Risk Rewired – The Energy Disputes Podcast - Episode 2

Speaker	Transcript
Richard Adams, Partner	Hello and welcome to episode two of Risk Rewired — the Energy Disputes podcast from Burges Salmon. In the last episode, we considered risk mitigation at the inception of an energy project through the lens of those drafting the contracts. Today, we're going to focus on the construction and operation phases, and in particular draw out some of the differences between energy disputes and disputes in non-energy projects. I'm Richard Adams, a partner in the Construction and Engineering team of Burges Salmon and deal with risk mitigation, avoidance, and dispute resolution across a broad range of energy technologies. I'm joined by my colleague Gregor Hayworth, a director specialising in energy disputes and dual qualified in England and Wales, and in Scotland. Gregor has also advised extensively on offshore matters, so brings a wealth of experience as to how those matters differ from onshore. Welcome Gregor.
Gregor Hayworth, Director	Thanks Rich. Thanks for having me. Great to be involved in this podcast.
Richard	Gregor, my aim for this episode is to try and explain to our listeners why energy disputes are different — what makes them unique? Of course, when you think of a construction or operation phase dispute, you can generally categorise it as a dispute to do with money, time, or performance, or all of the above. However, that's only the start. For me, energy disputes are much more complex than that and really interesting too, as you have to understand how the technology works, the usual contractual structures and risk allocations, and the issues that might arise on particular projects. Without that, it's pretty difficult to adopt a strategic approach to mitigating or resolving disputes. Do you agree with that?
Gregor	Yeah, definitely agree. Energy projects — they all have their own peculiarities, whether that's commercially or legally, and if you try and treat an issue as you would any other commercial dispute, there's definitely a risk you might miss a key issue or opportunity to mitigate or avoid the risk entirely. I guess you also have to remember a lot of energy disputes involve an energy asset that's operational and generating revenue, and often between parties that are tied into long-term or high-value contracts.
Richard	I agree, they're definitely key factors that need to be kept in mind. So, to bring the topic to life a bit, Gregor, I've selected three technologies that I thought we could discuss: process, solar, and offshore. Are you happy if we just touch on those three?
Gregor	Yes, excellent choice.
Richard	Okay, good. Let's start with process plants.
Gregor	Okay, yeah. I guess that could cover a fairly broad category of energy project.
Richard	Yeah, that's right. It could encompass things like biomass, energy to waste, waste energy from fuel, thermal hydrolysis, hydrogen to name a few. But, there are some synergies between these areas aren't there?
Gregor	Yeah absolutely. A lot of the issues we see across those types of projects typically relate to commissioning and testing, and takeover issues. So for example, the testing regime set out in an APC contract. If that has any ambiguities then we will see quite often disputes arise as to whether or not the contractors achieve the testing criteria, and potentially whether or not a takeover has been achieved. And the achievement of takeover — as you know — will often trigger a payment under the contract, and so generally that is a time when tensions can arise and disputes are instigated.
Richard	Yeah, I think that's right Gregor, and certainly in my experience I think the commissioning issues are really key and permeate quite a lot of process plant issues that arise. It probably harks back to what our transactional colleagues were saying on the last podcast about some of the risks that you have to ensure are carefully considered at a contract negotiation and inception stage, to try and foresee some of these issues and to provide the relevant drafting for them. For me, I think that the common problem typically arises where there is a disconnect between fuel input and design principles. For me, you can very simply explain a process plant by — whatever you put in determines whatever you get out. There's a very complicated bit in the middle of course, but what we tend to see, as you will know well, is that there are a lot of issues and potential finger pointing as to what has caused a commissioning or testing failure, or what is stopping a plant reaching takeover — whether that is the fuel input, or the process in the middle. And I think linked to that actually, is probably a point on fuel sampling, because a common complaint is: where do you sample the fuel, and whether or not the fuel actually changes in composition depending on the sampling point that you adopt. So actually, even the sampling point and the sample methodology can sometimes have a huge impact on understanding whether fuel is the problem here, or indeed whether or not it is a design issue, or a construction issue. And that's setting aside operation as well, because usually when you're commissioning — especially on wet commissioning on some of these process plants — you will have, potentially, a third-party operator assisting with the operation even during commissioning phases, which just throws added complexities into the mix and interfaces that you might not have in other projects.
