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Inside Energy & Environment

A Consequence of Falling Oil Prices

Posted in Oil

Oil prices have plunged in the last few months.  For example, Brent futures traded at over $110 per barrel in June, and fell below $85 last week.  This is a fall of over 20%, and the market price for crude oil is now at its lowest level since 2010.

Oil prices impact activities in the sector and, in particular, the investments that upstream operators choose to make.  Some means of producing oil cost more than others, and producers continually seek to reduce the marginal cost of production.  For example, as recently reported by the Financial Times, studies estimate that the median North American tight oil development needs a crude oil price of $57 per barrel to break even.  This threshold price compares to $70 per barrel one year ago.  The situation is similar for production from Canadian oil sands, for which the average break-even cost is reportedly between $63 and $65 per barrel.  A sustained drop in oil prices may provide a renewed focus on reducing costs and keeping these unconventional projects economically viable.

The implications for long-term projects with costs that cannot be scaled are potentially more worrying.  Certain projects — for example, oil field developments, pipeline transportation, or other investments tied to the price of oil, such as LNG liquefaction trains or re-gasification terminals — can be dependent on expected oil and gas prices.  When the oil price deviates outside of an anticipated range for an extended period of time, the economics of a project can change and it can create legal disputes (e.g., between co-venturers or between the investment company and supporting service providers).  A fluctuating oil price can also encourage a government to change the rules of the game, which can also lead to litigation.

There are ways of mitigating these risks.  When circumstances permit, some operators may try to include legal provisions in their contracts that anticipate potential changes in the energy markets, such as hardship clauses that shift some of risk of price changes to others.  Frequently, legal disputes center on how these provisions should be applied.  Depending on the law of the contract, there may also be legal doctrines that can be of assistance (e.g., bouleversement and imprévision, civil law concepts that can sometimes provide relief in the case of a supervening change in circumstances).  Stabilisation clauses and investment treaty protections can sometimes be relied on to remedy actions taken by the government.

In short, a falling oil price may be helpful for the global economy, but it can create unwanted headaches for participants in the oil and gas sector and, potentially, give rise to litigation.

DLA Energy Issues Solicitation for New, Large-Scale Renewable Energy Generation Project

Posted in Department of Defense, Government Contracts, Renewables

On October 17, 2014, the Defense Logistics Agency (DLA) Energy issued a solicitation for proposals to construct and operate a large-scale renewable energy project at Fort Hood in Texas, the U.S. military’s largest active duty armored post.  The Fort Hood project is part of the efforts of the Army Office of Energy Initiatives (OEI), which has already created a number of renewable energy generation opportunities at Army and other Department of Defense (DoD) facilities across the United States.  In addition to other recent procurement initiatives focusing on clean energy technology, OEI’s efforts confirm that DoD is committed to actively pursuing sources of renewable energy.

The Fort Hood project, which will involve the construction and operation of an on-site solar power generation system and an off-site wind energy generation system, is designed to meet 100% of Fort Hood’s electrical energy requirements at its Main, West Fort Hood, and Clarke Road substation meters.  Under this arrangement, the Government will commit to purchase the renewable energy generated from these two systems at a fixed price during a contract term of up to 29 years once the facilities are operational.  OEI anticipates that the on-site generation system will produce up to 40 megawatts of solar power, and will enhance Fort Hood’s overall energy security with a microgrid-ready design.

Interested bidders are invited to attend a pre-proposal event at Fort Hood on November 6, 2014.  The deadline for submission of proposals is December 17, 2014.  OEI has announced that it expects that an award will be made under the solicitation in early 2015.

EU Consultation on the Development of Criteria to Identify Endocrine Disruptors in Biocidal and Plant Protection Products

Posted in Europe

On September 26th the European Commission launched a public consultation on the development of criteria to identify endocrine disrupting chemicals in biocidal and plant protection products.  The consultation is open for contributions until January 16th, 2015, and its results may significantly impact a wide variety of products (e.g., cosmetics, medical devices, pharmaceuticals, consumer products) as well as biocides and plant protection products.

