'Only a matter of time' before developers start suing states over wind theft

Orsted, Iberdrola and Equinor are among the developers which could eventually launch international legal claims against states over ‘wind theft’ disputes, with a legal expert saying it is “only a matter of time” before such claims arise.

A who’s who of offshore wind developers – including the aforementioned names – are currently embroiled in disputes over inter-farm wake losses between multi-billion dollar planned and existing projects in the North Sea.

The only realistic way to remedy losses of this scale is by ordering developers of newcomer projects – RWE, TotalEnergies and BP all sit in this camp in current UK disputes – to pay hefty compensation payments to incumbents.

What legal avenue would a developer have for bringing such a claim? Potentially by invoking protections afforded to foreign investors under the web of bilateral and multilateral investment treaties signed between states.

Energy companies, most often in the oil and gas space, are big users of these treaties and frequently launch claims running into hundreds of millions or even billions of dollars against states they accuse of failing to protect their investments.

Many European states are in the process of leaving the ECT but, for now, remain bound by its 'sunset clause' that protects existing investments for an additional 20 years after exit.

So a developer from, for example, Denmark (Orsted), Spain (Iberdrola) or Norway (Equinor), countries that are all signatories to the ECT, could bring claims against the UK government if they believe they have been treated unfairly. Britain’s SSE would not however be able to bring such a claim against the UK, given these treaties are in place to protect international investments.

Claims brought under these treates are heard not by judges but by international arbitration tribunals, typically composed of three lawyers. The cases are admistered by institutions such as the International Centre for Settlement of Investment Disputes, based in Washington, DC, or the Permanent Court of Arbitration in The Hague.

Rahman, who co-heads London-based legal boutique Saadeh Rahman and has represented investors and states in numerous high profile international disputes, believes there are at least three possible circumstances in wind theft disputes under which a foreign investor could bring a claim.

The first would be an investor such as Orsted or Equinor bringing a claim against the UK government if energy secretary Ed Miliband approved a wind farm – for example Dogger Bank South – that would do huge damage to the revenues of their own projects without requiring that any compensation be paid.

“The incumbent investor would probably argue, among other things, that it was not ‘fair and equitable’ for the State to approve a new farm which damages the already-in-place investment,” said Rahman. Investment treaties including the ECT routinely require states to provide “fair and equitable” treatment to investments.

The second ground, he said, could stem from a disagreement over the extent of the wake losses affecting a project. With numerous competing models for assessing wake losses all currently in use, warring developers and indeed the government could all disagree over the extent of wake losses and financial losses stemming from them.

In that scenario, Rahman said that the owner of an incumbent wind farm may argue that compensation awarded is too low and may launch an investment arbitration claim against a state for “undervaluing its loss.” The reverse could also be true if a developer felt it had been ordered to pay too much compensation.

A third ground could stem from a government denying permission to an investor to build a wind farm on the basis of potential wake losses. An aggrieved developer, for example RWE, could bring a claim under an investment treaty arguing that the decision was “unreasonable” or “unfair,” said Rahman.

“The argument would be that the government did not have legitimate reasons for denying permission or that it could have allowed the investment with measures in place to mitigate or pay compensation for loss.”

Developers could use award against state as ‘leverage’ in future disputes

But would developers like Orsted or RWE be willing to risk launching a claim against a state – whether that be the UK or any other – and risk jeopardising their relationship with the government?

“The answer is likely to change from investor to investor and from state to state,” said Rahman.

An investor could be hesitant to bring a claim because it could prejudice future operations or investments in that state, he said, but “risk of future blowback is not likely to dissuade investors who have strong claims of substantial value.”

There is also another factor at play, said Rahman. A developer may worry that if they do not explore “every available avenue of challenge,” both internationally and locally, “any offending measure by one state may be adopted by other countries.”

So Orsted might worry that if it does not take a strong line with the UK over approving a new wind project that could substantially hit the revenues of its own without requiring compensation be paid – what would stop the Netherlands, Germany or Belgium doing the same?

Any award by an international tribunal “could be influential in setting out what is and is not permissible” in this space from an international law perspective, said Rahman, and provide investors with “meaningful leverage” in future disputes.

Lessons to learn from oil and gas disputes?

The wind industry is not the first in the energy sector to find major players at loggerheads over who has rights to resources that are not easy to delineate.

Tomas Vail, another investment arbitration expert and founder of London legal boutique Vail Dispute Resolution, highlighted the “potential links between this phenomenon and two more established sources of disputes, one being around riparian water rights and the other around adjoining oil deposits.”

Supermajors have long clashed over migration of oil and gas between adjacent development blocks, while disputes over water rights over major rivers can cause geopolitical tensions – think Egypt and Ethiopia clashing over the Nile, or China and India over the Brahmaputra river.

However, although the “underlying tensions are familiar,” Vail noted that there have been “decades of disputes and decisions to help shape the law” in the oil and gas and hydro space. The same cannot of course be said for wind wakes.

And although water and oil are “difficult to track if underground,” agreements can be made on how to divide an oil reservoir,” he said. Wind, by contrast, “cannot obviously be owned in place,” complicating matters further.

One thing is certain, disputes over wake losses between offshore wind farms are taking developers into uncharted waters.