The claimant is a National Equities Exchange and Quotations (NEEQ) listed company specialising in providing lighting solutions, and the respondent is a street light management unit under a municipal government in China. The claimant and the respondent entered into a project contract in 2015, under which both parties agreed to co-operate under the energy management contract (EMC) model, with the claimant investing more than RMB18 million (USD2.8 million) to complete the conversion of about 3,400 high-pressure sodium lamps to LED lamps under the respondent’s administration in order to reduce energy consumption, lower usage and maintenance costs, reduce carbon dioxide emissions, improve the environment and reduce urban pollution. The claimant, in return, receives a share of the energy-saving revenue from the respondent.
The project contract stipulates that the contract period shall be 10 years from the completion and acceptance of the project by the respondent. During that period, the respondent shall share 95% of the energy-saving revenue per month for the first 60 months, and 85% of the energy-saving revenue per month for the next 60 months.
The project contract also stipulates that when the national electricity tariff is adjusted, the estimated energy-saving revenue can be adjusted simultaneously. However, the total energy-saving revenue to be shared by the claimant during the whole life cycle of the project shall not be less than about RMB21 million.
The project was completed and accepted by the respondent in January 2016. The combined average electricity saving rate determined by the parties was 72.91%, while the electricity price was calculated at RMB0.79/kWh. During the period from 1 February 2016 to 31 December 2019, the respondent actually paid the claimant more than RMB190,000 per month for energy-saving revenue sharing payments under the project contract.
From 2020 onwards, due to the continual reduction of the local electricity price to RMB0.58/kWh, the respondent proposed to suspend the payment of energy-saving revenue and requested an adjustment of the regime of allocation. Since the two parties failed to reach an agreement on this issue, the respondent had not paid the energy-saving revenue since January 2020.
The claimant then applied to Shanghai International Arbitration Centre for arbitration in accordance with the arbitration clause in the project contract, requesting the respondent to pay the energy-saving revenue for the period from February 2016 to November 2020 at the rate of RMB0.79/kWh.
Analysis of the tribunal
An arbitral tribunal was constituted by an expert in property rights transactions, a university professor who teaches economic law, and a senior Shanghai law firm partner (the presiding arbitrator) who has long been engaged in the field of energy construction. After hearing the case, the tribunal concluded that the issue of the dispute was whether the energy-saving revenue requested by the claimant should be adjusted in accordance with the national tariff adjustment when the “minimum value” of the claimant’s energy-saving revenue was clearly agreed upon in the project contract.
The tribunal held that it was in no doubt that the parties had agreed on the minimum value of the monthly energy-saving revenue in the project contract by which the minimum value of energy-saving revenue that the claimant should have received throughout the project cycle was clarified. This arrangement, from the tribunal’s point of view, was a special agreement between the two parties on the claimant’s energy-saving revenue.
The underlying project was conducted via the EMC model, i.e. the energy-saving service provider and the project owner agree on the energy-saving target of the energy-saving project in the form of a contract where the energy-saving service provider gives necessary services for the project owner to achieve the energy-saving target, and the project owner pays the energy-saving service provider for its reasonable profit calculated by the energy-saving benefit.
In this case, the claimant first invested in the construction of the retrofit project, and then gradually received the energy-saving revenue distribution over a 10-year period based on the price of electricity. During this period, if the electricity price increased, the energy-saving revenue increased accordingly, and if the electricity price decreased, the energy-saving revenue decreased accordingly.
Nevertheless, it was clear that the claimant’s upfront investment was fixed, and was not affected by lower electricity prices. Therefore, the tribunal concluded that the parties’ agreement on the minimum monthly revenue in the project contract was in line with the general business logic of EMC projects, and was a reasonable allocation of business risks between the parties.
On this basis the tribunal held that, according to the project contract, the respondent should still pay the claimant’s share of energy-saving revenue for the period from February 2016 to November 2020. However, taking into account the objective fact that the local electricity price was reduced during this period, the tribunal held that the energy-saving revenue paid by the respondent should be the minimum value per month as agreed in the project contract.
Comments
EMC is the most common mode of commercialisation of smart streetlights at present. In this model, the government reimburses the energy-saving service provider in instalments for the energy costs saved by the project after the energy-saving service provider has upgraded city streetlights to achieve energy-saving targets stipulated in the EMC contract. After the EMC contract expires, the streetlights are returned to the government without compensation.
In this case, the tribunal made an accurate analysis of the business logic of the EMC contract. The claimant’s allocation of energy-saving revenue had objectively been calculated in its 10-year investment in the project renovation, including equipment purchase, construction, and operation and maintenance.
In the event that the project had met the agreed energy-saving targets after completion and acceptance, the respondent could directly take over an efficient and well-functioning energy supply system. In this regard, the “minimum revenue distribution” regime could appropriately share the economic risks borne by the claimant through investment, responsibility for operation and maintenance of the equipment, and long-term contract period, which is in line with the “win-win” orientation for both the owner and the provider under EMC model.
At the same time, the tribunal’s decision in this case may also serve as a positive guide for governments aiming to attract investment from advanced technology providers to achieve the goal of local “carbon neutrality” by respecting contractual agreements and trading practices in order to create a local business environment based on the rule of law.
In recent years, China has been stepping up its efforts in environmental protection and energy conservation and emission reduction. In September 2021, the State Council issued several opinions on the complete and accurate implementation of the new development concept in dealing with carbon peaking and carbon-neutral work, proposing the development of market-based energy conservation methods and the implementation of the EMC model, as well as other energy-saving integrated services.
Therefore, the environmental energy business, including EMC, will have a broader space for development in the future. Accordingly, this industry has a higher demand for professional and efficient dispute resolution legal services, and in this context, the unique independence, professionalism and flexibility of the commercial arbitration system can play an important role in the resolution of this type of dispute.
Xu Zhihe is deputy head of the department of research and information at SHIAC
