Conflict management in the energy transition

Typical areas of conflict in international renewable energy projects

The global transformation of energy assets, infrastructure and industry to limit global warming requires continuous investment in the energy sector. Forecasts assume that renewables will account for around 70% to 85% of electricity supply by 2050. The associated economic activity at home and abroad inevitably leads to complex disputes between companies, which are regularly cross-border in nature. International disputes in construction/engineering, energy and energy trading now account for around 40% of all proceedings before arbitral institutions such as the International Chamber of Commerce. They particularly concern disputes resulting from regulatory changes, disruptions to contractual relationships, technological risks, and supply chain issues.

Regulatory changes arise from government measures to implement national climate targets, which directly or indirectly affect contractual relationships. This includes, in particular, changes to support mechanisms such as grants or tax incentives; their reduction or withdrawal often leads to disputes. Regulatory innovations such as the introduction of an emissions trading system or production- or consumption-based taxes can also trigger adjustment clauses in contracts.

Contractual issues arise primarily in core agreements such as Engineering, Procurement and Construction (EPC), Power Purchase Agreements (PPA), Operations and Maintenance (O&M), and financing agreements (Loan / Facility Agreements; LA / FA). These contracts are typically complex because they link technical, legal, tax and financial issues. Typical causes of disputes include unclear performance definitions, delays and cost overruns. Added to this are breaches of environmental requirements and warranties, particularly in the context of M&A transactions and their financing, taking into account compliance and ESG requirements.

Technological risks result from the need for technological change. Investments in new technologies such as battery storage, hydrogen and ammonia production, floating offshore wind, or hybrid plants involve uncertainty. Disputes may also arise from the use of intellectual property, licensing agreements, or warranties for novel system components that have not yet been tested in practice.

The global integration of energy projects creates supply chain dependencies that carry conflict potential. Reliance on foreign components such as photovoltaic modules or rare earths can cause supply bottlenecks and lead to project delays. In addition, there are risks arising from non-compliance with ESG standards within the supply chain.

Costs, risks and choice of procedure

Companies experienced in dispute resolution view the handling of commercial-law disputes as a standalone business case.

Selecting the appropriate procedure for a specific dispute depends on numerous factors that often have significant legal, tax and commercial implications. It is therefore advisable to seek legal advice already when drafting the contract on incorporating suitable dispute resolution mechanisms, and to obtain well-founded advice even after a dispute has arisen.

Before making a commercial decision on the procedural route, dispute cost controlling is required to identify, quantify and reduce external costs. In doing so, state court proceedings must be compared with private arbitration and out-of-court dispute resolution options in terms of the expected costs. Many institutions provide digital cost calculators for this purpose.

In addition to external costs, internal costs are highly significant. These arise from tying up in-house staff such as in-house counsel, engineers and project managers. They are typically not recoverable and also include opportunity costs resulting from foregone other profitable activities. The duration of staff allocation directly affects costs. While arbitration takes an average of eleven months, mediation typically requires only one month. Companies should ensure that fact-finding and the compilation of evidence are primarily carried out by legally trained in-house staff.

Process risk analysis serves to objectively assess risk. It structures the dispute as a decision tree and quantifies probabilities of occurrence in order to determine the overall expected value of a dispute resolution outcome. For each chosen procedure, the cost reimbursement rules must be taken into account. While in state court proceedings costs are generally allocated based on who prevails, in mediations there is usually no obligation to reimburse costs.

State civil court proceedings

The Federal Republic of Germany has joined the competition among judicial venues to prevent major commercial disputes from moving abroad. Under the Act to Strengthen Germany as a Judicial Venue (Justizstandort-Stärkungsgesetz), the federal states can establish Commercial Courts as courts of first instance at Higher Regional Courts. They have jurisdiction over disputes between companies with an amount in dispute of €500,000 or more, provided the parties have agreed to this. Commercial Courts and Commercial Chambers can conduct proceedings in English.

In an international context, court proceedings in Vienna, Stockholm or Zurich are relevant. Since the substantive law applicable to the respective contract—such as sales law or contract-for-work law—is the main factor in choosing the forum, it is essential for German companies to understand the risks of foreign legal systems. Within the European Union’s internal market, the enforceability of judgments is ensured by the Brussels Ia Regulation.

Alternative dispute resolution

Alternative Dispute Resolution (ADR) is increasingly used, particularly in complex international EPC projects in the renewable energy sector, to avoid delays and cost increases. ADR includes private procedures such as arbitration as well as mediation, conciliation and expert determination.

Arbitration is the standard for international EPC contracts in German-international business. Institutional proceedings such as ICC and DIS as well as ad hoc proceedings are the most common. The arbitrators’ subject-matter expertise is crucial. Parties can specify in the arbitration clause that arbitrators must have specific knowledge of the subject matter of the dispute. Techniques such as an early case management conference help manage complex proceedings. For small and medium amounts in dispute, institutions offer expedited procedures to reduce costs.

Mediation is a flexible procedure led by a neutral third party and is particularly suitable for preserving long-term business relationships. It offers significant cost and efficiency advantages. In cross-border commercial mediations, co-mediators are often used to take cultural differences and differing areas of expertise into account.

Conciliation or expert determination by experts serves to resolve disputes that require specific technical or financial expertise. Unlike mediation, the expert’s decision is binding if the parties have agreed to this.

Multi-tier dispute resolution mechanisms are common in EPC and O&M contracts. They combine different procedural stages, starting with mediation and followed by arbitration. The main arbitration rules allow multi-party and multi-contract proceedings, as complex disputes often involve multiple parties and contracts. To avoid inconsistent decisions, the parties must agree on project-specific, tailored arbitration clauses.

Practical recommendations

Companies in the renewable energy sector that keep an eye on costs, risks and liquidity in the event of a dispute should integrate multi-tier dispute resolution clauses into their contracts at an early stage. These should provide for mediation or expert determination as a mandatory first step to save time and costs and preserve the business relationship. For potential disputes, a process risk analysis is essential. Decision trees are used to quantify the overall expected value and diversify risk. Internal resources should be managed efficiently by ensuring that fact-finding and the provision of evidence are primarily carried out by knowledgeable internal experts in close coordination with legal advisers. Arbitration and expert clauses should ensure that the dispute resolvers have specific industry expertise.

The author, Dr. Jochen Beckmann, is a German attorney and Spanish abogado at RÖDL in Barcelona, Spain. Alongside his teaching at a university of applied sciences, he works as an arbitrator (ICC) and Spanish commercial mediator (UOC).

From the newsletter
“REInEws” Your partner for RE and transformation:
We are happy to advise you.