As the saying goes - one person's rubbish is another's treasure. Never has this been truer in the energy from waste industry.
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An introduction to energy-from-waste technology
The types of waste capable of being treated and processed in energy-from-waste (EFW) plants is continually expanding, with thermal technologies now able to convert virtually any waste into steam to create electricity via a steam turbine. This includes waste from construction and demolition sites, commercial and industrial waste, municipal solid waste and refuse derived fuel (pre-treated black bin bag rubbish from homes).
The thermal technologies used to convert these wastes to electricity is achieved predominantly through traditional combustion and incineration methods, or gasification which is more technically challenging as it requires an oxygen depleted environment within the combustion unit to create a syngas before complete combustion of gases is achieved.
Processing food waste is achieved using entirely different biological processing techniques known as anaerobic digestion and fermentation. Both processes use proven technologies with proven designs and have been remarkably successful.
Flue gas treatment technologies developed to reduce the harmful pollutants emitted from combustion or gasification of these fuels are now extremely effective. These often involve a mix of dedicated urea injection systems, powdered activated carbon via a Scrubber to reduce Hydrogen Chloride (HCl), Sulphur Dioxide (SO2) and heavy metals from the flue gases, as well as a Baghouse utilising bag filter technology to further remove toxic dust and spent reagents.
The effectiveness of these measures stopping pollutants entering the atmosphere has helped significantly reduce, if not eliminate, what has historically been a major concern of environmentalists regarding the long-term viability of EFW plants to create electricity.
The next technological step of incorporating carbon capture technology into EFW plants will help increase the economic and environmental benefits associated with EFW plants. Given the UK government’s plan to become carbon neutral by 2050, the use of carbon capture technology is a significant step forward in reducing the volume of carbon dioxide that would otherwise be released from these plants.
As well as the environmental benefits, carbon captured in this way can also be used in the production of bicarbonate of soda, which can be used to make glass, pharmaceuticals, food and animal feed. The captured carbon dioxide can also be used in the manufacture of building materials, thereby contributing to a circular economy.
The need for waste to energy
The global population is expected to reach 8.5 billion by 2030 and 10 billion by 2050. As the population grows so inevitably does global consumption of food and products, as well as the need for further industrial development of countries. The types of waste and volumes of waste sent to landfill will therefore only likely increase with its hazardous effect on the environment.
A move towards a circular economy where waste is seen as a valuable commodity and a key source of electricity generation, is vital.
The benefits of utilising EFW plants for (a) waste disposal and (b) energy production, have been identified by a number of governments globally. The UK government, for example, aims to increase the amount of UK energy generated from waste to 15% by 2030. The UAE has set its own goal of diverting 98% of all waste from landfill by 2030, which will inevitably require the significant expansion of EFW plants. Many other countries have confirmed similar ambitions to stop landfill, thereby recognising the overriding environmental need to divert waste away from landfill and the dual benefit of creating a EFW circular economy.
The challenges and key considerations
It is fair to say that the EFW business in the UK has not been plain sailing for contractors and employers. There are a number of high-profile contractors that have gone insolvent trying to deliver EFW projects in the UK, the most famous perhaps being Interserve and Carillion. Similarly, a very significant number of EFW projects have ended up in protracted and expensive litigation leading to significant financial losses which have been well publicised.
Whilst the reason for particular businesses going insolvent will vary and may not be linked exclusively to a single project, there are nevertheless some key legal and practical steps that can be taken by contractors and employers alike to better protect themselves against a project going disastrously wrong and to be in the best position if litigation becomes unavoidable.
Know the technology
An employer will invariably be relying on the contractor employed through the Engineering, Procurement and Construction (EPC) contract to supply, install and commission the EFW plant, which will need to be of satisfactory quality and capable of generating power output guarantees specified in the contract. Equally the EPC contractor will invariably be relying on its chosen subcontractor(s) to supply the plant required to meet these contractual obligations. It is therefore crucial for the success of any EFW project (and indeed any process plant project generally), for the EPC contractor and employer to perform extensive due diligence on the reliability of the chosen technology before contracting.
