and it's about what happens about disruption caused by the events in the Red Sea and I think the answer is often the result you come out with is different but the answer in terms of negotiation is the same which is engage with the practicalities what worked two years ago in your contract might not work now because the practicalities of this project and of what's happening in the world are different encourage people to work through real life if events and examples and think about what might happen what could the impact be and what is the fair outcome in terms of how that risk is shared. I think quite often people are talking about these concepts and they haven't really engaged with the practicalities of in real life what's it going to mean for this project and so it's I think our job is almost to kind of facilitate that thinking a bit further working out worst case scenarios and then memorializing whatever is agreed in the contract.

Jessica

I love that I love the idea of the fact for a start that the evolving nature of these contracts means that we've always got a job so that's good it means that the templates aren't going to always work from the for the client purposes. All right then so we've touched on a little bit of this I'm really interested we we're seeing an awful lot of change and pressure in the market at the moment which I assume and no doubt you'll be able to correct me I assume that's impacting the risk profiles that that we're seeing and also some of the negotiation dynamics again it might be that we've already touched this in terms of the context for example force majeure but in what ways do you see the market shifts influencing negotiations and how does this sort of shape your client's approach.

Laura

Can I jump in on that one.

Alec

Please do.

Laura

So a big thing that we're seeing or I'm seeing and it's kind of started to happen over the last couple of years is there's because of this innovation that Alec was talking about and you've got these new technologies and you've got new ways of using old technologies and so all sorts of people it's all being thrown up in the air and contractors and technology providers are operating in different areas to where they might traditionally have been and something really interesting that we're seeing coming out of that is that you've got people from oil and gas backgrounds coming into negotiations in the same room as people from renewables backgrounds and they bring with them these ideas as to what a risk profile should look like and where the red lines are and I think something that probably everyone is guilty of to a greater or lesser degree is sometimes you haven't examined for some time the reason that you have these red lines or the profile that you're looking for and so something you know as an example knock for knock indemnities which may put they're a really good neat solution they make perfect sense in the context of offshore massive complex projects with huge risks and outcomes that are completely disproportionate to the value of the contracts perhaps involved makes sense in those in those scenarios but bringing your project onshore and bringing fewer contractors think about what the actual you what's the worst that could go wrong on a solar farm bringing your oil and gas concepts of risk into negotiations might not be helpful and I think it's been really interesting there's shifts on both sides and it's a great opportunity to take a step back look at the positions that you've traditionally been adopting in in negotiations and test whether or not they are still the right and relevant and appropriate position so I think that's it's actually is a time of disruption and that's always a time of is an opportunity to analyze and learn and develop your practice so it's actually it's been really interesting seeing that happen.

Jessica

Okay all right so new players causing us to rethink old methods. All right then so looking again sort of at risk we're really Keen in terms of the purpose of energy disputes to try and manage risk and look to mitigate risk from the outset can you think of any times where an unforeseen risk has materialized perhaps during mid negotiations and again the sort of strategies you and your clients have utilized to be able to try and steer your way through it. Don't know if either of you can got any thoughts on that one?

Alec

Not specifically I think the one thing I would say is that in general at the moment what we're seeing is and I alluded it to earlier actually an awful lot of time being spent on thinking through the proposed changes the regulatory reforms and how that might impact project projects going forward.

So a great example is sort of potentially a project in the North of Scotland that otherwise might be economic but if for instance we have no to law zone or pricing so a breakdown of the day ahead electricity price within the UK and any electricity price with in the UK to multiple clearing prices across different geographic areas suddenly it it changes the economics of the project quite materially and that is leading to people to looking at the change in law risk allocation under all contracts to a much greater extent now a lot of these are known when people go into the contract negotiations as with the same the technology solution and what can be what is being offered but what we're finding is that given the constant updates and refinements to what is being proposed inevitably there is usually a process halfway through the negotiations where everyone looks again at what has been being proposed or reformed to try and deal with the issues that are coming out of the ongoing changes.

Apologies that's not immediately direct response to your question but I think it alludes to the issues that all of our clients are currently grappling with which is the flux of change and the rate of change is really quite material and staying on top of it and trying to address that risk in your contracts to a way that works for you, works for your contractors and works for potentially limited recourse funding is an increasingly hard task.

Jessica

Thank you Alec I mean certainly when looking at from the other end I mean the question was sort of very much posed at the purposes of the front end of the contract the early end but I suppose when the clients are coming to us then are the dispute lawyers saying this just isn't working for me the project economics are no longer there this doesn't work we are then as dispute lawyers immediately turned to the termination provisions what are our rights here, what are the opportunities here, what pain are we going to take here, so presumably that is again sort of something that you guys at the front end of the drafting termination provisions are always going to be a key one does that sound about right?

Alec

Yes absolutely.

Jessica

Yeah lots of nodding there that's good news. All right then so most of our clients and I do say most not all of them they're going to prefer to avoid disagreements with their counterparty on their energy projects I do have the odd few who seem to absolutely revel in the opportunity for a good bust but they are very much few and far between in what are the key clauses that you tend to include in your energy project contracts to pre-emptively address and try to prevent potential disputes down the road Laura is that one for you?

