Brexit patchworking: the impact of continued uncertainty on the construction industry

Brexit patchworking: the impact of continued uncertainty on the construction industry

by | May 27, 2019 | Purpose Built (LexisNexis)

50388749_xxl

Here we are in May 2019, and, almost 3 years on, Brexit is still not sorted. Whatever your politics, you can’t help but feel “what a mess”. Industry is suffering from uncertainty, people and organisations cannot plan, budget or invest with confidence. This ripples right down from the biggest public and private investors to the smallest of SMEs, like mine.

As I have remarked before (see: The ongoing impact of Brexit on the construction industry), lack of certainty creates risk, and the construction and engineering industry looks far in advance when planning its projects, so those involved, whatever their perspective or tier, need to be able to plan. Without a coherent plan, and confidence in the plan, you simply cannot start to think to execute (let alone actually put a spade in the ground). There has never been a greater need for the ”foresight and stamina” I mentioned in that interview.  

In amongst all this uncertainty, I consider myself lucky in that, as an independent consultant to industry, I work on a wide variety of projects, with public and private clients and across broad sectors. The past 2 years I have advised on more infrastructure projects than ever before, and many are procured through NEC contracts, or on long term frameworks, where contracts are “called off” at the clients’ direction. These types of projects, and other “major” projects which are primarily for socio-economic benefit, cannot be stopped and started, except at great cost and hassle to all involved. They also have long durations and are either done or not done; a half-built railway, or school, is no good to anyone. They have a steady stream of public money and, for this amongst other reasons, must demonstrate “best value to the taxpayer”. By contrast, commercial projects (hotels, office blocks etc), being privately-funded, are more sensitive to financial investor confidence; one or two of mine have paused for strategic rethinking while the real estate market was fragile, and been taken up again as the market recovered. Now, for these projects, it is all about the £/SQFT,  the onward portfolio value, and the ability to spread the risk with, for example, multiple use occupation. 

Our entire industry relies heavily on labour, in particular the skills of EU nationals. My contractor clients and professional services clients (architects, engineers) have significant percentage of EU contract (freelance) labour, or employed staff. Jittery staff is not a recipe for a good project. It is entirely understandable and not of their, or their employer’s doing. And yet, day to day, they, and we, must manage it. 

On the ground, some of my clients have asked me to revise their Terms and Conditions to try to protect against the risk of Brexit. Recently, I wrote some optional clauses for a contractor to bind into its fee proposals. We will see how these work as they are rolled out on new jobs. In terms of contract negotiation, I am still seeing some attention being directly paid to Brexit, however it is very difficult when there is so much uncertainty, and it seems interest in thrashing out risk allocation is waning, and so we come back around to risk, foresight and proactive management. 

One subcontractor specialist has been stockpiling for months, spending a chunk of money on a warehouse to store its EU-derived kit.  Trying to get your Client to bear that cost has been difficult, and in some cases clients have refused. Others have been more sympathetic, and been grateful at my clients’ foresight in ensuring that the kit is available – albeit with an additional storage price - and most importantly, at no delay to the project; remember, whoever has the contractual risk, it is a practical problem. 

The current date of 31 October 2019 allows, on the one hand, some short-term preparations to be made to manage the UK’s exit (no deal or some deal, who knows) but on the other hand, extends the uncertainty too, into the medium term and is only an interim “patchwork solution”. 

Brexit means “horizon-“ or “vision-projects” are paying more attention to flexible sources of investment. This is to balance the risk of financial exposure to uncertain money markets, and, interestingly, is occurring in both public and private sectors. 

All in all, it is a cautious time for industry.

The views expressed by our Legal Analysis contributors are not necessarily those of the proprietor.

 

Source: LexisNexis Purpose Built
Brexit patchworking: the impact of continued uncertainty on the construction industry

Net Zero—will the UK lead the way in combatting climate change?

by | May 27, 2019 | Purpose Built (LexisNexis)

Environment analysis: The Committee for Climate Change’s (CCC) report into the UK’s contribution to stopping global warming comes at a time when climate change is high on the agenda. But, while the government’s commissioning of the report is to be lauded, it remains to be seen whether its response will be enough to ensure the UK retains its position as a world leader in the climate arena, as Simon Tilling, partner in Burges Salmon’s environment law team, explains.