Gregor	Yeah absolutely. I think the fuel input point that you made is obviously important, and clearly fuel supply is a big risk to these projects as the supply of the fuel is key to the operation. And I think, as I mentioned, these energy projects are often operational and revenue generating when disputes arise. We've seen quite a lot of issues recently around fuel security and ultimately fuel shortages. And another common issue, particularly for example in energy from waste plants, could be whether the fuel itself meets the specifications set out in the fuel supply agreement, and those can be quite complex disputes because you need to get into the laboratory testing, the testing regimes under the contract, whether third-party laboratories are undertaking the testing in accordance with the contract, and those all can be quite fraught with complexities and generally are quite technical in nature.
Richard	I think that's right, and you mentioned the waste specification. I think that equally applies to some of the biomass fuels that we're seeing as well. So, if you take for instance, waste wood, it's very important to understand actually where your waste wood is coming from, what pre-treatment (if any) has occurred, has it got paint traces on it, what is the moisture content like. It's very important to understand what that specification is, and to manage it as part of your process, and it is a whole life process for that. I think it also feeds in a bit to the plant optimisation issues as well, because if your fuel is causing performance dips, you ultimately have to optimise the process one way or another because it's all about increasing your revenue or maximising the revenue generation from your plant — that's the reason that you've got the project in the first place. I think from an owner or an operator point of view, obviously you could change the fuel, but you mentioned fuel shortages and potentially you may be locked into fuel supply arrangements which may be challenging. Then you look at optimisation on your plant and thinking about the ways in which you could potentially add enhanced equipment or enhanced steps into the process in order to help with managing any fuel issues. And that could rise from things like dealing with the moisture content of the fuel, dealing with rogue finds within the fuel that you want to remove, to even dealing with other things such as — you know I spoke about waste wood earlier — looking at dust suppression, which causes big problems in the process itself, so you look at the optimisation of the plant, and then you think about who pays for that? Is it a CAPEX cost, is it an OPEX cost, or how do you address it? So it can be quite challenging.
Gregor	Yeah absolutely. I think these projects often have complex technology involved as well, which in itself can lead to quite significant issues, and particularly when the technology is more cutting edge and experimental. Obviously you're going to get a greater risk of things going wrong with new technology, and energy contract drafters have to keep up with these issues that these new technologies throw up, and that is obviously quite a difficult task and often unforeseen circumstances will arise which just aren't adequately dealt with in the contract, or at least clearly dealt with in the contract, and again that's often where we see contentious issues happening in these types of projects.
Richard	I completely agree, and that's why an understanding of where these issues arise helps us to strategically guide clients through the process and try and mitigate and avoid those risks. But inevitably, there are a lot of nuances which need to be considered because the process by its very nature has a lot of moving parts. Now, having spoken about a process where there's lots of different parts and biology, for instance, to consider as part of that process, maybe we should move on to talk about, maybe what I would describe as a more traditional form of renewable energy, maybe not as many moving parts, and maybe a little bit easier conceptually for listeners to get their head around, and I thinking solar is a good example of that.
Gregor	Yeah absolutely. Yeah certainly, I think I would agree more of a traditional form of energy project, but nonetheless one that still throws up quite complex issues, contractual issues, that we come across quite frequently. For example, I guess similar to the fuel supply issues that we were mentioning before, we've definitely seen an uptake in disputes arising out of availability of materials. Historically, there was availability issues with PV panels, but recently actually what we've seen is clients commenting on the availability of the steel itself for the mountings, and I guess availability of steel is of course a big issue generally in the energy sector and wider industries, particularly following the start of the Ukraine war, but this is just a particular issue that we've seen on solar projects recently.
Richard	I agree, and I think the availability of material has a significant impact on construction build periods, and then ultimately when you can get into generation, and I think when you're in generation, or an operation phase. And solar performance issues are also really pertinent, I think. The generation is effectively based on the efficiency of the PV panels and their availability. Certainly, we've seen issues involving wiring defects, cable trenching, inverter issues, and snail trails believe it or not! But not of the shelled kind, snail trails in a solar context are more visible discoloration or degradation of the solar panels which look like lines of snail trails across the panel itself, and these can have a significant impact on efficiency, and can all sometimes result in systemic issues too. And just on systemic occurrences of a defect, this is something that you encounter quite a lot in solar projects. That could be issues with the wiring just being systemically problematic across the site, inverter installation — how they've been wired up to the solar PV, or indeed just a bad consignment of solar PV panels themselves, so you tend that if the problem has occurred in one part of the solar farm, there's a high chance that it will occur in other parts as well, and I think that the larger your solar farm, the more problematic that becomes when you get to performance issues.
