Renewable Energy & ADR

1. Renewable Energy & ADR 4 March 2014 Hosted by Osborne Clarke on behalf of the Chartered Institute of Arbitrators

2. The Chartered Institute of Arbitrators Andy Harmer John Laing Investments Limited Environmental Infrastructure (Wind & Waste) 4th March 2014

3. John Laing John Laing plc is a specialist investor in, and manager of, infrastructure assets in the UK and internationally, principally for the public sector. By combining its skill in the management of development risk, project financing, asset management and operations with those of its chosen partners and the project supply chain, it has built an enviable reputation as a market leader in privately financed infrastructure. John Laing’s key target sectors include renewable energy, waste, accommodation, health, and transport, focusing on markets in the UK, Continental Europe, North America and the Asia Pacific region. www.laing.com

4. John Laing’s portfolio • John Laing has invested in 110 infrastructure projects • Direct investments • Invested by JLIF* Holdings in 85 infrastructure projects as at 31 January 2014 49 financially closed PPP projects 1 preferred bidder 36 are owned by JLIF* and managed by John Laing 2 commercial close 26fully operational 5partially operational 17 under construction 1 pre construction *John Laing Infrastructure Fund 3

5. Headlines! – Energy • BP Energy Outlook – Increase in Energy needs to rise 1.5% per annum over the next 2 decades • Lord Brown – Government to play critical role tin oil and shale gas investment! • European Commission – Examining pricing at Hinkley Point C (Market failure?) • Drax – Compensate us if you freeze levy? • UK Utility – Share price continues to drop! • Cyprus gas bonanza – Fuelling tensions with Turkey! • UK wind – Offshore wind projects dropped!

6. Market in Wind Highlights • UK to obtain 15% of its energy from renewables by 2020. Renewable Energy share of electricity generation was 13.2 per percent at the end of 2013, needs to reach 30% by 2020 • Onshore wind and offshore wind provided 50% of this target Challenges for Investors/Developers – What to invest in? • Electricity Market Reform • ROCs or Cfds • 2020 and 2030 Targets • Government(s) Strategy – in UK and Europe (e.g. Germany)

7. Market in Waste Recent History • PFI/PPP Programme curtailed • Treasury announces that EU targets for municipal waste diversion will be met by 2020 from current and in construction infrastructure • Impact of recycling Challenges for Investors • Landfill escalator • Merchant market • Lack of data on Commercial and Industrial Waste • Technology Choices and Government Support Mechanisms • Debt Funding

8. Renewable Energy & ADR Edward Butler March 2014

9. Introduction • Project structures • Flashpoints for renewable projects • Different forms of ADR • Particular issues • HGCR and adjudication in power projects • RECC Arbitration service

11. Shareholders (Shareholders' Agreement) Lenders Authority Shareholding Concession Agreement Lending Agreements Operation and Maintenance Agreement Offtake Purchaser Project Company Offtake Purchase Agreement Operator Input Supply Agreement Construction Contractor Input Supplier Construction Contractor

12. Flashpoints for renewables projects • Planning & consenting • Input/feedstock • EPC phase • Materials & equipment • Variations • Programme • Commissioning & performance • Grid access • Income generation • Development of technology

13. ADR – the alternatives • Negotiation • Conciliation • Mediation • Adjudication • DAB, DRB • Early neutral evaluation • Expert determination • Multi tiered DRPs

14. ADR – why use? • Early presentation of claims • Opportunity to avoid disputes • Maintain goodwill and relationships • Better understanding of other side's positions • Relatively flexible & efficient • Much less costly than arbitration and litigation • Multi party

15. Renewable Energy & ADR John Redmond March 2014

16. Particular issues • Incompatibility – adjudication in power projects • Housing Grants Construction & Regeneration Act 1996 - Section 105 (2) • "The following operations are not construction operations within the meaning of this Part – • (a) Drilling for, or extraction of, oil or natural gas;(b) Extraction (whether by underground or surface working) of minerals; tunnelling or boring, or construction of underground works, for this purpose;(c) Assembly, installation or demolition of plant or machinery, or erection or demolition of steelwork for the purposes of supporting or providing access to plant or machinery, on a site where the primary activity is – (i) nuclear processing, power generation, or water or effluent treatment, or (ii) the production, transmission, processing or bulk storage (other than warehousing) of chemicals, pharmaceuticals, oil, gas, steel, or food and drink"

17. Particular issues • Construction operations or not? • Palmers Ltd v ABB Power Construction Ltd (1999) • Homer Burgess Ltd v Chirex (Annan) Ltd (1999) • ABB Power Construction Ltd v Norwest Holst Engineering Ltd (2000) • North Midland Construction Plc v AE&E Lentjes UK Ltd (2009)