Original News

Government ‘hard pressed to ignore’ new climate change zero-emissions report, LNB News 02/05/2019 65

The CCC has declared in a report that the UK can end its contribution to global warming within 30 years by setting new targets to reduce the country’s greenhouse gas emissions to zero by 2050. According to Simon Tilling, partner at Burges Salmon, the CCC’s report cannot be easily ignored by the government, and will likely have an effect regardless of whether its recommendations are implemented. Begonia Filgueira, legal director at Foot Anstey, contends that the report is a ‘game changer’. Although Filgueira believes that the 1–2% annual GDP hit estimated by the CCC is not insignificant, she nevertheless emphasises the opportunities of climate change policy. Finally, the charity ClientEarth has welcomed the report, although it has warned the government not to continue incorporating surplus emissions into future carbon budgets.

What is the background leading up to this report?

The CCC report comes at a time when the momentum around urgent action on climate change is hitting a crescendo—Greta Thunberg-inspired school strikes, extinction rebellion’s protests, Sir David Attenborough’s call to arms on prime time and Parliament’s declaration of a climate emergency all suggest that it’s an issue the public wants the government to address. All eyes are now on the government to see what it does with this report. But to truly understand the report, we need to go back in time to understand its origins.

The UK set out its stall as a leader in the international climate arena back in 2008 when Parliament passed the Climate Change Act 2008 (CCA 2008). It was the first Parliament to set binding carbon reduction obligations on future governments—namely to reduce emissions by 80% by 2050—and to hold future governments to account on progress towards this target by setting up the independent CCC.

The UK continued its influential role in the 2015 negotiations that led to the Paris Agreement, a commitment to carbon reduction targets to keep temperature increases to below two degrees Celsius above pre-industrial levels, and to pursue efforts to limit rises to one and a half degrees Celsius.

However, in 2018, the Intergovernmental Panel on Climate Change (IPCC) published a report warning of the dangers of a two degree Celsius increase, and pressing for more action to ensure the rise does not exceed one and a half degrees Celsius. Governments across the globe were told that more needs to be done, and faster.

This prompted the government to ask the CCC to advise on whether the targets under CCA 2008 should be revisited and whether a target should be set for net zero. This report has now landed back on government desks—it just so happens it is at a time when numerous sections of society are clamouring for action. That makes the report—and its recommendations—hard to ignore.

What is the significance of the recognition of the need for urgent action?

Credit should be given to the government for asking the question in the first place—it shows that CCA 2008 remains relevant and the advisory role of the CCC is taken seriously. That is good. Of course, what really matters is what the government does with the advice.

What are the key recommendations made in the report?

The crucial recommendation that has come out of the report is the new carbon target suggested by the CCC of net-zero carbon by 2050 for the UK. Scotland should be given a more ambitious target to reach net-zero by 2045 and Wales a slightly lower target of 95% reduction in emissions by 2050, due to fewer opportunities to decarbonise there. This target will mean a greater reduction in carbon emissions than set in CCA 2008 and matches up with the IPCC’s recommendation.

In order to be net-zero by 2050, the report recognises that policy-making will need to accelerate. This will likely focus around tightening up restrictions on key industries but the report makes clear that all sectors should address emissions.

A continued investment of 1-2% of GDP with the costs shared equally across the country is another key recommendation.

Practical suggestions in the report for achieving net-zero include:

  • concentrating on resource and energy efficiency
  • electrification of transport and heating
  • development of hydrogen as a fuel
  • increasing the uptake of carbon capture and storage
  • changing the way we use land

These practical suggestions reflect the report’s focus on the role of technology in achieving the goal of net-zero by 2050. There is already a strong clean tech industry in the UK—a development we have seen at Burges Salmon in the work we do to support the energy and transport sectors. No doubt this will continue to be a focus, in particular developing carbon neutral transport through the use of electric vehicles and electrification of rail. Similarly, there will likely be an increase in environmental standards in certain key emitting sectors.

What has the government said in response to publication of the report?

On the day of publication Greg Clark, the Secretary of State for Business Energy and Industrial Strategy, welcomed the report but said more time was needed to consider the recommendations fully. Prime Minister Theresa May would not go any further when the question arose at Prime Minister’s question time. In fairness, all legislative interventions should be given careful thought before being brought forward, but if there is too long a delay within government then it risks accusations that it is not listening to the central demand for urgent action.

Do you have any thoughts on what the government’s formal written response might contain?

Given that it was the government who requested the report, I doubt it will be shelved, and I doubt others in society would allow that to happen. The question is whether whatever comes forward will match the ambition of the report. Maybe it will—the UK is looking for opportunities to lead on the world stage, and it already has a track record in climate change action, so the government might see this as a chance to cement the UK’s role as a climate leader by becoming the first industrialised economy to legislate for net zero and an end to its contributions to climate change. We shall see.

What are the next steps and likely timescales?