Gregor	Yeah of course. Yeah, I mean I guess linked to performance as well then is the maintenance of these solar projects, and often these solar projects are built to last 20 odd years, and so long-term O&M contracts, operation and maintenance contracts, are entered into which will generally contain availability guarantees, and those will be linked to liquidated damages provisions. And so whether or not the maintenance contractor has met that guarantee is very much a contentious and complex issue, and usually when we're tasked with looking at an availability guarantee, we're faced with a fairly horrible and complex formula used to calculate that availability. And again, a common theme throughout our discussions here, if those provisions aren't clear then again, it just leads to arguments between the parties and yeah, not least because these can be quite high value claims that arise.
Richard	Yeah, I completely agree. There are a lot of disputes that can arise in solar projects, it's just not when the sun doesn't shine. There are lots of problems that can arise. Shall we move on to — what I think is probably one of your favourite subjects, Gregor — which is offshore. What is the attraction of offshore projects? Why do you think they're different?
Gregor	Yeah, it's certainly one of my preferred topics. But yeah, they're very different to onshore energy projects in a lot of ways. They tend to be large scale, and I guess depending on where in the world the project is being developed, the construction phase can be quite a challenging phase, and a lot of legal issues and commercial issues will arise during that period.
Richard	And what would you say, Gregor, are the top issues — the top two issues say — that you would typically see on an offshore project?
Gregor	I guess probably, if I had to pick two, I think definitely weather would be the first and linked to that, probably vessel availability. So, in terms of the weather, it's always a key battleground in offshore construction disputes where parties have agreed, for example, a program which has certain weather windows where works can and can't be carried out. Obviously bad weather means that a lot of vessels don't have the capability to go out and do the job, and so if a weather window where they can do the work is missed, then that can mean significant delay, which again often linked to liquidated damages provisions, and the costs and claims can stack up in value quite quickly.
Richard	So, Gregor, weather I think is quite significant, because of course, you can't even get to site sometimes. So, on onshore projects you could obviously go into a site hut or just pause operations until a period of extreme weather passes, but offshore you have to build in additional time to mobilise and actually get back out to site. So I think it just exacerbates the issue that weather causes when you're working in an offshore environment.
Gregor	Yeah absolutely. And that links to vessel availability. These are huge vessels generally involved in these projects, and with that a lot of expense — could be hundreds of thousands of pounds per day, and so any downtime, for example, of the chartered vessel is going to be extremely costly, and the charter will want to avoid unplanned downtime at all costs really. But inevitably, that can happen, and vessel availability then becomes another hot topic, and essentially which party bears the risk for that downtime can often drive behaviours and create disputes between parties.
Richard	I think that's very true, and isn't there also a risk of, as well as downtime, the vessel going off hirer completely on a particular project due to, potentially, another pre-agreed charter party arrangement? That can obviously throw a project into really significant delays; you have to wait for the vessel to become available again, or source an alternative, which is quite difficult given the scarcity of some of these vessels globally. And, as you said, who bears the risk of these issues can become very expensive, very quickly and you need to be taking proactive steps to help mitigate the losses. And also, thinking about the project, thinking about the delays to the wider project because a particular vessel might not be available. It has a significant knock-on effect I think overall. And you've been talking a bit about the above water issues. What I find quite interesting in offshore is the sub-sea challenges as well, whether that be the marine survey deficiencies, under-sea cabling installation issues, and certainly the challenge of rectifying any defects once those cables are laid, and also the interface between onshore and offshore infrastructure. Those are usually provided by different parties and typically subject to different dispute resolution provisions and risk allocations, so it becomes quite challenging. It's a bit of a patchwork quilt for these projects because of the multi-package contractual arrangements that tend to be used and adopted.
Gregor	Yeah absolutely. There's certainly never a dull moment in offshore energy projects and I guess that's what I love about contentious offshore work; you come up against quite a lot of unique scenarios. I mean personally over the years, I've actually dealt with quite a few offshore projects which have stalled, for example, due to fishers refusing to allow survey vessels or piling vessel to carry out those works to allow the project to progress. And obviously, those types of disputes can be quite emotionally charged and difficult to navigate, and often can end up in injunction territory, or interdict if you're in Scotland, and being before the court, so there's lots of issues and factors at play and considerations when a developer is going out to build one of these offshore energy assets. It's just a really interesting area.
Richard	Gregor, thank you for that. I thought that was a really interesting discussion, and even with a very quick canter through three technologies, it is clear that a deep understanding of the underlying technology is really essential when dealing with energy disputes in the construction and engineering phase, so thanks again.
Gregor	Thank you for having me.
Richard	Thank you for listening to Risk Rewired the Energy Disputes podcast. If you're interested in reading about risk mitigation across the energy project life cycle, visit our website to download our energy disputes guide. In our next episode, we welcome a special guest for a deeper dive into energy disputes from a different perspective. Thanks for listening.