Ineos Manufacturing Scotland Ltd v Grangemouth CHP Ltd

JurisdictionEngland & Wales
JudgeThe Honourable Mr Justice David Steel
Judgment Date11 February 2011
Neutral Citation[2011] EWHC 163 (Comm)
CourtQueen's Bench Division (Commercial Court)
Docket NumberCase No: 2006 FOLIO 1081
Date11 February 2011

[2011] EWHC 163 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

Before : The Honourable Mr Justice David Steel

Case No: 2006 FOLIO 1081

Between
Ineos Manufacturing Scotland Limited
Claimant
and
(1)grangemouth Chp Limited
(2) Fortum O&m (uk) Limited
Defendants

Mr Laurence Rabinowitz Q.C. and Mr Daniel Toledano Q.C. (instructed by Baker & McKenzie LLP) for the Claimant

Mr Ian Glick QC and Mr Orlando Gledhill (instructed by Dewey & LeBoeuf LLP) for the Defendants

Hearing dates: 29 November —8 December 2010

The Honourable Mr Justice David Steel

The Honourable Mr Justice David Steel :

Introduction

1

This action involves a substantial claim relating to EU CO2 emissions allowances. It arises in the following way. The Claimant ('IMSL') is responsible for sourcing electricity and steam for use at the Grangemouth petrochemical facility and refinery in Scotland. The First Defendant ('GCHPL') is a special purpose vehicle created for the purposes of the Grangemouth CHP Project ('the CHP Project').

2

The CHP Project involved the construction of a Combined Heat and Power ('CHP') plant at the Grangemouth Site ('the CHP Plant') and the supply of electricity and steam to IMSL. The Second Defendant ('Fortum O&M') is a provider of operation and maintenance and asset management services to power plants including CHP plants.

3

A number of agreements were entered into on 25 November 1998 in order to give effect to the CHP Project. The focus of the dispute is to be found in one of these agreements. This was an Electricity Supply Agreement ('ESA') between IMSL (formerly 'BP') and GCHPL, in which GCHPL agreed to deliver a supply of energy to IMSL for a 15-year period from 27 April 2001.

4

Clause 3.4 of the ESA provides:

"3.4 CO2 Credits

GCHPL agrees that all CO2 Emissions Credits accruing to it from time to time shall be held by it for and on behalf of BP and that: -

3.4

1 GCHPL shall forthwith co-operate with BP and execute and deliver such documents and make such other arrangements and take such other actions (including obtaining all Clearances) as BP shall reasonably request for ensuring that BP obtains the benefit of all CO2 Emissions Credits.

3.4

2 No payment will be made by BP to GCHPL in respect of such CO2 Emissions Credits.

3.4

3 BP will be free to exploit any CO2 Emissions Credits as it in its absolute discretion thinks fit.

3.4

4 GCHPL shall not utilise for its own benefit nor transfer any CO2 Emissions Credits to any person other than BP."

5

The term 'CO2 Emissions Credits' is defined as "all the CO2 emissions credits or entitlements (or other similar entitlements, rights or benefits in respect of CO2 of whatsoever nature) accruing to GCHPL in respect of the CHP Plant."

6

These provisions have given rise to short but difficult issues of construction in particular in relation to the meaning of the word "entitlement", the identity of the person to whom any entitlements were "accruing" and the scope of any obligation to ensure that IMSL obtained the "benefit" of such entitlements. There are also issues in regard to the construction of certain exemption and limitation clauses.

7

The source of any such entitlements is said to be an EU scheme for greenhouse gas emission allowance trading. This was established by Directive 2003/87/EC ('the Directive') and the scheme was implemented in the UK with effect from 1 January 2005 by The Greenhouse Gas Emissions Trading Scheme Regulations 2003, which came into force on 31 December 2003 (the '2003 Regulations'). The 2003 Regulations have since been replaced by a new set of regulations which came into force on 21 April 2005 (the '2005 Regulations'). However there is no material difference between the two sets of Regulations for the purposes of the issues in this action.

8

The 2003 and 2005 Regulations ('the Regulations') both require the "operators" of relevant installations, of which the CHP Plant is one, to apply for a greenhouse gas emissions permit ('GGE Permit'), and the holders of such permits are then issued free of charge a particular quantity of transferable allowances in accordance with a National Allocation Plan. The operators are required to surrender allowances equal to the total emissions of the installation in each calendar year within four months of the end of the year.