Current Restrictions without Definitions

Endocrine disruptors (EDCs) are chemicals that interfere with hormone systems and may lead to harmful effects on health and the environment.  There is substantial controversy regarding the scientific criteria to identify these substances.  While a wide variety of EU legislation (e.g., REACH, cosmetics, biocides, medical devices, pesticides, water framework rules) restricts the use of EDCs, it fails to provide criteria to identify them.

For example, the Regulations on biocidal products (Regulation  528/2012) and plant protection products (Regulation 1107/2009) severely restrict the use of EDCs in these products.  The European Commission may only in exceptional circumstances grant an authorization for marketing a biocidal or plant protection product containing EDCs “that may cause adverse effects on humans.”  Although both Regulations leave it to the Commission to develop criteria to identify EDCs, it has not yet done so.  Instead, the Commission applies provisional criteria primarily linked to carcinogenic properties as referred to in the CLP (Classification, Labelling and Packaging) Regulation 1272/2008.

Towards Legally Binding Criteria on Endocrine Disruptors?

The current public consultation is intended to assist the Commission in the preparation of an impact assessment that will form the basis of a legislative proposal on criteria to identify EDCs in biocidal and plant protection products.  A Roadmap published by the Commission in June presents the scope of the impact assessment and four policy options that the Commission will assess.  These options rely heavily on the definitions of EDCs of the World Health Organization (WHO) and the International Program on Chemical Safety (IPCS).  The Roadmap also clarifies that the Commission should be able to allow the marketing of biocidal and plant protection products that contain EDCs on the basis of other factors, such as socio-economic considerations or risk-benefit assessments.

The consultation asks stakeholders to comment on the four options that the Roadmap identifies: (i) continue to apply the current provisional criteria (i.e., maintain the status quo); (ii) apply the WHO/IPCS definitions;
(iii) apply the WHO/IPCS definitions together with additional categories on the basis of  strength of evidence for meeting this definition; and (iv) apply the WHO/IPCS definitions and also take into account potency as an element of hazard characterization.  In addition to the feedback regarding the scientific criteria that define EDCs, the consultation also gathers input on considerations of a regulatory rather than a purely scientific nature, including the importance of socio-economic arguments.

Importantly, while the consultation focuses on biocidal and plant protection products, it is likely to be a first step towards the adoption of EU horizontal criteria for identifying EDCs in a wide variety of products.  In fact, the Roadmap confirms that the Commission’s objective is not only to develop scientific criteria in the context of biocidal and plant protection products, but also to ensure the “possibility to apply these criteria across all relevant Union legislation.”

EU Court Confirms Support for Protective Local Green Energy Schemes: Will This Approach Spill Over to Other National Environmental Measures?

Posted in Uncategorized

EU Member State green energy schemes that only support locally produced renewable energy are compatible with EU law.  This is the main conclusion of the Court of Justice of the European Union in its judgment of 11 September 2014 (CJEU, Joined Cases C-204/12 to C-208/12, Essent Belgium NV v. Vlaamse Reguleringsinstantie voor de Electriciteits- en Gasmarkt).  The Court’s decision essentially confirms the Court’s earlier landmark judgment in the Ålands Vindkraft case.

Background

Directive 2001/77 on the promotion of electricity produced from renewable energy sources (“Directive”)1/ required Member States to set national indicative targets on the consumption of electricity produced from renewable sources.  In order to facilitate trade and consumer transparency in renewable electricity, the Directive also required Member States to guarantee the origin of renewable electricity by means of “guarantees of origin” that should be mutually recognized.  The Directive also encouraged Member States to establish support schemes for renewable electricity, but made clear that guarantees of origin do not themselves entail a right to benefit from such national support mechanisms.