Whilst a certain level of due diligence will be undertaken by different interested parties, commonly funders, banks, insurers, the employer and main contractor, the technology delivered can still often be defective and fail to perform as promised. So what can be done?
Well, firstly, very thorough due diligence. It is essential to have suitably experienced experts within the EFW industry conduct a thorough review of the technology being offered and make adequate investigations to confirm whether there is any proven reliability of the technology in the commercial market. If there is no proven use in a commercial setting, the only option might be to establish that the technology has been appropriately verified in dedicated test plants. As part of these investigations, it will be important to find out whether the fuel type used during testing is the same as the fuel being used on the project. If the fuel type is slightly different, the contractor / employer will need to consider the potential impact of those differences on the ability of the plant to operate successfully for the project.
The contractor/employer will need to consider what operational run time data the technology provider can supply for their technology. If this type of information is not forthcoming it will be important to ask why.
The technology provider may be able to provide a list of commercially operational plants which show the same technology being used. Nevertheless, it will always be worthwhile visiting these sites before entering into the contract, because it is only by visiting such plants and speaking to the existing operators that it could become clear that the technology has suffered operational problems and/or has required re-designs to achieve operational stability. Taking these steps will help the contractor and employer obtain a far clearer picture of the technology they are paying for.
If proper investigations are performed pre-contract, the contractor and/or employer will have the opportunity to reconsider its technology provider. Having tried and tested technology, operating on the same or very similar fuel type, could be a key defining factor between a successful project and a disastrous project.
Contract wording
Even if due diligence is performed correctly, it can still fail to highlight problems and defects that occur once the technology has been delivered to site and commissioning has started. This is especially so when the technology is cutting edge. It is therefore important that the contract terms are drafted to protect the contractor and/or employer in the event that the technology supplied is defective and/or not otherwise in accordance with the requirements of the contract.
Whilst there are many considerations during contract negotiation which require analysis by lawyers experienced in this industry, from our experience the following are key considerations:
Pre-contractual representations
The ‘usual’ approach adopted by lawyers during contract negotiation is to exclude the right of either party to rely on representations made pre-contract. The only exception to this is in relation to fraud which cannot be excluded.
As part of the contractual negotiations, it is worth considering whether it remains reasonable and commercially acceptable to exclude a party's right to rely on false representations made negligently, if those representations knowingly induced a party to contract. Why should a party not be able to rely on such representations to bring a claim?
To the extent that parties cannot agree a right to rely on negligent false representations made pre-contract, at the very least it should be reasonable to agree that if a negligent false representation is formally incorporated into the terms of the contract, the party relying on the false representation is entitled to seek damages for any loss suffered. Approaches to contract negotiation and the outcomes achieved in this regard are largely dependent on the negotiating power of each party, and the personalities of the lawyers and their clients driving those negotiations.
Quality of technology required by the subcontract/the EPC contract
It is vital that the EPC contract and subcontract accurately define the expected capability of the plant to be delivered for the project. If the contract states that the plant to be delivered will be 'demonstrated' or 'verified' or 'tested' it is important to include a definition of what these words mean in the specific context of the technology to be delivered. If these types of terms are not defined it leaves the meaning open to unnecessary and time-consuming debate, probably requiring the opinions of experts in the relevant field of engineering, and giving rise to needless uncertainty and wasted costs.
Parties may want to agree a fitness for purpose (FFP) obligation on the technology provider to effectively guarantee the technology will work as required and provide strict liability protection to the purchaser of the technology. Given the onerous obligation that a FFP obligation gives rise to it is perhaps unsurprising that contractor and technology suppliers often seek to avoid such an obligation.
