Emerging Trends in Renewable Energy Arbitration in Korea

Since the Paris Climate Agreement of 2015, it is no secret that government incentives, capital investments and activities in the renewable energy sector are on the rise globally. According to the International Energy Agency, global renewable capacity is expected to increase by almost 75% between 2022 and 2027, bringing us ever closer to the target of net-zero emissions by 2050. As the world increasingly moves towards carbon neutrality and the adoption of green energy, it opens up a vast array of opportunities for industries and businesses. However, this transformation also presents a multitude of potential disputes within the renewable energy sector – and South Korea is no exception.

Under the Renewable Portfolio Standard Policy (“RPS Policy”), South Korea requires large electricity producers to generate a minimum percentage of gross power generation from renewable energy sources. However, the Yoon administration recently adjusted the mandatory Renewable Purchase Obligation (RPO) ratio, so that renewable energy is projected to account for 21.6% of capacity by 2030, down from the previous projection of 30.2%. That being said, such downgrade is more of a neutralisation of the anti-nuclear policy of the previous Moon administration, and the overall trend in pursuing carbon neutrality and renewable energy remains unchanged. This article briefly examines why international arbitration is often the preferred mode of dispute resolution for renewable energy disputes, and highlights a couple of features of renewable projects in Korea from a dispute-resolution perspective.

Navigating the potential risks of the energy transition requires an understanding of the particular features of renewable energy projects, such as significant upfront investments, new and developing technologies, valuable intellectual property, construction disputes, supply chains, complex regulatory issues, investor-state disputes, etc. Renewable energy projects involve complex construction and operational challenges, and there will likely be licensing disputes with emerging technology in solar plants, wind farms and fuel cells. These particular features are also relevant in identifying potential disputes and dispute resolution mechanisms.

As with traditional energy project disputes, international arbitration seems to be the preferred mode of dispute resolution among commercial parties in the renewable energy sector for several reasons. First, arbitration offers an impartial forum for the resolution of cross-border disputes and seems to be the preferred choice given that diverse players from different jurisdictions are often involved in large-scale renewable energy projects. Second, the enforceability of arbitral awards under the New York Convention offers significant advantages. Third, confidentiality is another attractive feature of arbitration, considering the trade secrets involving emerging and innovative technologies in renewable energy projects. Fourth, parties appreciate that they can choose arbitrators with technical expertise and/or industry knowledge in the renewable energy sector and climate change.

A recent case between FuelCell Energy, Inc. and POSCO Energy Co., Ltd is a good example. This billion-dollar technology dispute unfolded across five ICC arbitrations and parallel litigations (eg, provisional attachment, inspection of books and records, etc), and was amicably settled following a successful mediation. This case underscores the growing potential for renewable energy arbitration in the coming years, as well as the practical importance for key players in the renewable energy sector to include a well-drafted arbitration clause and/or other dispute resolution mechanisms, such as mediation, in their contracts.

When examining the landscape of renewable energy disputes in Korea, it is important to understand the unique facets of the Korean renewable energy industry and its practices. This understanding is particularly important when negotiating relevant contracts and deciding upon dispute resolution mechanisms. Several aspects of Korean wind power projects provide insightful examples and takeaways, beyond the common risks associated with wind projects such as the use of relatively unproven technologies for commercialisation and uncertainties during the manufacturing and construction phase.

First, there are criticisms that the licensing process is relatively complex and sometimes lacks transparency as compared to other jurisdictions where the wind power market is fully mature. When carrying out offshore wind power projects in Korea, there are various uncertainties at different stages. For instance, obtaining a power generation business license and securing grid connection are necessary for the project, while acquiring permits for public water occupancy and usage and compensating for fishing losses are required for development permits. During commercial operation, potential issues may arise in relation to curtailment regulations, REC (Renewable Energy Certificate), and regulations related to community participation systems.

It took over ten years for Jeju Hanlim Offshore Wind Power Project, a landmark wind project in Korea, to obtain all necessary approvals. Recently, the project owner announced that the project timeline would be extended by an additional year due to delays in concluding agreements related to compensation for fishing losses. To address this, legislation dubbed the “One-Stop Shop Act” was proposed in 2021 to establish integrated administrative procedures, and the industry anticipates enactment of the legislation in light of recent government initiatives, led by the Ministry of Trade, Industry and Energy.

Given the uncertainties regarding government permits and third-party complaints, parties to various project contracts should deftly incorporate risk allocation clauses in their contracts and factor in mechanisms to address potential delays and costs overrun.

Second, while a limited multi-contracting structure is more common in Europe and Taiwan where there are multiple contractors for each division of works to save costs and engage best-in-class suppliers, a single EPC contractor may be appointed in Korea to avoid interface risk among contractors partially due to the preference of Korean investors. The completion of the Jeju Hanlim Offshore Wind Power Project has been entrusted to a single EPC consortium led by Hyundai Engineering and Construction.

On the one hand, this structure might ease the complexity of resolving project disputes involving multiple parties triggering consolidation and a joinder process in relevant arbitration rules. On the other hand, careful consideration should still be given when choosing suitable dispute resolution process and applicable rules of international arbitration. Third, foreign owners and investors should be aware that there are Korean mandatory laws applicable to project contracts regardless of their choice of governing law. These pertain to construction, subcontracting, employment and other areas. Some of the applicable laws and regulations are unique to Korea, and foreign companies may be unfamiliar to them. In this regard, the project contracts should be reviewed from a Korean law perspective and amended in line with relevant regulations as required.