Should the government decide to follow the recommendations of the report, then there is first the relatively simple task of legislating (provided, of course, the government can carry a parliamentary majority on this matter—although I suspect they will be able to, given the policy position of the other parties), followed by the rather more difficult task of delivering against those targets. There is a lot to be done.

The execution is always the hardest part. It might be worth concluding with a reminder that part of the CCC’s role is to report on the government’s progress against the CCA 2008 targets, and that the CCC has warned that the UK’s fourth carbon budget (2023–27) is unlikely to be met. There is nothing wrong, of course, with setting more stretching targets even though current projections indicate we will miss the current targets. It might just mean a redoubling of efforts. But the government’s appetite for stretching itself even further—with the impact on society that will result—remains to be seen.

 

 

Source: LexisNexis Purpose Built
Net Zero—will the UK lead the way in combatting climate change?

Is electricity considered ‘goods’? (Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others)

by | May 27, 2019 | Purpose Built (LexisNexis)

Commercial analysis: Deterioration and cessation of relations between two companies that had partnered in the retail electricity market provides lawyers with an instructive case, particularly concerning the question of whether electricity is to be classed as ‘goods’. Jeffrey Chapman QC, barrister at Fountain Court Chambers, gives an overview on those details that the case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others has helped bring into the light.

Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others [2019] EWHC 507 (Ch), [2019] All ER (D) 79 (Mar)

What are the practical implications of this case?

The case of Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others had the largest award made by an English court in a contested case of compensation to an agent whose agency had been terminated. It was made under regulation 17 of the Commercial Agents (Council Directive) Regulations 1993, SI 1993/3053, a notoriously difficult piece of legislation to interpret. It will be used in the future as an example of the way in which the court values an agent’s business at the date of termination in order to calculate the compensation due to the agent from his principal.

The court also decided (at para [143]) that electricity was ‘goods’ under SI 1993/3053 which may be important in future agency cases in order to decide whether an agency relationship is within the terms of SI 1993/3053.

What was the background?

EE was an energy company selling gas and electricity to consumers largely through pre-paid meter supplies. The claimant, GDM, had provided the defendant, EE, with a sales force whose job was to persuade consumers to ‘switch’ energy suppliers to EE. The commercial relationship between the parties started in May 2015 under the terms of a partnering agreement. On GDM’s case, that was replaced with effect from 29 June 2016 by a document entitled ‘Heads of Terms’.

EE argued that the document was not binding and required another agreement to be drawn up and signed in order to be effective. In the event, Ofgem started an investigation into EE into alleged non-compliance by EE with regulations designed to prevent mis-selling. Relations between EE and GDM thereafter worsened until the end of January 2017 when EE informed GDM that it intended to suspend field sales with immediate effect. On 27 February 2017, GDM’s solicitors (Brandsmiths) wrote to EE confirming the agreement between the parties had been terminated.

What did the court decide?

The court decided in summary:

  • the parties’ relationship was governed by the ‘Heads of Terms’
  • EE had no good grounds to terminate the ‘Heads of Terms’
  • EE had wrongfully terminated the ‘Heads of Terms’
  • GDM was an agent within the meaning of SI 1993/3053
  • GDM was entitled to £1,049,600 for compensation under SI 1993/3053 on the basis of the court’s assessment of the value of GDM’s business at the date of termination
  • as to formation of contracts, variation and superseding terms—the use of the description ‘Heads of Terms’ was not determinative and, applying the objective test from RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14, [2010] All ER (D) 95 (Mar) (at para [95]), the ‘Heads of Terms’ took effect as a valid contract with effect from the date it was signed on 29 June 2019 (at para [98])
  • as to repudiatory breach, key performance indicators and impact on a claim for repudiatory breach—the argument that any mis-selling by GDM was a repudiatory breach of contract by GDM was rejected (at para [124])
  • as to the application of the definition of ‘commercial agent’ in SI 1993/3053, reg 2(1) and the broad interpretation of ‘negotiating’—GDM was an agent under SI 1993/3053 and that its sales force ‘negotiated’ in the broader sense applicable to SI 1993/3053 when selling gas and electricity (at para [146])
  • as to the classification of electricity as ‘goods’ under SI 1993/3053— the 19th century sale of goods cases were unhelpful and concluded that electricity, like gas, was ‘goods’ (it is notable that, since the judgment, the Supreme Court has referred the case of Computer Associates Ltd v The Software Incubator Ltd [2018] EWCA Civ 518, [2018] All ER (D) 21 (Apr) (referred to at para [143]) to the European Court of Justice on the issue of whether computer software which is downloaded constitutes ‘goods’—the judge said he was unsure why Gloster LJ in Computer Associates had found the meaning of goods in the 19th century sale of goods act cases to be helpful (at para [143(6)]))
  • as to the right to compensation under SI 1993/3053, reg 17 and damages for breach of contract—on the facts of this case, common law damages would be based on the same facts as the claim under and would amount to double recovery (at para [188])