The Belgian Region of Flanders implemented the Directive by adopting a scheme that among other things requires electricity suppliers to surrender a certain number of “green certificates” to the Flemish Regulatory Authority for the Electricity and Gas Market (VREG).  For that purpose, the VREG  accepts only green certificates issued to producers that have produced the renewable energy in Flanders . 

In order to meet its green certificates obligation under the Flemish scheme, electricity supplier Essent NV surrendered to the VREG guarantees of origin from producers established outside Flanders.  The VREG refused these guarantees of origin and imposed several administrative fines on Essent.  Essent challenged the VREG ‘s decision before a Belgian court claiming that it violated the EU principles of free movement of goods and non-discrimination.  The EU Court’s decision is in response to a reference for a preliminary ruling from the Belgian court.

Analysis

  • Certificates or Origin vs. Green Certificates: Essent argued that the VREG should accept its guarantees of origin from non Flemish producers  as a means to comply with its green certificates obligations because the Directive required the mutual recognition of guarantees of origin.  However, the Court dismissed this argument, stressing the difference between guarantees of origin and green certificates and their different purposes.
  • Restriction of Free Movement of Goods?:  Essent also claimed that the VREG’s rejection of its guarantees of origin constituted an unjustifiable restriction of trade in goods.  Following a reasoning very similar to that of the Ålands Vindkraft case, the Court rejected Essent’s claim and argued that even if the VREG’s rejection could constitute a restriction of trade, it was justified under Article 30 of the EC Treaty (now Article 36 TFEU).

Article 30 of the EC Treaty provides public interest grounds that can justify restrictions on the free movement of goods.  The article does not explicitly list protection of the environment among these grounds, but does include “the protection of health and life of humans, animals or plants.”  According to the Court’s case-law, this also extends to the protection of the environment, including the promotion of renewable energy sources.

Article 30 of the EC Treaty also provides that in any event, and despite the existence of justification grounds, restrictions should not “constitute a means of arbitrary discrimination or a disguised restriction on trade between Member States.”  In Essent, however, the Court did not address this element, but instead focused only on whether the Flemish mechanism was proportionate, i.e. whether it was suitable to attain the objective of promoting renewable energy and whether it was necessary for achieving that purpose.The Court concluded that the territorial limitations of the mechanism were indeed necessary for promoting the increased use of renewable energy sources.

The Court emphasized that the EU legislature allows national green energy targets, and that the renewable energy potential and energy mix may vary between Member States.  According to the Court, it is essential that Member States be able to control the effect and cost of their national support schemes according to their potential, whilst maintaining investor confidence.

However, the Court also made clear that in order to be proportionate and justified the Flemish scheme should: (i) provide for a genuine market of green certificates in which supply can match demand so that it is actually possible for all suppliers to obtain certificates under fair terms; and (ii) ensure that the fines imposed on suppliers that do not obtain the required green certificates are not excessive.

  • Discrimination?: As mentioned earlier, the Court did not address the issue of whether the Flemish scheme was discriminatory when it assessed whether it could be a justified restriction of trade under Article 30 of the EC Treaty.  Instead, it seemed that the Court considered that under Article 30 it was sufficient to assess whether the measure was proportionate.  Nevertheless, at the request of the national court, the EU Court assessed whether the Flemish scheme violated the EU principle of non-discrimination.

With brief arguments, the Court took the view that there was no violation of the principle of non-discrimination.  The Court addressed the alleged discrimination towards electricity suppliers (who must render green certificates issued to producers of green energy produced in Flanders), and towards producers (to whom certificates are only issued when they demonstrate that the green energy was produced in Flanders).  Regarding suppliers, the Court concluded that the scheme was not discriminatory, because it applied “to all electricity suppliers operating in the Flemish Region, irrespective of their nationality.”  Regarding producers, the Court ruled that the assessment of the scheme comes within the scope of restrictions on free movement of goods, and therefore, did not address its alleged discriminatory nature.