Laura

Yeah sure in the construction contracts essentially you've got a thing that you want to build and you've probably got a deadline by which you want to build it so you just want to flush out the disputes as soon as you possibly can and I think a lot of what the drafting that we're putting in is there to encourage getting everything out on the table resolving it and moving on so there's various kind of early warning obligations we put in these regular reporting triggers and some kind of level of detail in terms of what is to be reported on.

Then there's slightly more I wouldn't say draconian I was going to say that but there's a bit more of a stick as well which is time bars look if if you haven't told us that this thing is happening within a certain amount of time having discovered it, you're not going to get relief or the relief that you get is going to be it's going to be reduced according to the delay that you've um the delay in reporting so you kind of coming at it from both angles to squeeze out the circumstances around the potential dispute and then you've got this kind of sometimes this soft escalation where you go through senior managers and kind of try and just resolve things practically before it turns into this nuclear option of pressing go on a proper dispute. I wholly recognize that in terms of what we see at our end I think one of the really particular points of energy disputes is actually the parties for a variety of reasons really don't want to get into a big bust up and particularly a big bust up which means the end of the project either practically or contractually so those opportunities to avoid that to build in these triggers to build in these opportunities to avoid.

I absolutely recognize that from the sort of dispute side yeah and I think and that it is you know when you look at a construction contract it's for a limited period of time but then you've got your operation and maintenance contract most often with the same contractor or a related entity so you're at the beginning of a 20-year relationship you don't want to all fall out over an extension of time claim in year one so yeah totally. d it at all or if it is going to happen then to try and mitigate the impact.

Jessica

I suppose actually just the very nature of the energy projects It's not unusual to have other contractors based in other jurisdictions, or you're going to have technology or you're going to have parts you're going to be coming from various different parts of the world so again I mean I've seen because of that probably more of a prevalence for if they are going to go to a big bust up and proper tribunal. I seem to see more the arbitration in terms of the preferred form of dispute resolution but does that reflect your sort of experience and what you're seeing.

Laura

Certainly for me that's the advice I would give is if it's going to have any kind of cross boarder element then I think arbitration makes sense and parties from different countries are familiar with that and can get comfortable with that so yeah that's absolutely and then Alec and I are quite often comparing notes to try and ensure that the dispute resolution regime has flowed through a whole of contracts across a project but that it has to be its own discussion I think on a case by case basis.

Jessica

Which leads me very nicely in on to probably my next question then so do you think parties and let's be fair advisers as well do they give sufficient attention to the dispute resolution provisions and you can probably guess what answer I want of this as a dispute lawyer.

Alec

I think no one wants to think about the worst case scenario and that will inevitably find itself through the draft even with lawyers who will be generally have a prevalence to think about the worst case scenario so I think people do think about it in terms of how they want disputes to work and sort of the escalation process and also as Laura was talking about making sure that there is to the extent possible alignment in all of the forums for disputes and governing law but beyond that and sort of whether expert determination features or the other processes, I probably agree with you I think I think there is a general desire within people to sort of go through it but not potentially consider all the ramifications of what is being put in the document.

Jessica

Laura do second that?

Laura

It's not very sexy is it like you know you can have you really get stuck into a conversation about like performance warranties and liquidated damages and I just don't think anyone has any energy left to negotiate and properly discuss the dispute resolution.

Jessica

his is why they're called the midnight clauses this is like oh God do we really have to go through this and I suppose that's my big plea I mean working through the practicalities how is this going to work in practice is this actually going to resolve your dispute and also the points that you were touching on earlier in terms of trying to where necessary preserve relationships moving forward if you're going to be stuck with these parties for the next X many years try and draft your DRP Provisions accordingly .

Alec

I think the one thing for me I probably had to that is potentially try and keep it simple we've had a lot of situations where people have proposed sort of dispute resolution clauses which have sort of five separate forums for different types of dispute and different types of classification and and I can I readily understand why that might be appropriate in some instances but the issue is you then get into satellite and litigation around whether the forum is the correct forum for that type of dispute and various other things and I think going speaking particularly to energy projects as Laura and and you were saying Jess these are long lasting relationships where people generally want to get along and make a project succeed and actually having something that's too complicated for contract managers and everyone to engage with I think can actually be an impediment to resolving a dispute quickly.

Jessica

Yeah absolutely and again it's the point that we were touching on earlier some of these markets are quite small some of these players you're going to come across each other again so again trying to draft your DRP so you can all just get on with a day job that's got to be them the preference.

Okay well Laura Sharples, Alec Whiter thank you both so much for today thank you so much for sharing your insights it's clear even from this pretty short discussion that risk mitigation it's a key issue really from the very early stages of an energy project and we should all be think of it in that sort of manner.

If you'd like to know more about our energy disputes team or indeed the work that Laura and Alec are doing you can get in contact via our website. Do look out for our next episode where we are going to be examining some of the issues which are really specific to energy projects and some of the points that parties need to think about as a result of that so don't forget to subscribe and thank you very much for listening.