Source: LexisNexis Purpose Built
Is electricity considered ‘goods’? (Green Deal Marketing Southern Ltd v Economy Energy Trading Ltd and others)

Contracts for Difference Allocation Round 3—key changes and likely impact

by | May 27, 2019 | Purpose Built (LexisNexis)

Energy analysis: In the lead up to the Contracts for Difference (CfD) third Allocation Round (AR3), Munir Hassan, partner and head of clean energy, Matthew Brown and Dalia Majumder-Russell, senior associates, all at CMS Cameron McKenna Nabarro Olswang LLP, provide insight into how AR3 differs from previous rounds and the impact these differences are likely to have.

Original news

CfD Allocation Round 3—final contracts and statutory notices published, LNB News 02/05/2019 39

The Department for Business, Energy and Industrial Strategy (BEIS) has published the final contract documentation and issued the required statutory notices for CfD AR3 that opens on 29 May 2019. These include the final versions of the Standard Terms and Conditions, the generic front-end CfD agreement and the contract variants for CfD AR3. BEIS has also published the final statutory notices required and the allocation framework that sets out the rules and eligibility requirements for CfD AR3.

What is the background to CfD AR3 and the key next steps on the process?

The next round of allocation of standard form CfD support to new renewables projects in Great Britain (GB) has for some time been expected to commence in May 2019. On 1 May 2019, government formally confirmed and triggered the AR3 process through the issuing of:

  • a number of notices under the Contract for Difference (Allocation) Regulations 2014, SI 2014/2011(Allocation Regulations) and the Contracts for Difference (Standard Terms) Regulations 2014, SI 2014/2012, Statutory Notices
  • final forms of the standard contract terms (and variants thereof) to be awarded to successful applicants, AR3 Standard Terms and Conditions
  • a final form AR3 Allocation Framework (the Allocation Framework), which supplements the legislative position to provide more detail on the allocation and auction process

Accordingly, project developers will be able to submit applications to National Grid Electricity System Operator Limited (in its capacity as the Electricity Market Reform (EMR) Delivery Body) from 29 May 2019, with a deadline of 18 June 2019 for such applications. Those projects found, following any reviews and appeals, to be eligible will (assuming there is more eligible project capacity than budget available, which is very likely) then be required to compete in a competitive auction process to establish which projects will win support and the level of subsidy (the strike price) they will receive.

The timing of this auction process is contingent on the review/appeals process, however assuming there are reviews/appeals then an indicative window of 9-15 October 2019 for submission of sealed bids has been established by the Allocation Framework. This would lead to CfD contracts being signed in respect of successful projects around early December 2019.

What are the key differences between the CfD Allocation Round 2 (AR2) and AR3 and what impact are these changes likely to have?

Since AR2, there have been a series of government consultations and draft documents, establishing and refining the amendments to the CfD contractual terms and the CfD allocation process that will apply for AR3.

The fundamental architecture of both the allocation process and CfD contractual terms remains the same as for AR2, but there have nevertheless been some important changes. Key among these changes are:

  • onshore wind farms of over five megawatts (MW) that are located on remote islands off mainland GB will be eligible to participate in the allocation process. This means that such wind farm projects join offshore wind, advanced conversion technology (ACT), anaerobic digestion (AD), dedicated biomass with CHP, tidal stream, wave, and geothermal in being able to participate in this allocation round. This sets remote islands onshore wind apart from mainland onshore wind, which (as for AR2 and in common with other technologies classed as established) is not able to participate. Whether a project is defined as remote islands onshore wind is in large part determined by the distance of the relevant island from mainland GB and the length of cabling required to link to the project the GB mainland transmission system. The detailed requirements are set out in the Allocation Regulations, as amended for AR3
  • the budget available for subsidy under AR3 is £65m per year (in 2011-12 prices) and the new capacity to be supported is capped at a maximum aggregate of six gigawatts (GW). To compete, projects must be expecting to commission between 1 April 2023 and 31 March 2025. The ‘administrative strike price’ caps on the maximum strike price levels at which project can bid have been reduced—most notably for offshore wind and £65m is a considerably lower budget than made available for previous allocation rounds, and therefore competition is expected to be fierce. This will be heightened by the introduction of higher load factor assumptions for AR3 when the EMR Delivery Body is valuing the cost of supporting projects, although conversely lower strike prices would of course have a positive effect on how far budget can stretch. The revised load factors to be used can be found at Appendix 3 of the Allocation Framework and the administrative strike prices are set out in the statutory ‘Budget Notice’ in respect of AR3
  • various relatively minor (but nevertheless important) amendments have been made to the standard CfD contractual terms to apply to projects successful in AR3 (versus those term which apply for projects successful in previous allocation rounds). These changes include amendments to the definition of force majeure and the provisions for grid connection/grid reinforcement delay, heightened requirements on forecasting of anticipated generation levels, tightened requirements in respect of ACT plant efficiency and types of equipment and updated Combined Heat and Power Quality Assurance scheme requirements for biomass with combined heat and power (CHP), updated definitions of ‘waste’ and bioliquid sustainability requirements to reflect Directive 2015/1513/EU on renewable energy and biofuels in the EU transport sector, new greenhouse gas emissions level requirements for biomass with CHP, updated drafting to clarify that CfD difference payments should be paid on electrical output net of parasitic loads, various changes regarding State aid, and references to reflect the anticipated Brexit position
  • finally, while it has had less emphasis in consultations, the Allocation Framework tweaks the allocation process and auction process in a number of respects. Again, the fundamentals around the eligibility requirements and competitive auction process remain the same (subject to the introduction of remote island wind), but amendments include refinements to evidencing planning consent and connection requirements, updated requirements for ACT reflecting the amended contractual requirements set out above, changes to the flexibility afforded to phased offshore wind bidding, and updates to bids that ‘interleave’ a projects’ flexible bids. Together with the Allocation Framework itself, the EMR Delivery Body’s Round 3 guidance provides additional information on this

Do you view any of the changes to the CfD standard form contracts as likely to have much effect? Anything of surprise?

To a large extent the changes being made in respect of AR3 have been well sign-posted and therefore should not come as a surprise. In AR2, perhaps the main surprise was how low offshore wind farm projects were able to bid versus the 2014 auctions from allocation round one (AR1). Therefore, there will be a keen interest in where strike prices end-up after AR3.

The amendments to the contractual terms are, in the main, perhaps best defined as clarificatory rather than fundamental. Nevertheless, as for previous rounds, it is of course important for projects developers (and their advisors) to consider the specific position of their projects as against both the requirements of the allocation process and the contractual requirements that will apply if a CfD contract is awarded.

The participation of remote island wind will inevitably attract attention as, linked to this, will the ultimate mix of technologies that win support. Depending on where strike prices settle, no doubt the policy debate will continue on the types of technology/projects that should be given CfD support and (of relevance to some technologies more than others) the use of the CfDs with low strike prices to give price certainty as opposed to subsidy.

Source: LexisNexis Purpose Built
Contracts for Difference Allocation Round 3—key changes and likely impact

Brexit patchworking: the impact of continued uncertainty on the construction industry

PI claims and renewable energy disputes

by | May 20, 2019 | Purpose Built (LexisNexis)

windfarm

Jonathan Spencer (Partner) and Harry Speak (Trainee Solicitor) of Simmons & Simmons look at some of the key areas of disputes and consequent professional indemnity (PI) claims in projects relating to wind power, waste to energy plants, solar power installations and hydroelectric schemes.

Introduction

PI claims in respect of renewable energy projects usually arise from the negligence of either the designer or the contractor who has breached their obligation to act with ‘reasonable care and skill’.
 
The distinction between a designer and contractor is sometimes blurred, particularly with renewable energy products where the product designer may also be responsible for the implementation of the product. This is usually the case with smaller-scale renewable energy solutions.
 
PI insurance is only likely to cover a designer/contractor’s liability where they have contracted to provide a service with ‘reasonable skill and care’ (which would be implied into the contract in any case), rather than the higher duty associated with warranting that their product will be ‘fit for purpose’. That said, if an employer demands that a fitness for purpose obligation is included in the designer/contractor’s appointment, an endorsement to the PI policy could be agreed.
 
Given renewable technologies are relatively new and are under constant development, it is to be expected that designers and contractors will encounter issues while they gather experience of designing and deploying these technologies, and subsequently incur liability.
 
Furthermore, Californian-based GCube Insurance recently indicated that there has been a significant rise over the last 5 years in the number of claims in the U.S. renewable energy market as construction firms have come under pressure to build projects more efficiently and in shorter timeframes. With less experienced personnel being used to handle increasingly complex equipment, the frequency and severity of claims is on the rise. Similar risks likely apply in the UK. It is, therefore, essential that insurance policies are drafted carefully to avoid coverage where operators of equipment are inadequately trained.
 