Impact 

  • Investor Confidence:  As with the Ålands Vindkraft case, the Court’s decision has been widely welcomed by the renewable energy industry across Europe.  Had the Court found that the Flemish scheme violated EU law, this would have required Member States to dismantle many green energy support schemes across Europe, which tend to promote local production.  Instead, by upholding the Flemish system, the Court allows national governments to maintain the “status quo” and remain ‘in charge’ of their support schemes.
  • What About the Future?:  This apparent stability will only be temporary, however.  Indeed, the Court’s decision shows that it will be difficult to have a single EU renewable energy target and an EU wide approach to renewable energy as advocated by the European Commission.

In fact, it seems difficult to understand why Europe’s support for renewable energies essentially depends on patch of national schemes, rather than a coherent EU scheme, if, as the Court states, “the use of renewable energy sources […] is useful for the protection of the environment inasmuch as it contributes to the reduction in greenhouse gas emissions, which are amongst the main causes of climate change that the European Union and its Member States have pledged to combat.”  On the other hand, the Court’s decision may become irrelevant if Europe’s renewable energy industry moves from a support based system to one based on equal opportunities and interconnection.

  • What About Other National Environmental Measures?Yet, perhaps the biggest impact of and Ålands Vindkraft and Essentwill be on national environmental measures beyond renewable energy/climate change schemes.  Both decisions leave the reader wondering whether from now on national environmental measures no longer need to pass the standard of non-discrimination in order to be justified restrictions of trade.

______________

[1]Later replaced by Directive 2009/28/EC on the promotion of the use of renewable energy.

A Renewed Focus on Climate Change This Week in New York

Posted in Uncategorized

Regardless of your perspective on the subject, expect significantly increasing media and public attention around climate change and greenhouse gas emissions this week.

The Secretary General of the United Nations, Ban Ki-moon, is convening a Climate Summit on Tuesday in conjunction with the meeting of the UN General Assembly in New York.  More than 120 world leaders are expected to attend this gathering, making it significant and historic to have so much focus on this issue.  The Climate Summit prompted activists to put together a People’s Climate March on Sunday calling for action by the assembled world leaders.  Hundreds of thousands of people reportedly joined the march in New York — creating media and popular momentum– and demonstrations also occurred in cities around the world.

This focus on climate change has come to be known as Climate Week in New York City.  One of the most notable features of it is the role that businesses are playing in promoting private sector innovation for clean energy solutions, accounting for their climate-related activities, and even advocating for clearer governmental climate emissions policies.  The week is filled with dozens of meetings and forums featuring such business approaches.  Today, for example, Apple’s CEO Tim Cook will be joining Climate Week opening day events to discuss his company’s approach, and dozens of CEOs will be attending a Private Sector Forum tomorrow at the UN.  These meetings include financial firms and investors, as well as greenhouse gas emitters.  The Carbon Disclosure Project (CDP) will be at the New York Stock Exchange on Tuesday to release its  annual survey of company reporting on carbon emissions, showing that some 70% of the S&P 500 companies voluntarily report on their carbon emissions.  Several major companies are expected to announce commitments to power 100% of their operations from renewable energy.

The business discussions in New York will increasingly center on a call for companies to put an internal price on carbon, as a complement to efforts to have governments establish regulatory mechanisms — such as emissions limits or trading schemes — that likewise impose such a price.  A carbon price is believed to sharpen the business focus on climate change risks, costs and opportunities.  The UN Global Compact and the World Bank are promoting leadership criteria for companies based on such reporting.  Indeed, a just released report  from the Carbon Disclosure Project (CDP) shows that some 150 companies have developed internal carbon pricing schemes.  It would not be surprising for calls for company pricing policies to increasingly appear in future shareholder resolutions.