9

The Regulations define operator as 'in relation to an installation the person who has control over its operation'. The Department for the Environment, Food and Rural Affairs ('DEFRA'), the Environment Agency and the Scottish Environment Protection Agency ('SEPA') have issued guidance in relation to the meaning of operator under the Regulations ('the Guidance').

10

In this connection another of the agreements is pertinent namely an O&M Agreement between GCHPL and Fortum O&M whereby Fortum O&M agreed to provide operation and maintenance services to GCHPL in relation to the CHP Plant. This has been replaced by an Amended O&M Agreement between the same parties.

11

In respect of the CHP Plant, Fortum O&M is the entity to which a GGE Permit and allowances have been issued by the relevant authority, SEPA, and which has duly surrendered the appropriate number of allowances after each year.

12

IMSL claims that the allowances issued in respect of the CHP Plant are 'CO2 Emissions Credits accruing to [GCHPL]' within the meaning of clause 3.4 of the ESA, either because they are allowances within the meaning and definition of 'CO2 Emissions Credits' which accrue to GCHPL in respect of the CHP Plant, or because they are within the meaning and definition of 'CO2 Emissions Credits' and should have been issued to GCHPL as operator of the CHP Plant but are being incorrectly issued to Fortum O&M.

13

IMSL claims that GCHPL is obliged by clause 3.4.1 of the ESA to take all such action as IMSL reasonably requests to ensure that IMSL obtains the benefit of all the allowances that have already been issued in respect of the CHP Plant as well as the benefit of all the allowances that will be issued in respect of the plant for future years over the remaining term of the ESA, and that GCHPL has wrongfully refused to do so.

14

GCHPL's position is that the allowances are not "Emissions Credits" as defined but even if they are they do not accrue to GCHPL. Further it is said that the relevant allowances are properly allocated and issued to Fortum O&M as the operator of the CHP Plant and that GCHPL is not in breach in failing to ensure that IMSL obtained the benefit of the allowances.

15

The financial implications of the dispute are significant. The issue of quantum has now been settled subject to liability. The original claim was in the region of €152 million. It is now agreed that the value of the allowances already issued amounts to €68 million. As regards future allowances, the parties have agreed not to attempt to value them as of today but to make arrangements, again subject to liability, for the transfer of any allowances that may accrue.

Background

16

The refinery at Grangemouth is the only refinery in Scotland. It supplies transport fuels for the whole of Scotland and parts of northern England. It takes crude oil feed from the Forties Pipeline in the North Sea and from imports from deep loch import facilities on the west coast of Scotland. The petrochemical site at Grangemouth has production assets which convert ethylene/propylene to form plastic pellets or ethanol which is exported to the UK and continental Europe.

17

As at 1998, IMSL (then called BP Oil Grangemouth Refineries Limited) was responsible for operating the refinery, for operating the on-site utilities assets so as to generate and distribute steam and power for use by all the BP assets at Grangemouth and for securing any additional power requirements from the grid. In the mid 1990's the BP Group had commenced an investment options study at the Grangemouth Site. This study looked at the various business development plans at the site from an integrated perspective. One of the conclusions of this study was that there was not enough electrical power or steam at the site.

18

The Grangemouth site had an existing power station incorporating seven existing boilers (numbered 9 to 15) used to produce steam and seven existing turbo-alternators used to reduce the boiler steam pressure (to the level required by the refining and petrochemical process plants) and in so doing produce electricity as a by-product. However, this electricity production was not enough to meet the needs of the site, which was therefore importing its additional power requirements from the grid.

19

The BP Group decided that a CHP Plant should be constructed. The CHP Plant would be built in the middle of the existing BP site at Grangemouth meaning that arrangements would be needed to regulate how it would be integrated into the site as a whole. The BP Group did not want to own the CHP Plant itself and thus approached various power companies to see if they would be interested in constructing and owning the CHP Plant. These companies were asked to submit bids. The Invitation Memorandum made it clear that "operations [were] …. to be undertaken by the preferred developer or by a third party O&M contactor with proven experience…".

20

From the beginning, the CHP Project included an "Additional Boiler" namely a new boiler to be installed on a separate part of the Grangemouth site from that used for the CHP Plant. The Additional Boiler was to run in conjunction with 7 other boilers already in operation at the site in November 1998 (i.e numbers 9 to 15). The purpose of the Additional Boiler was to provide back-up to the steam supply from the CHP and otherwise to be an additional source of steam for IMSL.

21

Following review of the bid documents, the potential candidates were narrowed down to two...

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