Highlighting the distribution of income within the framework of the EMC model

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JThe plaintiff is a National Equities Exchange and Quotations (NEEQ) listed company specializing in the provision of lighting solutions, and the defendant is a street lighting management unit under a municipal government in China. The plaintiff and the defendant entered into a project contract in 2015, under which the two parties agreed to cooperate under the Energy Management Contract (EMC) model, with the plaintiff investing more than RMB 18 million. (2.8 million USD) to complete the conversion. approximately 3,400 high-pressure sodium lamps to LED lamps under the administration of the defendant in order to reduce energy consumption, operating and maintenance costs, reduce carbon dioxide emissions, d improve the environment and reduce urban pollution. The plaintiff, in return, receives a share of the energy saving revenue from the defendant.

The project contract stipulates that the duration of the contract will be 10 years from the completion and acceptance of the project by the respondent. During this period, the sponsor must 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 applicant during the whole life cycle of the project should not be less than approximately RMB 21 million.

The project was completed and accepted by the defendant in January 2016. The combined average electricity saving rate determined by the parties was 72.91%, while the electricity price was calculated at 0.79 RMB/kWh. During the period from February 1, 2016 to December 31, 2019, the defendant actually paid the plaintiff more than 190,000 RMB per month for the energy saving revenue sharing payments under the project contract. .

From 2020, due to the continuous reduction of the local electricity price to 0.58 RMB/kWh, the defendant proposed to suspend the payment of energy saving revenue and requested an adjustment of the energy saving regime. ‘allocation. Since the two parties were unable to agree on this issue, the respondent had not paid the energy savings rent since January 2020.

The claimant then filed a request for arbitration with the Shanghai International Arbitration Center in accordance with the arbitration clause of the project contract, asking the respondent to pay the energy saving revenues for the period from February 2016 to November 2020 at the rate of 0.79 RMB/kWh. .

Court analysis

An arbitral tribunal was constituted by an expert in property rights transactions, a university professor who teaches economic law and a senior partner of the Shanghai law firm (the presiding arbitrator) who has long been engaged in the field of energy construction. After hearing the case, the court concluded that the issue in dispute was whether the energy saving revenue claimed by the plaintiff should be adjusted in accordance with the adjustment of the national tariff when the “minimum value” of the Applicant’s energy saving revenue was clearly agreed in the project contract.

The court held that there was no doubt that the parties had agreed on the minimum value of the monthly energy savings income in the project contract whereby the minimum value of the energy savings income that the applicant should have collected throughout the project cycle was clarified. This arrangement, from the court’s perspective, was a special agreement between the two parties on the plaintiff’s energy saving revenue.

The underlying project was conducted through the CEM model, i.e. the energy saving service provider and the building owner agree on the energy saving objective of the project energy saving plan in the form of a contract in which the energy saving service provider provides the services necessary for the building owner to achieve the energy saving goal, and the building owner works remunerates the energy saving service provider for its reasonable profit calculated by the energy saving profit.

In this case, the applicant first invested in the construction of the renovation project, and then gradually received the distribution of energy saving income over a period of 10 years according to 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 applicant’s initial investment was fixed and unaffected by falling electricity prices. Therefore, the court found that the parties’ agreement on the minimum monthly income in the project contract was consistent with the general business logic of EMC projects and constituted a reasonable allocation of business risk between the parties.

Based on this, the court found that according to the project contract, the defendant still had to pay the plaintiff’s share of the energy saving revenue for the period from February 2016 to November 2020. However, considering the objective fact that the local electricity price was reduced during this period, the court held that the energy saving revenue paid by the defendant should be the minimum value per month agreed in the project contract.

comments

EMC is the most common way of marketing smart street lights at present. In this model, the government reimburses the energy-saving service provider in installments for the energy costs saved by the project after the energy-saving service provider upgrades street lights in the city to achieve the energy savings goals stipulated in the EMC contract. After the EMC contract expires, the streetlights are returned to the government without compensation.

In this case, the court carried out a precise analysis of the commercial logic of the EMC contract. The applicant’s energy savings revenue allocation had been objectively calculated in its 10-year investment in the renovation of the project, including the purchase of equipment, construction, operation and maintenance.

In the event that the project has achieved the agreed energy saving targets after completion and acceptance, the Respondent may directly take over an efficient and well-functioning energy supply system. In this respect, the “minimum income distribution” scheme could appropriately share the economic risks borne by the claimant through the investment, the responsibility for the operation and maintenance of the equipment and the duration of the long-term contract, which is in line with the “win-win” principle. » guidance for both owner and supplier under the EMC model.

At the same time, the court’s decision in this case can 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 business practices to create a local business environment based on the rule of law.

In recent years, China has intensified its efforts in environmental protection, energy conservation and emission reduction. In September 2021, the State Council issued several opinions on the comprehensive and accurate implementation of the new development concept to deal with the carbon peak and carbon-neutral work, proposing the development of energy-saving methods. market-based energy and the implementation of the EMC model, as well as other integrated energy saving services.

Therefore, the environmental energy industry, including EMC, will have a wider development space in the future. Therefore, this industry has a higher demand for professional and effective 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 resolving of this type of dispute.


Xu Zhihe is Deputy Head of Research and Information Department at SHIAC

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