Renewable energy in Africa looks set for a bright future, with increasing investment and growing incentives from states to develop green infrastructure. But what are the key legal and contractual issues that stakeholders should consider?
Africa has a huge need for energy. If its energy gap is to be closed in a timely and sustainable way, renewables have a key part to play. It is no secret that Africa presents exciting opportunities for investment in, and development of, renewable energy. There is an abundance of renewable resources across the continent, including solar, wind (both onshore and offshore), geothermal and hydroelectric. As renewable technologies advance, the opportunities in Africa can be expected to continue to expand, despite the global disruptions caused by the COVID-19 epidemic.
But what risks should stakeholders consider before committing to such projects? How can risk most effectively be managed? We will explore some of these questions, centred around three key risk areas: technology risk; performance measurement and testing; and policy and political risk.
- Technology Risk
Renewable technologies tend to be at the cutting edge. While it is very positive to see technical innovation providing answers and enhanced options against the backdrop of the climate crisis, this creates its own set of risks. New technologies come with enhances risk, and the prospect of defects claims and/or deficient performance is therefore heightened.
In more mature renewables markets, such as Europe, owners and funders have grown more comfortable in accepting some of this risk and managing it appropriately during the course of the project. In Africa, where there may be less experience on the part of national bodies in developing such projects, it seems likely that these bodies will seek to place as much risk as possible onto concessionaires and contractors.
It is key, therefore, to ensure that the project documentation precisely allocates and demarcates design responsibility, with warranty periods and terms clearly defined. From the perspective of a party to an operating agreement with a state counterparty, engaging a contractor to undertake the necessary construction works, it is important to strike a careful balance. This balance lies between on the one hand, ensuring adequate recourse against contractors and designers to ensure the plant functions as it should, and on the other hand avoiding passing on a risk so high that contractors will be unprepared (or unable) to accept it without charging a significant premium.
- Performance measurement and testing
An issue closely related to technology risk is the assessment and measurement of performance. The performance obligations that a contractor (particularly in relation to a design and build contract) warrants will be fulfilled by a project are often assessed over several years following project handover. This means that the contractor may be become liable to pay liquidated damages, or may lose entitlement to upside payments, as a consequence of failures by the plant to performance targets in a period when it has no control over the running of the plant.
Other factors may contribute to plant underperformance, such as poor operation and maintenance mechanisms/practice. Such risks are heightened in markets where experience of the relevant (sometimes novel) technology may be lacking. The potential therefore exists for the contractor to be unduly prejudiced by the post-handover operation and/or maintenance of the plant; this is something which should be guarded against. It is therefore critical for both contractors and owners to give careful consideration to performance criteria and how success is to be measured, over what period of time and with regard to what additional factors.
- Policy and political risk
Renewable energy projects often necessitate significant upfront capital commitment, which is then to be recouped over a sometimes lengthy period of operation. Economic viability may well depend on stable government policies with regard to such matters as tariffs, subsidies and the development/availability of transmission infrastructure. These factors are often coupled with the fact that such projects may well be closely connected to national policy initiatives and may well involve a state (or a quasi-state entity) as a key stakeholder. It can be thus be seen that such projects are highly vulnerable to changes in state policy.
Further, the current dramatic collapse in global oil prices presents a challenge to the cost-competitiveness of renewable technologies and fuels, and indeed risks fundamentally upsetting the financial parameters of a renewables investment. That is to say, low oil and gas prices may tempt some counterparties to seek to abandon renewables projects in favour of "quick fix" alternative options, making use of cheap and readily available oil and gas.
All of this serves to enhance risk, and the need for parties to properly secure their positons as far as possible, including ensuring robust rights of recourse by way of appropriate dispute resolution mechanisms.
International arbitration is often a preferred means of dispute resolution. Investors are often wary of coming before local courts, whose practices the investor may be unfamiliar, and there may too be concerns about conceding "home court advantage", particularly where a state is involved and that state's courts would adjudicate disputes. The flexibility offered by international arbitration in permitting the selection of an appropriate tribunal provides a further attraction, in allowing parties to ensure a tribunal likely to be comfortable with the technical issues particular to renewables projects. A further, and key, attraction of international arbitration is the relative ease (at least by comparison with a judgment of a national court) of enforcement of an arbitral award internationally – via the New York Convention.
Investment treaties too may provide recourse against the risk of state action which might serve to harm the project. This will of course depend on there being an investment treaty in place between the investor's domicile state and the host state for the renewables project. It would also be necessary to ensure that the investment qualified under the relevant treaty. Since almost every African state is party to at least one (and in many cases several) bilateral investment treat(y)(ies), the potential for treaty protection is an important consideration.
These are some of the key considerations to keep in mind as Africa continues its growth as a promising and important renewables market. In today's uncertain times, careful attention to the identification and management of risk are more important than ever.
Originally published by Energy Voice on the 28th of May, 2020
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