18. Solutions - ADR • Mediation • Contractual adjudication • Dispute boards • Hybrid dispute boards / adjudication

19. RECC Arbitration Service • The Renewable Energy Consumer Code - Renewable Energy Assurance Ltd • Consumer makes complaint • Member responds within 7 days • If not satisfied, consumer lodges complaint with the Scheme Administrator • SA asks for report and proposals from member • If not resolved, consumer can refer to conciliation • SA either refers the complaint to an independent expert or to the Conciliation Scheme provided by IDRS Ltd (without charge) • If no agreement, either party can refer the dispute to Arbitration

20. RECC Arbitration Service (cont'd) • Consumer makes application on the prescribed form and pays the fee • Application includes statement of case plus relevant documents • IDRS sends the claim to the member – 21 days to submit defence • Consumer has 14 days to reply • Papers are sent to Arbitrator appointed by IDRS • Arbitrator makes a reasoned Award in 28 days • Award is final and binding, subject to Arbitration Act rights of appeal • A successful consumer can recover the fee • Power to award costs if a party has acted unreasonably

21. Speakers [insert photo here] Height = 6cm Width = 6cm [insert photo here] Height = 6cm Width = 6cm

22. Thank you osborneclarke.com

23. BPVA Arbitration: the CIArb renewables seminar Peter Kralj LL.B LL.M Investment Banker Griffin Capital Grant Jones LLM. 1. Member of Simmons Gainsford Gibraltar LLP2. Chartered Accountant, Solicitor, New York Attorney, Licensed Insolvency Practitioner & Special Professor of Laws Nottingham University. 3. London CIArb branch committee member.4. email: gmjones@gmjones.org 5. LinkedIn: http://uk.linkedin.com/in/accountantarbitrator

24. We have 10 minutes to explain the newly drafted British Photovoltaic Association (BPVA) arbitration scheme. So we will be fast! • What is the BPVA? • Why the necessity for a BPVA arbitration scheme? • What is the BPVA attitude to arbitration? • What are the nature of photovoltaic disputes? • How do I use the BPVA arbitration scheme? BPVA Arbitration: the CIArb renewables seminar background part 1

25. What is the BPVA? “[The]...BPVA...is the national trade association of the UK solar photovoltaic industry. The BPVA is a strong political & commercial organisation, & has become the industry's favourite platform since formation in 2010. As the most influential & trusted voice of the industry, we have made a significant contribution to the growth of the solar industry in the past few years. We are a fully independent not-for-profit organisation & the only trade association in the UK with 100% focus on solar PV.“ BPVA Arbitration: the CIArb renewables seminar part 2 The BPVA offers services in Finance, Insurance, Law, Recruitment, Training, Marketing & now DISPUTE RESOLUTION.

26. Why the necessity for a BPVA arbitration scheme? BPVA Arbitration: the CIArb renewables seminar • The industry acknowledged that litigation, or the threat of litigation, could become a drag growth & that there needed to be an industry based solution, given: • The rate of development of industry technical know how. • The plethora of stakeholders. • The range of industry players. • The novelty of the developing dispute issues facing the industry. • The quasi-disciplinary attitude taken by the BPVA. part 2

27. What is the BPVA attitude to arbitration? BPVA Arbitration: the CIArb renewables seminar COST REDUCTION. REDUCE LEGAL INPUT. EXPERTISE part 2 Resolution costs should not stymie solar growth But lawyers are invited to join the

28. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar • Most disputes are about damages to modules & inverters, & the efficiency of the operations & maintenance managers, who are meant to discover problems as soon as they arise. • Damage to modules can be covered by warranty (25 years normally) & to inverters by extended warranties. • Often both the insurers & warranty provides deny liability. part 2

29. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar • The most important stakeholder (& likely claimant) is the investor (the person who owns the plant & and has paid for it). • Banks – who typically lend up to 85% of the purchase price are also major & in reality the controlling stakeholders. part 2

30. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar • Typical claims are that the O&M operator did not discover the fault promptly. • There is not enough money to service bank debt – could be due to bad weather or to technical problems. • Inverters have broken down / overheated & shut down. • Modules broken, but not covered by warranty. • Insurance declines to pay for damage that appears to be covered. part 2

31. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar • Typical financing is project finance – non recourse. • It is generally long term & financed on a fixed rate basis, & there are usually reserves to take account of possible shortfall or a workout. part 2

32. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar • Long term relationships are with the bank & the O&M operator & warranty providers. • The real problem in the PV industry is that most companies in this business are young & have volatile earnings. Some become insolvent & that puts an end to the warranties that they provide. O&M operators who become insolvent can be replaced, but often at additional cost. • Manufacturer warranties are therefore potentially of limited value. • Insurance only provides annual cover. part 2

33. What are the nature of photovoltaic disputes? BPVA Arbitration: the CIArb renewables seminar Novel situations. 1. The roof. 2. The consumer. part 2

34. BPVA is pleased to announce the provision of a disputes resolution service for its members, associated organisations, and any parties involved in legal disputes relating to the Photovoltaic industry either in the UK or overseas. The PV industry is a specialist business in which arbitration by industry experts is well suited to the resolution of legal disputes at minimal cost, quickly and in private. How do I use the BPVA arbitration scheme? BPVA Arbitration: the CIArb renewables seminar http://bpva.org.uk/Arbitration-Rules-Request The BPVA also offer mediation & expert determination services. part 2