In circumstances where the parties have excluded any FFP obligation, alternative words to describe the technology are often used, including that the plant will be "appropriate" for its intended use and/or that the party will “ensure” its plant performs in a certain way. What do these words mean in this context? Is there something different between a plant that is appropriate for the project and one that is fit for its intended purpose? Similarly, parties often refer to an obligation to use “good industry practice” but what is accepted as good industry practice in emerging and developing process plant technology is not always straightforward and lawyers and experts will undoubtedly have different views.
Unless defined somewhere within the contract, the use of these types of terms will inevitably cause ambiguity as to the scope of the contractual obligations agreed and uncertainty if a dispute arises.
Deliberate breach and wilful misconduct
If a party acts in deliberate breach of its contractual obligations or acts with wilful misconduct and/or commits a repudiatory breach of contract, any caps on liability in a contract are often drafted so as not to apply.
Legally, the terms "wilful misconduct" and "deliberate breach" have no fixed meaning (unless defined in the contract) and so are generally always open to the question of interpretation and perhaps in practice (but not in law) the justice of the dispute. Nevertheless, case law suggests that "wilful misconduct" has a wider meaning than "deliberate breach", which requires a party to perform an act intentionally. Wilful misconduct on the other hand is not generally limited to intentional acts, and extends to acts done recklessly, and could include acts of negligence.
Regardless, parties should give very careful consideration to defining the terms "deliberate breach" and "wilful misconduct" in the contract so that they are clear from the outset.
Dispute Resolution Forum
Whilst standard form contracts will have ‘standard’ dispute resolution processes, these are frequently amended by the parties. Parties should consider whether there is benefit to having a tiered and compulsory dispute resolution process with direct discussions between commercial managers and/or at Directors / Board level to see whether commercial settlement of disputes is possible without immediate recourse to costly litigation or arbitration.
Whether or not there is a tiered compulsory dispute resolution process embedded in the contract, the parties should give proper consideration as to whether they want adjudication to be an available dispute resolution option in EFW projects. Whilst parties to a construction contract cannot prevent a party starting an adjudication, contracts governing EFW plants fall outside the ambit of the Construction Act as their principal purpose has been confirmed by the courts to be power generation rather than waste disposal. Accordingly, if parties to a EFW project want to have the right to adjudicate a dispute, they will need to provide for adjudication as a dispute resolution option within the terms of the contract.
Should the parties to a EFW project be minded to include contractual adjudication, they should consider naming agreed adjudicators in the contract. It is infinitely better to have an adjudicator that the parties trust and respect deciding disputes on an interim basis, rather than running the gauntlet of a nominating body determining an adjudicator for the dispute. Similarly, if the parties choose arbitration as the ultimate dispute resolution forum, it also makes sense to agree the names of arbitrators or panel of arbitrators to hear the dispute.
Sufficient PCGs
Finally, given the considerable value of claims that often arise from EFW plants when they go wrong, it is imperative that a suitable parent company guarantee (PCG) with adequate security is provided by a parent company which has the assets to meet large financial liabilities.
Whether the PCG is limited to the contract price or is unlimited, will depend on the negotiation of the parties and, in practice, it is not unusual to see either approach. Given hyper-inflation affecting the cost of raw materials it will not be surprising to see parties demanding higher PCG values than the contract price.
Conclusion
The EFW industry is here to stay and presents an important contribution to the circular economy for diverting harmful waste away from landfill whilst generating electricity to feed our expanding cities and support a growing global population.
There are a myriad of factors to consider before contracting on EFW projects and which are essential to help avoid a project being a failure and tied up in protracted litigation. The Construction and Engineering team at Trowers & Hamlins LLP has a wealth of experience in the EFW sector, providing support to clients at all stages of a project including procurement and contract negotiation, construction, commissioning, and dispute resolution.
We would be happy to come and speak to you about contracting principles and our experience of how to avoid the pitfalls of an unsuccessful EFW project.