This note focuses on key areas of disputes and liability in respect of: (1) wind power; (2) waste to energy plants; and (3) solar installations. It also considers briefly a recent and apparently ongoing claim regarding hydroelectric power. While the examples considered are not exhaustive, given the ever-shifting landscape of liability, they address known ‘hot spots’ for liability that have emerged.

Wind power

Generally, throughout the construction stage for wind power, the possibilities of disputes (and consequent PI claims) arising would be like any conventional construction project. However, one specific issue which has affected wind turbines on several occasions has been the failure of their foundations.

MT Højgaard v E.On [2017] UKSC 59 is the most widely reported example of a case concerning wind turbines: is the most widely reported example of a case concerning wind turbines:

  • Facts: Shortly after completion of the project, the foundation structures of two offshore wind farms, designed and installed by MT Højgaard A/S (MTH) at Robin Rigg, failed. The foundations had been made in accordance with an international standard for the design of offshore wind turbines. However, a formula contained within the standard was incorrect, meaning that the foundation strength had been overestimated and repairs were necessary. The resulting dispute considered who was responsible for the €26.25m of remedial costs.
  • Supreme Court decision: It was MTH’s responsibility, as contractor, to identify whether the works required a design which exceeded the minimum expectations provided for by the international standard. Furthermore, MTH had given and breached a warranty that the foundations would last for 20 years, placing them at the higher ‘fitness for purpose’ standard, rather than the mere duty to exercise ‘reasonable care and skill’. Therefore, MTH was liable despite having exercised reasonable skill and care in the design of the foundations.

Although each case will turn on its own facts and the specific wording of the contract, the Supreme Court’s decision serves as a useful reminder that a contractor/construction professional cannot always rely on the defence that they exercised reasonable skill and care. This case is also of concern to construction professionals as, typically, PI policies exclude cover for strict liability (e.g. for guaranteeing fitness for purpose). Agreeing absolute design obligations could, therefore, leave construction professionals in a situation where there is a gap in cover.

There are other scenarios in which claims could arise, including:

  • With off-shore wind farms, disputes can arise where subsea cables have been positioned poorly, or where the incorrect cable has been selected at a design stage, resulting in the cables being damaged by anchors or by the dragging of fishing nets. Repairs to damaged cables are likely to have significant financial implications because their (usually) remote location makes it difficult to carry out repairs, as does the limited number of skilled professionals with the expertise to undertake such repairs. This type of liability might affect parties acting at a design stage (who have made decisions regarding the location of the cable), or those involved at a construction/installation stage where a contractor has laid the cables in the wrong position, not in accordance with the design, thereby acting without ‘reasonable care and skill’.
  • Another issue in relation to the construction of off-shore wind turbines was recently seen in the High Court case of Fluor v Shanghai Zhenhua Heavy Industry [2018] EWHC 1 (TCC). In this case, the Claimant had contracted to construct the infrastructure for 140 wind turbine generators at sea. The materials provided by the Defendant were found to have cracks in the welding, which resulted in the Claimant incurring added costs of inspection and repair of these parts, as well delay in installing the turbines at sea.
  • Following the installation of wind turbines, claims can arise if the installation does not perform as well as the consultant had estimated. A consultant cannot be expected to predict the output of a wind turbine entirely accurately, so the notion of what is an ‘acceptable margin of error’ remains unsettled. However, the consultant may still be exposed to claims where the reality of the performance of the turbines proves to be far from what their analysis had suggested would be the case when the location for a development was selected.
  • It is standard practice following completion of a power project that a review of the technical capabilities of the project will be undertaken by an independent engineer who will prepare a report for the benefit of the lender. This report will validate that the project has been completed in accordance with the design specifications and that the wind turbines will operate as expected under that design. In providing these assurances, it also opens the possibility of the independent engineer themselves being exposed to a claim (i.e. should their assessment of the wind farm not be conducted with reasonable care and skill).

Waste to energy

Waste to energy (W2E) projects are not technically ‘renewable energy’ projects. Rather, they provide an alternative to landfill. These projects take waste and convert it into a valuable product; usually electricity and heat. Typically, this is often done by burning waste and using the hot gases to boil steam and turn a steam turbine. However, new technologies also allow for ‘baking’ of the waste at a high temperature to produce synthetic gas, ‘syngas’, which can be burned directly in gas turbines. W2E projects generate revenue both through the collection of waste products and through the generation and export of power.

