Energy and adjudication

When MPs were creating adjudication in the 1990s they exempted power generation projects, a move described by His Honour Judge Humphrey Lloyd as a tribute to power generation and the other industries that were similarly exempted "… for the absence of malaises which had been found to bedevil others."

The list of exemptions which includes oil, gas, water and mineral extraction paints a picture of major projects undertaken by major participants who did not need the assistance of the HGCRA to regulate their relations.

But yesterday’s law makers obviously didn’t foresee that, in the eleven years since establishing their creation, their successors would be encouraging just about every building owner in the land to become a power generator in their own right and, in so doing, create a whole new meaning to “the power generation” industry.

Guidelines needed

So if there is a dispute on one of the new breed of power generation projects, will the dispute be excluded from adjudication?

If the equipment is being included to satisfy a Merton Rule type requirement, then it is likely to be inside adjudication’s big tent because the exemption only applies if power generation is the primary activity [see Postscript 1 below] on the site. In other words, if you’re building an office, retail complex, or any other commercial development the equipment to produce 10% of its energy needs is unlikely to be the primary activity. That holds well even if the power generation package is physically fenced off from the rest of the site, because the fence will not convert one site into two separate ones.

If a building owner decides to retro-fit some renewable energy equipment, then, even though the work involves only the building of a power generation facility, the primary activity will continue to be the activity of the occupant. The same concept has already been applied when a building owner adds a generator for, say, emergency use. So when a printing works added two generators, there was no exemption from Adjudication. The court decided [Postscript 2 below] printing was the primary activity.

Blurred lines

But none of these ideas makes allowance for the ingenuity of developers and all others who want to make the most of sustainability and, surely, over the years we will start to see dual purpose developments where the answers will not be so clear cut.

For example, some developers may satisfy their Merton Rule obligation by putting the power generation equipment on a separate site, slightly down the road from the development. The two places will be physically different sites but it may nevertheless be unclear whether the primary activity of the remote site is power generation or support for the main development.

Similarly, if a developer uses the on-site equipment for, not only satisfying the Merton Rule but also exporting some of the energy to another user or to a supplier, under one of the new breed of supply agreements, there may come a point at which it is difficult to decide if it is power generation that is the primary activity and support for the development that is the by-product. If that tipping point were reached, disputes on that site may not be capable of resolution by statutory adjudication.

The tipping point was in question three years ago on a site concerning a waste to energy plant. Conor Engineering v. Les Constructions Industrielle de la Mediterranee concerned such a plant in Hampshire. The judge decided [Postscript 3 below] that the building of that power generation facility was really to contribute to Hampshire's waste disposal capability; and that power generation was (to use the Judge's words) "a spin off" from the incineration process. But he also pointed out that, in other cases the balance might go the other way. So if someone can show that his motivation for building an energy plant is the wish to take the benefit of the incentives to be had from generating renewable energy, it may well be possible to say that the primary activity is power generation and that the solution to the county’s waste problem is really the spin off.

That motivation might be demonstrable from the enhanced value that resides in renewable energy. For some time now, every megawatt of renewable energy has been effectively two things. Not only a unit of energy (which can be bought or sold), each megawatt is also a special unit of energy, having been made from renewable sources. And it comes with a certificate to say so. The megawatt has a value. So does the certificate - a separate value of its own in a market where these certificates are traded.

Embracing change

The certificate and the megawatt are detachable from each other so an owner can use the power but sell the certificate, thereby taking advantage of one of the Government’s incentives to encourage the growth of renewable energy production. At present the value of a certificate is quite low, so this benefit only becomes worthwhile if you generate a lot of power – far beyond the output of most micro-generators. But, in order to widen the appeal of the incentive, the Government has made it possible for micro-generators to link up with agencies who will sell the certificates on their behalf.

It will be some time before the extent of its impact is known but, in due course, perhaps the chance to generate one’s own power and to sell the certificate will be the motivation that makes power generation the primary activity. These arrangements will require the installation and supply of measuring equipment and rules for the sale of the certificates. Although these activities are probably so far removed from the definition of construction operations in s104 of the Act as to leave any disputes under them outside the tent, they are another example of agreements that parliament had not envisaged when defining the extent of adjudication.