This article was written by Daisy Mallett, James McKenzie and Eoin Caffrey.
The response to climate change is driving changes in the renewable energy industry globally. Countries around the world are increasingly looking to renewables projects (solar, wind, geothermal, hydropower and tidal) in order to address climate change issues and their energy needs. To put a figure on it, renewable energy sources are set to account for over $7.5 trillion USD worth of global investment in new power generating technology until 2040.
As the volume of renewables projects increases, so too has the number and scale of energy disputes. These disputes can arise in various contexts (whether between private parties, or between investors and states under investment treaties), but a common feature of them is usually loss of income, with subsequent claims for damages. These disputes are also frequently, and increasingly, arbitrated and typically involve complex claims for damages and economic loss.
The focus of this article is on the role that economic experts play in an arbitration in explaining this complex financial information and in helping to articulate damages claims. To do so, this article explores the nature and classification of energy projects, looks at how damages claims are framed and the role of an economic expert, and provides some of our key takeaways for using economic experts in energy disputes.
The nature and classification of energy projects
Renewables projects have common and variable features.
Common features include that projects:
- are typically underpinned by complex, long‑term contractual structures;
- tend to allocate rights and obligations among the project participants in order to spread the risks; and,
- depend on large upfront investments, which are only recovered over long period of time.
Variable features include that:
- projects can be domestic or international;
- projects can exist between private entities, public entities or quasi‑public entities;
- the form of the contracts which underpin the project can take different forms (for example, the project may consist of private agreements, public law concession agreements, or international treaties); and
- different laws can apply to the various contracts which underpin the project, (particularly in cross‑border energy projects).
These disputes are generally complex and often involve damages for economic loss (as was the case in recent actions brought against Spain and Canada). Indeed, when Spain reduced the feed‑in‑tariff on renewables projects, a number of damages claims were brought by investors against the Spanish government under the Energy Charter Treaty. Similarly, when the Canadian province of Ontario placed a moratorium on offshore wind farms, a US wind power company initiated a damages claim for C$475 million under the North American Free Trade Agreement. Framing a damages claim in this context requires careful consideration.
Framing a damages claim in energy disputes
The guiding principle for any damages claim is the principle of compensation. In a general sense, an aggrieved party is entitled to recover the actual losses. it suffered as a result of the other party's breach. However the contractual principles applicable to a commercial arbitration differ substantially from the international law principles applicable to an investment treaty arbitration.
A number of interdependent factors are involved in a damages claim in this space, including: the type of project; the nature of the breach; the type of loss; causation, and the measure of damages. Framing a damages claim necessarily involves consideration of these interdependent factors in the context of breach, loss and causation. The use of an economic expert who is sufficiently appraised not only of the relevant principles of damages but their application to the factors in play is therefore critical to the success of any damages claim. Finding an expert with relevant experience and market know‑how is easier said than done.
The role of the economic expert in energy disputes
In the lead up to an arbitral hearing, the analysis of economic evidence by an expert can play a crucial role in ensuring that the evidence is substantiated, and that it supports the overall claim:
- With respect to breach economic experts can usefully analyse the relevant data to determine: income and loss; how far the loss is cause by the breach; the calculation of quantum; and the financial effects of any hypothetical mitigation strategy.
- With respect to loss economic experts can prepare financial and economic models in order to calculate: hypothetical income streams; the historical and future losses caused by the breach; pre award interest; and any relevant discount rates.
- With respect to causation economic experts can provide reliable economic assumptions about different types of risk (i.e. country risk and market risk); and determine the overall valuation.
Issues to be mindful of when using economic experts
As with the use of any expert, there are issues to be mindful of.
In energy disputes (as in all disputes), competing economic experts will likely disagree on: the choice of calculation method; the application of the calculation method; the underlying assumptions of the calculation method; and the applicable rates to apply (e.g. interest. the discount that should be applied and whether or not interest should be compound or simple).
Throughout this process, it is important to protect the credibility of the expert in the eyes of the tribunal.
The complexity of the competing evidence may lead to the tribunal being unable to understand the evidence or how to choose between the competing analysis. One consequence of this can be that a tribunal might appoint its own economic expert (leading to increased costs, time and less party control over the expert process including the inputs and assumptions).
Key take away messages
In order to address these issues:
- Engage an economic expert early – early assistance with framing and substantiating the claim can be critical to success
- Ensure the economic expert's report is presented clearly ‑ a well prepared report is critical to allowing the tribunal comprehend the evidence and avoid any loss being deemed as speculation.
- Don't encourage the expert to act as an advocate ‑ the impartiality of an expert is key to convincing a tribunal of the underlying merit of the economic experts' evidence.
Parties to energy disputes should always take care to do their due diligence before appointing any economic expert, and legal advice on the merits of any candidate should always be sought in advance.