The most prominent reported case involving W2E is MW High Tech v Haase [2015] EWHC 152 (TCC). In this case, the contractor submitted a fixed price tender to an employer which relied on a basic design prepared by its process engineer for an anaerobic digester. The engineer subsequently developed a detailed design which went beyond the parameters required in the ‘Delivery Plan’, adding substantially to the contractor’s costs. The court held that the reasonable skill and care obligation overrode a specific obligation to comply with the Delivery Plan. This meant that if compliance with the Delivery Plan was not possible without the engineer being negligent, then the engineer was not obliged to comply with the Delivery Plan. However, if compliance with the Delivery Plan was possible with a non-negligent design and the engineer failed to use reasonable skill to produce the expected design, that was a prima facie breach of contract. Therefore, the engineer was liable for the contractor’s increased costs.

Once operational, ‘throughput’ is the term denoted to the amount of material, or the number of items, which pass through a W2E system. A high throughput is necessary to ensure maximum intake of waste and maximum electricity generation and, therefore, maximum income for the plant.

Plants are designed for a particular waste composition. Faults with the design of the plant may prevent the planned composition of waste in the W2E system from being used effectively by the plant, reducing throughput and leading to a loss of income for the plant. This, in turn, can then lead to claims for negligence against the designer.

On the other hand, the operator of the plant is usually responsible for the provision of the waste and may fail to provide the composition of waste necessary for the plant to operate in accordance with its design. Subsequently, the operator may be subject to a professional negligence claim for failing to act with reasonable care and skill in gathering the necessary composition of waste, although, in reality, it is difficult for the operator to control this.

Disagreements may arise between the designer and the operator in respect of where the responsibility for the composition of the waste lies and the criteria the plant should have been designed to meet, opening both parties up to the possibility of professional negligence claims.

As W2E technologies continue to develop, designers may also find that they incur liability where a major component of a system that they have designed simply does not operate as expected. Where remedial works are required, claims may be brought against the designer for loss of income resulting from operating the plant at a reduced capacity.

Solar

A key element of claims arising from solar energy systems comes from the installation of the system itself to the existing infrastructure (particularly in a residential context). First, the contractor responsible for installation must ensure that the existing roof structure can actually accommodate the additional load of a solar panel. When assessing the risk, underwriters should check that the individuals at the potential insured have (1) an appropriate dual-qualification to make the assessment of the structural stability of the roof, or (2) had a certified professional make the assessment, before any installation takes place.

Where solar energy is not being used for electricity generation, but simply for thermal water heating, an assessment of the existing infrastructure of the property is also necessary. A failure to do so could result in a substantial claim should the system later fail.

The UK government closed its Feed-in Tariffs scheme to new applicants on 31 March 2019 (though applications to the scheme can be made until 31 March 2020 in respect of eligible systems installed before 31 March 2019). There is a possibility, therefore, that liability could also arise where a contractor delayed the installation of a renewable technology meaning that the consumer lost the benefit of an applicable subsidy or tariff. See, for example, GPP Big Field LLP v Solar EPC Solutions [2018] EWHC 2866 (Comm) in which the court held that, had a liquidated damages clause not been effective, it would have awarded general damages because the delay meant that the claimant was not eligible for a particular Renewable Obligations Order Feed-In Tariff (it qualified instead for a lesser tariff which was still available). See News Analysis: Liquidated damages clauses were not unenforceable penalties (GPP Big Field v Solar EPC) for further details.

Hydroelectric

Hydroelectric claims can arise from: water turbines failing; the breakdown of electrical and mechanical machinery; and damage from water surges. SSE v Hochtief [2018] CSIH 26 is a recent Scottish decision which involved a claim concerning a hydroelectric power scheme.

  • Only 7 months after opening, the Glendoe hydroelectric power plant stopped generating electricity as a result of falling rock material which had gradually and completely blocked the tunnel. While out of operation, SSE lost substantial amounts of revenue. It asked the contractor, Hochtief, to carry out the remedial works, but the two parties were unable to reach agreement about who should pay. The dispute between the parties considered whether the collapse was caused by a defect in the design or in the construction.
  • The engineering geologists had been aware of the risks of a fault zone at the part of the tunnel where the collapse occurred but, having not found poor rock conditions, they did not reinforce the tunnel perimeter at that section. The collapse was then caused by insufficient support.
  • As such, it was not the design that had caused the loss, but the implementation of that design. The tunnel’s collapse was a contractor’s risk, and the contractor was found liable for in excess of £100m.
  • It was announced that Hochtief had been granted leave to appeal to the UK Supreme Court. However, at the time of writing the case does not appear to have advanced past this initial step towards securing a Supreme Court hearing.

