As part of our series of blogs on disputes and risk mitigation in energy transition projects, we consider the disputes that might arise from the use of new technology on energy transition projects, and possible mitigation measures to consider at the project outset and throughout the project lifecycle.
For a broader look at energy transition projects and construction arbitrations, see: Construction arbitration in the face of energy transition and climate change.
Why do new technology issues arise?
New technology brings with it a huge number of challenges for all players on major projects, including owners, contractors, fabricators, suppliers and off-takers. These challenges include:
- insufficient experienced or skilled labour available to develop projects using new techniques and technologies;
- lack of developed industry standards where parties do not know exactly how the final asset will operate;
- heavy reliance on both: (i) scaling up demonstrator technology, where assumptions are necessarily made as to output and build cost and complexity; and (ii) feasibility studies, leaving parties unsure whether the project will meet financial projections in the long term;
- regulatory and planning approvals might take longer than anticipated, particularly where a safety case must be proved or technology is new to the relevant regulator;
- any approval delays may lead to an owner/ operator losing its ‘place in the queue’ with a supplier for fabrication or construction.
What disputes could arise?
The impact of any one or a combination of these issues could lead to disputes. The kinds of disputes that may arise could affect any project (for instance, delay claims and defect claims), but there are specific challenges faced by renewable energy projects that will have an impact on the type of dispute that may occur. By way of example:
Floating offshore wind: some of the unique challenges associated with floating offshore wind projects include the need to interface project delivery with timing and availability of support vessels on a time charter. Significant delays could lead to these vessels becoming unavailable and/or prohibitively expensive. Similarly, delays in planning approvals may lead to an owner facing claims for prolongation costs from its supply chain where it is unable to meet the initial project schedule due to regulatory approvals. Further, given the novel nature of certain technology, defects may appear after only completion of the works, with the owner needing to rely on warranties for design life.
Carbon capture, usage and storage (CCUS): one significant risk with CCUS is the consequences of a failure of the technology leading to leaks of CO2 and negative ecological impacts. In this scenario, it is the consequences of the defect that are unique to CCUS, and possibly significant: any leak could, for instance, open up parties to disputes with public authorities and regulators for failure to comply with environmental standards.
Hydrogen: there is a tension between the supply and demand market for hydrogen projects: developers of hydrogen projects may be reluctant to invest in building facilities where demand for the product is uncertain. By the same token, without a secure supply (and potential high prices), off-takers may be reticent to invest too. Therefore, when these projects do start, the owner will be under considerable pressure to meet the commercial operation date to ensure it can meet its offtake agreement obligations: any delays to that commercial operation date caused by technology issues could create disputes in the construction phase and at the off-taker level.
Parties can and should take steps to mitigate, avoid and/or deal with disputes as they arise:
- risk apportionment for technology faults should be clearly set out, with the parties considering all key interfaces, including any off-taker agreements;
- consideration should be given to the extent of limitation of liability clauses and what losses parties are entitled, or not entitled, to recover;
- use of pan-project dispute resolution agreements to allow for the joinder and consolidation of multi-party disputes to allow disputes arising at multiple interfaces (e.g. owner, supplier and installation contractor) to be resolved together;
- use of expedited dispute resolution procedures (such as expert determination or adjudication) where project completion without delay is imperative.
The combination of a rapidly developing sector, hugely ambitious plans and a tight timescale to achieve net-zero commitments means that disputes will inevitably arise. However, careful consideration at the outset of the risks associated with novel technology, and agile dispute resolution mechanisms, can help mitigate these risks.
This is part of a series of blog posts exploring the potential impacts of energy transition and climate change on global projects disputes. Click here to see other posts in the series.