Thorough preparation is an absolute necessity for hydro refurbishment projects, Peter Cassidy says. Environmental, contractual and financial aspects must be considered. And this does involve getting your legal team involved at an early stage
Within the European Union (EU), uprating and refurbishment of hydro power plants is a very topical subject. Why is this so? Well, just consider any of the following issues:
• Refurbished plants are up to 10% more efficient.
• Hydro power is now considered a renewable source of energy under the recently adopted EU Renewables Directive.
• The possibility for new hydro power schemes is now more limited, not only due to the exhaustion of suitable sites but also due to growing environmental concerns.
• The monies made available by the UK government in 2001 for a refurbishment programme.
However, before any refurbishment project can begin, there are a number of environmental, contractual risk and finance issues that need to be taken into account.
From an environmental perspective there is a range of general environmental legislation, stemming from the EU, which could impact on refurbishment projects should the project include, for example, new access roads, new power lines or significant change to the plant construction.
The Access to Environmental Information Directive
Adopted in 1990, this directive gives people the right to obtain environmental information from their state governments. This includes air and water emissions, accidents and incidents with significant releases of pollutants and land use plans. Therefore, it has the potential to impact adversely on hydro power upgrade and refurbishment projects, not only during the planning and development stages but also after the site is once more operational.
Environmental Impact Assessment Directive (EIAD)
It is likely that many schemes will need to be assessed in terms of the impact they will make on the environment. This relates not only to the member state in which the project is domiciled but also to those states which could, potentially, be affected by the scheme.
The aim of this directive is to contribute to the maintenance of biological diversity through the conservation of natural habitats and of wild fauna and flora in the European territory of the member states. This, of course, has a massive impact on the development of any power project and will lead to potential problems for the hydro power industry.
For example, the European Commission has issued a reasoned opinion against the UK for failure to properly apply the Habitats Directive. This reflects the EC’s concern that the application of the licensing system, which is used to grant exceptions to the directive in the UK, is unsatisfactory.
There have been a number of instances in Wales, where developers have built on the habitat of the great crested newt which is endangered throughout Europe (although ironically it is not endangered in the UK). A possible solution to the newt problem is to rehouse affected colonies. This is currently happening in Scotland where £200,000 is being spent on a system of ponds and tunnels to re-house newts in the way of the development of the former Gartcosh steelworks.
The Water Framework Directive (WFD) was adopted in December 2000. The aim of this directive is to protect inland surface and ground water, including the:
• The prevention of further deterioration to inland water.
• Protection and enhancement of aquatic ecosystems.
• Mitigation of the effect of floods and droughts.
Indeed, the preliminary notes to the directive state: ‘Water is not a commercial product like any other but, rather, a heritage which must be protected, defended and treated as such’. The notes go on to say where use of water may have trans-boundary effects, the requirements for the achievement of the environmental objectives establish should be co-ordinated for the whole of the river basin district.
For river basins extending beyond the boundaries of the Community, Member States should endeavour to ensure the appropriate co-ordination with the relevant non-member State. It will, therefore, be essential to take this directive into consideration if it is necessary to prepare an environmental statement, under the EIAD terms.
Each country has localised consents procedures that may need to be complied with before a hydroelectric power station project can actually begin to be refurbished.
Issues that may need to be taken into consideration in this regard include wayleaves, water regulations (for example, is it acceptable to interfere with water courses?) and the compulsory acquisition of land. For instance, will there be any conflict between the support that has recently been given by the UK government to the Scottish hydro industry and the proposed Special Areas of Conservation (SACs) in Scotland? Will wayleaves be granted to run power lines over SACs, even if the power station is outside the designated area?
Additionally, as pressure grows from environmentalists regarding large scale hydroelectric schemes, will environmental groups attempt to stop such projects by claiming violation of human rights under the new human rights legislation?
In terms of contractual risks that need to be considered, parties will need to ensure that uncertainty is eliminated and that their intentions are properly reflected in the contract. Key issues which need to be addressed during the negotiation and drafting stages include time, price, design liability, negligence, misrepresentation and workmanship/materials.
Most of the standard forms of construction and engineering contracts make provision for a specific completion date of the works under them to be carried out. If such a provision is to be included, the risks associated with the date not being met should be assessed. In particular, parties should establish under what circumstances an extension of time can be claimed and the consequences of not including a provision.
Workmanship and materials
Under English law, a contractor’s obligations are not only set out under the express terms of the contract, but may also be defined under certain terms implied in construction contracts and by statute. The process of certification also needs to be considered, since certification is often a condition precedent for payment. Finally, the effect of final certification (for example, whether it is binding or not) should be defined by the parties.
Here, there is a fundamental disharmony between the owner’s desire to place the design and construction risks with the contractor, the differing basic standard of legal obligation owed (depending on whether a party is designing or carrying out construction work) and the desire for the contractor to pass on the design risk to insurers. Issues to be considered include the legal position in the contract, whether reasonable skill and care mean fitness for purpose and whether the standard form contracts are adequate solutions.
The pricing structure will depend largely on the form of contract adopted – the type chosen will influence both owner and contractor behaviour. However, the following are the main issues:
• Fixed prices.
• Pure lump sum and its hybrids.
• Comparison of measurement and value contracts with bills of quantities contracts.
• The concept of a fundamental change.
• Payment for variations under standard and bespoke forms of contract.
Misrepresentation and negligent mis-statement
Misrepresentation is particularly relevant to statements made by the parties during pre-contract negotiations. In essence, misrepresentation is a false statement of fact made by one party to the other which, whilst not being a term of the contract, induces the other party to enter into the contract.
If the misrepresentation becomes a term of the contract, then the party relying on the statement would simply sue for breach of contract.
In contrast to misrepresentation, negligent mis-statement does not require a statement of fact. There may be a statement of opinion, a promise or an assertion of fact. A claim for negligent mis-statement does not require the party relying on the statement to have entered into a contract, it simply requires the party to have acted upon the statement to its detriment
And last but not least, what about the financing of refurbishment projects? Factors that need to be taken into account here, include:
• The nature of a build, own and transfer (BOT) financial structure, whereby the special purpose vehicle (SPV) takes on the financial risk of building and operating the scheme and, for this reason, lenders will lend to the SPV on a limited recourse basis.
• The measures a lender should include in a loan agreement
Legal team work
The main message here must be to spend an adequate amount of time at the very outset of any upgrade and refurbishment project to find out what you need to do and how you need to do it. You need to make sure that all areas of responsibility are clearly and comprehensively defined in the contract. And – dare I say it? – this will include, getting your legal/commercial team on board at an early stage.
Related ArticlesSpotlight on … uprating and refurbishment