Don’t be green when it comes to renewable contracts

The Renewables Obligation places a growing importance on increasing the share of renewable energy provided by the UK’s electricity suppliers. In response, organisations across the public and private sectors continue to take steps to develop solutions which could offer an incremental income stream through renewables obligation certificates (ROCs).

However, the case of Eco-Tec (Europe) Limited and French-fries-to-pizza manufacturer McCain Foods GB Ltd is an instructive one. McCain raised a successful claim against the supplier for loss of revenue from lost ROCs.

The case, heard in the English High Court, has reinforced the need for an assessment of the commercial challenges before implementing renewable energy schemes.

McCain sought substantial damages in the wake of the failure of equipment to remove contaminants from biogas produced in the company’s waste water treatment process. The plan was to use the clean biogas, treated by Eco-Tec’s equipment, to generate electricity through a combined heat and power plant. This source of power and electricity would entitle the company, as an Ofgem-accredited generator of renewable electricity, to obtain ROCs based on the calculated energy value of electricity produced.

McCain claimed the equipment supplied by Eco-Tec was not fit for purpose and, as a result, it suffered losses. The contract between the parties included a clause excluding liability for “indirect, special, incidental and consequential damages”. The customer argued its losses were “direct losses” and should not be excluded. The court supported McCain, deciding the exclusion clause did not prevent the company from recovering losses from Eco-Tec, including loss of revenue from the lost ROCs. 

The claim for lost ROCs revenue came as a result of the renewables obligation order, which has created a market for such certificates. An accredited generator of renewable energy can use the energy generated and sell the ROCs, originally issued for the renewable energy produced and used, to other electricity suppliers. If the equipment had been fit for purpose, McCain would have obtained the ROCs under the order and these would have had a market value. In this particular case, the lost ROCs revenue was valued as £609,319.

The contract price of the equipment supplied by Eco-Tec was £263,531. However, as a result of the problems with the equipment, McCain was awarded a total of £1,693,183, of which £609,319 was attributable to the lost ROCs revenue.

The case has raised a series of issues for organisations involved in the design and supply of equipment to the renewable energy market.

In particular, it highlights the importance of assessing the overall risks and whether a loss could arise as a result of products or services supplied. In such cases, there is a strong argument to introduce contractual limitations or a liability cap. This would require careful wording, as the contract signed by Eco-Tec did contain an exclusion of liability for “indirect, special, incidental and consequential damages” but failed to effectively exclude the loss of revenue claimed. 

The amount awarded reinforces the commercial benefit for suppliers of having an aggregate limit on financial liability. Such a cap would provide commercial certainty for the supplier by fixing the supplier’s maximum liability under the contract.

To address these risks, suppliers should review their standard terms of business and the basis on which they are prepared to enter into a contract. It is important to consider how the products will be used, the anticipated benefits and the worst-case scenario repercussions for customers.  

An assessment of the wider implications demonstrates commercial awareness and an understanding of risk. The potential risk has to be sustainable and offer an appropriate financial return.

With the role of the renewables obligation order and ROCs forming a fundamental part of the UK’s renewable energy landscape in years to come, suppliers and clients must ensure they address the wider commercial risks at an early stage.

l Craig Bradshaw is a lawyer in the construction & engineering department of Maclay Murray & Spens LLP, and a member of its renewable energy practice