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36. The same thing, only differentWhy renewable energy needs alternative approaches to ADR Gordon Nardell QC MCIArb gordon.nardell@39essex.com

37. Scope of this presentation • “In law, context is everything”: Lord Steyn, Daly v. Home Secretary (2001) • Nothing special about renewable energy… • A tonne of concrete is a tonne of concrete • “Renewable” and “fossil” electricity taken offgrid and sold to consumers are identical • But important features of renewable energy that create particular kinds of dispute… and particular problems/pitfalls in resolving them • Overview of some distinguishing features of the renewables context – esp. public policy and geography. Plus a case study (and a short point about pathological clauses if time)

38. The public policy context (1) • Renewables sector highly sensitive to public policy: • Overall investment climate depends on degree of political commitment, which is variable and driven by a variety of factors: • Climate change mitigation, decarbonisation of energy supply • Reliance on fossil fuels from sources affected by geopolitical risk • Domestic politics • Packages of supply-side, demand- side and regulatory measures, all shaping the framework for contractual relations

39. The public policy context (2) • Economic instruments: subsidies (supply side) and levies (supply and demand sides) • Supply side and benefits: • Reflect high capex relative to running costs • Legislative mechanisms, eg FiTs, CfDs • Degree of certainty of revenue stream overlife of project? What happens where changesoccur mid-stream? • Demand side and burdens: • Subsidies etc. financed by imposing charges on non-renewable generation/supply • Charges also fund demand-reduction measures – eg in UK, ECO (Energy Companies Obligation) – formerly CESP (Community Energy Saving Programme) and CERT (Carbon Emissions Reduction Target) • Huge potential for disputes

40. The public policy context (3) • Regulation generally: projects and downstream trading • Environmental impacts of renewable energy projects: • a huge issue in EU and, increasingly, elsewhere • Significant risk of third party challenge and/or intervention by regulator, eg. biodiversity impacts of coastal offshore wind projects • Wholesale and retail gas/electricity markets: elaborate systems of regulation of retail pricing, wholesale trading arrangements, cross-ownership, transmission/distribution

41. So… • Disputes tend to occupy chaotic boundaries between law/politics, public/private law, national/international law • Familiar contractual concepts can give rise to unfamiliar problems: eg. operation of penalty/indemnity clauses where “loss” is regulatory action (the case study) • Public policy risk/uncertainty produces high project failure rate: • Disputes are frequently about things that don’t get built • But characteristics of industry mean operators must make significant financial commitments early on • How far down the contractual chain can risk be passed? • Complexity of funding/contractual arrangements: • Multiple parties have an interest in project disputes • Choice of DR mechanism needs to be suited to addressingmultiple interests

42. Where’s it all happening? • Global shift is inexorably eastward • China 2012 -- in national terms, largest single generator of energy from wind: • 75GW installed capacity, 100.2 TWh total output • Whole EU was 106GW, 180TWh • China likely to dwarf EU in terms of future trends: wind currently only 2% of national generation (cf. coal 75%), but major policy commitment to achieve 200GW installed capacity by 2002 = a 266% increase in 8 years. • In EU highest national % increase for total renewables 2010-2020 under Renewable Energy Directive is 49% (lowest is 10%)! • Choice of dispute resolution mechanisms will have toincreasingly accommodate Asian business culture(s) • Exotic/complex funding arrangements and Stateinvolvement generate specialised kinds of dispute

43. A case study: regulation meets contract • UK CESP/CERT schemes: • “in kind” obligations on suppliers /generators to undertake energy efficiency improvements to housing stock. • “Points” system, with regulatory penalties (Ofgem) for non-compliance – capped at 10% of turnover but potentially huge eg. £400M for Scottish Power (turnover £4Bn). Much less for smaller companies, eg say £20M. • Companies outsourced improvement work under a variety of forms of contract, some containing standard commercial wording excluding “penalties” from recoverable loss unless due to “deliberate” breach. • Compliance cost rocketed • Issues where sub-contractor in breach: • Are regulatory penalties excluded by “no penalties”clause even though that’s the only possible loss? • Is it reasonable mitigation for the company to spend anextra (say) £10M to achieve limited additionalcompliance if its penalty can’t exceed £20M and will probably be much less? • Really suited to ADR techniques such as voluntary adjudication?

44. ADR good, pathological clauses bad • The inverse problem to the case study – parties negotiating non-standard contracts to accommodate complexity and cultural expectations in international energy project/investment agreements • Risk that multi-tiered ADR provision will enable a party to delay arbitration indefinitely or challenge jurisdiction • Crucial to ensure absolute clarity as to: • What a party has to do to comply with its ADRobligations • The point at which ADR is treated as havingfailed, enabling a valid reference toarbitration to be made.

45. Renewable Energy & ADR 4 March 2014 Hosted by Osborne Clarke on behalf of the Chartered Institute of Arbitrators