The Transition to Renewable Energy Will Fuel New Disputes in the Energy Industry
USA March 8 2021
Interest in renewable energy has risen sharply in recent years. More than ever, companies are investing in technology and businesses for solar, wind, hydrogen/carbon capture, and renewable fuels/biomass. Private equity companies, through special purpose acquisition companies (SPACs), have also fueled more investment in renewable energy projects and electric vehicle companies. Moreover, public companies that are in the renewables business or tangentially related, i.e., Tesla, NextEra, Enel, and Iberdrola, have seen tremendous growth in recent years. This interest in renewables and related businesses has accelerated with the election of President Joe Biden, who many believe will use policies to promote the country’s transition to renewable energy. With all this interest in renewable energy, corollary disputes will involve many new actors in disputes that are long familiar to those in the energy industry. This article explores some potential areas of disputes that companies in renewables space may face.
Renewable Energy Credits
The economics of certain renewable projects depend on certain government incentives (tax or otherwise), which many refer to as “renewable credits.” These renewable credits may make or break the economics of an energy project and thus are critical for companies hoping to rely on existing or future laws when starting new projects. In other words, whether a company complies with certain standards to obtain renewable credits will likely determine the profitability of the project. Therefore, there will likely be disputes surrounding whether companies engaged in best efforts to obtain these credit incentives or whether investors can withdraw money in case they do not. One such dispute has already occurred between RIL USA Inc. and Sundive Commodity Group LLC. In that dispute, RIL USA alleges that Sundive did not deliver renewable fuel standard program credits by the end of 2020 as promised. As more projects whose economics are based on renewable credits continue to develop, additional disputes will likely follow.
Shareholder Disputes and Shareholder Activism
As more energy companies go public, they will increasingly face the traditional lawsuits from certain shareholders. For example, shareholders of SolarWinds Corp. sued it for allegedly failing to disclose certain information concerning certain cybersecurity vulnerabilities. Even for non-renewable companies, a trend that is only likely to increase is the outspoken shareholders who want to push their companies to accelerate their transition to renewable energy or at least reduce their carbon footprint. This has been true with activist investors of supermajors who have begun to pressure their companies to reduce their carbon footprint. This type of activism, however, is not limited to energy companies, a number of non-energy companies find themselves negotiating with shareholders to decrease emissions or to stop investing in nonrenewable companies. Such activity by shareholders is not likely to abate, and therefore, activism and shareholder lawsuits will likely increase as interest in renewable energy increases.
More companies and investors looking into renewable energy could mean greater focus on anticompetitive activities by regulators. If renewable companies follow some of the consolidation that traditional energy companies have seen within the past year, antitrust flags could be raised. This is especially true if renewable energy companies try to combine. Likewise, there may be a focus on anticompetitive practices by certain utilities as new market participants begin to compete for space. This is especially true for companies engaging in distributed solar.
General Commercial Litigation
The rise in renewable energy will also bring in new breach of contract disputes as companies accuse one another of failing to meet obligations. One such dispute already under way is Valero Marketing & Supply Co. v. Sundive Commodity Group LLC, pending in the 151st District Court of Harris County, Texas. Many other breach of contract disputes arising from busted deals or failed commitments are likely to occur. With the high interest in renewables by private equity investors, these somewhat small disputes could turn into disputes between portfolio companies with high-powered attorneys funded by sponsors. Regardless of who is in these disputes, they will almost certainly increase.
Engineering, Procurement, and Construction (EPC) Disputes
The transition to renewables will likely lead to fresh rounds of EPC disputes as companies build solar plants, wind farms, and modify refineries to support renewable projects. The construction firms active in the energy industry now will likely be the same firms subject to these new disputes. Even though the engineering and construction of these projects may differ from traditional energy projects, the disputes concerning timeliness, appropriateness of specifications, and breaches of agreements will likely mirror current oil and gas EPC disputes. For example, in a dispute over five EPC contracts to construct solar power generation plants, the purchasing party succeeded on claims for delay damages and non-completion of the work required by the EPC contracts. A similar dispute occurred over delays concerning the construction of a solar-wind project.
Hydrogen and renewable fuels must still be transported, and thus companies in the midstream space can expect to see fresh disputes concerning similar midstream disputes with different players. In addition, some people view natural gas as a “bridge fuel” that will help support the transition to renewable energy. Thus, to some extent, natural gas will continue to have a prominent place in the energy framework during a transition to renewable energy. Therefore, disputes surrounding natural gas and liquefied natural gas (LNG) will also continue to occur and grow.
Renewable energy will not only provide fresh fuel to meet our rising energy demands but it will also fuel litigation in various areas. While many of these disputes will involve actors new to the energy industry, the disputes themselves will involve conflicts that are long familiar to the oil patch.