Author: Vivek Kapoor
We have all come to realise that achieving the twin global goals of universal access to affordable energy and averting a climate crisis will require a mass scale-up of investments in renewable and green energy infrastructure – redirecting capital from carbon intensive energy and transport systems. The International Renewable Energy Agency estimates that the transformation of the energy system alone needs cumulative investments to reach USD 110 trillion by 2050 to keep the rise in global temperatures to below 2°C and towards 1.5°C during this century. Of that amount, over 80% will need to be invested in renewables, energy efficiency, end-use electrification, and power grids.
The energy crisis in Europe has refocused minds on the dependency on fossil fuels even in the more mature economies. The emerging economies not only have to decrease their diet of carbon intensive energy, but also need to achieve universal access to affordable energy. Hence, the need to scale renewable and green energy generation, transmission, and storage is urgent.
The development of new infrastructure and decarbonisation of the energy supply chain will generate more public-private partnerships, collaborations between traditional and renewable energy companies, and with new technology companies. The implementation of these partnerships and collaborations will give rise to disputes arising from incompatible expectations between partners, technology and designs not fit for purpose, infrastructure constructed on overly-zealous timetables, competition over funding and state aid, pricing pressures, performance requirements, and contractual warranties not being met.
Development of new infrastructure will also entail repurposing or decommissioning of old infrastructure. The decarbonisation policies of the numerous private and state-owned companies in the energy sector will necessarily operate on different terms and on different timetables. These differing approaches to decarbonisation will often translate into incompatible approaches to operational adjustments. The existing contracts and the warranties, indemnities, force majeure clauses and other contractual provisions are unlikely to be able to allocate risk and responsibility for the consequences of such fundamental changes.
In the interim – until suitably renewable and green infrastructure is in place – significant investments in fossil fuels will continue in order to deal with short-term energy shortages, compounding the challenge. This is likely to bring a wave of claims, when this infrastructure is decommissioned.
States will be key players in these energy transition related disputes. Laws and regulations will sometimes drive the change and many times respond to the changes and their consequences. States will also find themselves as respondents in investor-state claims as longer-term contracts are amended or terminated, and infrastructure decommissioning. They are also likely to face claims arising from state’s continuing environmental obligations.
The private sector and private finance will play an important role in scaling renewable and green energy infrastructure. Much of this investment will be cross-border, with cross-border capital and technology flows. The jury may be out on where protections against discrimination and uncompensated expropriation and guarantees of fair and equitable treatment rank as factors for investment, but ISDS is vital to the energy industry’s investments.
The great challenge to ISDS is that it is seen an obstacle to global climate transition. In its 2022 Report the IPCC highlighted ISDS as a crucial obstacle to global climate transition. One of the instruments that they pointed to, the Energy Charter Treaty, has already seen a mass exodus over the last couple of months – even though States presumably appreciate that their obligations under the ECT will not immediately evaporate.
In the leadup to COP27, the UNCTAD released two companion Issue Notes covering ISDS. According to the Issue Notes, ISDS is impacting countries’ ability to effectively legislate against climate change. The risk of private companies using the ISDS system to challenge climate policies is a major concern.
While there are instances where the ISDS mechanisms are being used to directly challenge important environmental policies and climate actions, many have not been successful. Arbitral tribunals are also increasingly recognising treaty-based environmental defenses to investor claims.
The UK Supreme Court decisions in Vedanta and Shell is likely to propel attempts by claimants to pursue transnational parent companies for actions of their overseas subsidiaries, particularly in connection with environment and climate change issues arising from the energy and natural resources sector.
ESG issues have become more important factors in investor decision-making in the energy and natural resources sector. There is greater scrutiny from shareholders, which will only increase as a result of shareholder activism. Thus, climate-related litigation is likely to witness an upward trajectory.
The disputes that arise from the pursuit of energy security and energy transition will be often be cross-border. Those that play out in the public domain will be keenly observed across jurisdictions as potential precedents. English courts – which are preferred by parties across the globe, arbitral tribunals seated in key seats like London, and the counsel and international and regional law firms that act before these courts and arbitral tribunals, will all play an important role in shaping the legal framework for achieving energy security and energy transition. As we congregate in London for the London International Disputes Week 2023, I look forward to discussing some of the important issues arising on these topics with colleagues from across the world.
Vivek Kapoor is a barrister, advocate and arbitrator specialising in commercial and investor-state disputes, particularly those arising from corporate and commercial transactions in the energy and natural resources sector, and energy infrastructure. He has a wide-ranging practice as counsel in international arbitration, and before the Courts in England & Wales, India, and DIFC. He also regularly sits as an arbitrator.