First published on LexisPSL Construction. The views expressed by our Legal Analysis contributors are not necessarily those of the proprietor.

Source: LexisNexis Purpose Built
PI claims and renewable energy disputes

Energy weekly highlights—3 May 2019

by | May 3, 2019 | Purpose Built (LexisNexis)

This week’s edition of Energy highlights includes the Office of Gas and Electricity Markets’ (Ofgem) announcement that customers will automatically receive compensation from 1 May 2019 if they are mistakenly switched and not returned to the correct supplier; Innovate UK and UK Research and Innovation’s announcement of a £30m fund available to help develop designs for smart local energy systems and the Department for Business, Energy & Industrial Strategy (BEIS) has launched its second consultation on the future of small-scale low carbon generation. Also this week, the Oil and Gas Authority (OGA) has published its new corporate plan which endeavours to ‘add an additional three billion barrels of production by 2035’ and the Intergovernmental Panel on Climate Change (IPCC) has invited experts to apply to become an expert reviewer for the first order draft of the IPCC Working Group I, Sixth Assessment Report. We also include details of our new and updated content, including our new Brexit Toolkit.

Electricity and gas market regulation and licensing

Customers will receive compensation if switched to different energy supplier

Ofgem has announced that customers will automatically receive compensation from 1 May 2019 if they are mistakenly switched and not returned to the correct supplier—as well as if there is a delay in refunding credit balances of customers who have switched away. Customers will receive at least £30 in compensation as new requirements from Ofgem aim to increase consumer protection and confidence in the switching process. Ofgem will also introduce compensation for delayed switches and late final bills later in 2019. See: LNB News 30/04/2019 72.

Renewable energy

Consultation on changes to introduce Smart Export Guarantee (SEG) opened

BEIS has launched its second consultation on the future of small-scale low carbon generation. This consultation seeks views on proposals to modify electricity supply licence conditions for introducing SEG. The closing date for submissions is 27 May 2019. See: LNB News 29/04/2019 47.

£30m in funding announced for smart local energy systems

Innovate UK and UK Research and Innovation have announced that UK organisations can apply for a share of up to £30m to help develop designs for smart local energy systems. The funding aims to make the best use of innovative technologies that include cheaper renewables, energy storage, low carbon heat and digital infrastructure. The funding comes as part of the Industrial Strategy Challenge Fund that aims to support industry, academia, public bodies and local communities in providing new and innovative energy systems in the UK. See: LNB News 30/04/2019 29.

Oil and gas

OGA’s new corporate plan looks at data digitalisation

OGA has unveiled its new corporate plan, which outlines the regulator’s priorities for the next five years. The plan is in line with the OGA’s Vision 2035, which endeavours to ‘add an additional three billion barrels of production by 2035 and to grow supply chain turnover by being a world leader in specific sub-sectors, doubling the UK’s share of service sector exports.’ According to the regulator, ‘key to unlocking these and other future opportunities are data and digitalisation.’ The OGA in 2019 launched the UK’s first National Data Repository, which the regulator hopes ‘will encourage innovation and potentially help unlock significant additional value—particularly if industry can fully embrace digitalisation across the asset lifecycle.’ See: LNB News 26/04/2019 14.

Conventional power, waste to energy, biomass and combined heat and power projects

Government told to give clear policy direction on carbon capture technology

BEIS has urged the government to give a clear policy direction on carbon capture technology to ensure that ‘the UK seizes the industrial and decarbonisation benefits of carbon capture usage and storage’. See: LNB News 25/04/2019 4.

Air emissions, efficiency and climate change

Call for expert reviewers on climate change draft report

BEIS has announced that the IPCC has invited experts to apply to become an expert reviewer for the first order draft of the IPCC Working Group I, Sixth Assessment Report. The report is available for expert review from 29 April 2019 to 23 June 2019 and registration closes on 15 June 2019 at 11:59 pm. See: LNB News 30/04/2019 15.

Government ensures that British Steel company complies with EU environmental obligations

The Secretary of BEIS, Greg Clark MP has stated that the government has entered into a short-term bridge facility worth approximately £120m with British Steel in order to allow the company to meet its 2018 legal obligations under the EU Emissions Trading scheme (ETS). The absence of the expected 2019 free ETS allowance for British Steel—gifted to companies that are the most exposed to international competition—due to the Withdrawal Agreement not yet being ratified, meant that without the £120m provided by the government, British Steel would not have met its 2018 obligations. This would have led to an ‘immediate and unremovable fine’ of £500m, had the government not provided the funds. See: LNB News 01/05/2019 91.

Source: LexisNexis Purpose Built
Energy weekly highlights—3 May 2019