This increasing private sector focus complements the accelerating pace of the official UN negotiations.  Interestingly, the Climate Summit is merely an effort by the Secretary General to enhance the focus on the climate treaty negotiations, which are happening elsewhere.  The next step is the annual meeting of the parties of the UN Framework Convention on Climate Change in Lima, Peru in early December to continue with drafting a framework.  Countries will then submit emissions reduction commitments in the Spring, with an effort  to reach a global agreement at the Paris meeting of the parties in December 2015.  Yesterday, the Major Economies Forum of the largest nations met to tackle these issues and discuss next steps to accomplish such an agreement.  Several observers see this meeting as a demonstration of the increasing importance of this issue, as for the first time that meeting consisted of country Foreign Ministers (Secretary of State Kerry attended) rather than simply energy or environmental officials.  Issues around addressing the growing emissions from rapidly developing economies, such as China and India — which currently sit outside of the existing UN framework — remain central to the ultimate success of this endeavor.

Key to the United States’ position are the significant emissions reductions that would be derived from the Environmental Protection Agency’s recently proposed rules for existing power plants.  They are a central piece in fulfilling the President’s international pledge in 2009 that the United States would reduce its carbon emissions by 17% by the year 2020.  The President’s speech this week will be important in setting a trajectory for how much further the United States may be willing to go after 2020.

The UN’s chief climate change official, Christian Figueres, speaking at a small gathering yesterday, regards the week’s activities as an indication that the climate issue may be reaching a tipping point.  She characterizes the public demonstrations as a statement that the nations of the world “must” address climate change, the business actions as a demonstration that governments “can” address climate change, and believes that governmental leaders are now poised to assert that they “will” address it.  While the outcomes may not be fully settled for some time, companies can expect to see a renewed public focus on these issues and will likely find that they present a range of increasing risks and opportunities.

U.S. Navy Affirms Commitment to Use Alternative Fuels

Posted in Biofuels, Government Contracts

On August 25, 2014, the U.S. Navy announced that it would continue its four-year collaboration with the Chilean Navy to research, develop, and use “drop-in” alternative fuels to power surface ships and aircraft.  Both navies have established goals of significantly increasing their use of alternative fuels.  The Chilean Navy intends to use renewable energy sources for forty-five percent of its newly installed energy capacity over the next eleven years.  Similarly, the U.S. Navy hopes to satisfy fifty-percent of its energy needs with alternative energy sources by 2020.  As part of this effort, the U.S. Navy has been pursuing drop-in biofuels, which are chemically indistinguishable from petroleum-derived fuels and may be used in existing ships, aircraft, and infrastructure.  The U.S. Navy confirmed the viability of using drop-in biofuels during a fleet exercise in 2012 and intends to use drop-in biofuels in normal operations beginning in 2016.

The announcement of the continuing partnership between the U.S. and Chilean Navies comes shortly after the U.S. Department of Defense (“DoD”) issued its annual $3.5 billion procurement for bulk fuels for facilities located in the Eastern, Inland, and Gulf Coast Region, in which the U.S. Navy for the first time sought biofuel and petroleum blends.  The procurement represents a major development in the partnership between the U.S. Navy and the U.S. Department of Agriculture (“USDA”), which was formed in 2010 after President Barack Obama called on the U.S. Navy, USDA, and the Department of Energy to facilitate the development drop-in alternative fuels.  As we previously reported, the Department of Energy is independently making efforts to develop drop-in biofuel technology through its recently announced clean energy technology loan guarantee program.

The U.S. Navy is aiming to make ten percent of its purchases under the new procurement in biofuel and petroleum blends.  As part of the USDA’s partnership with the U.S. Navy, the Commodity Credit Corporation offered grants to suppliers of blended products to ensure that blended products were offered at a competitive price.  USDA’s role in the procurement is critical because the 2014 National Defense Authorization Act (“NDAA”) limits DoD’s ability to purchase drop-in fuels for operational purposes if the drop-in fuels are not cost-competitive with traditional fuels.  The current version of the 2015 NDAA contains a similar restriction that limits DoD’s ability to purchase biofuels until the cost of biofuel is generally equal to the cost of traditional fuel, which the U.S. Navy and USDA expect to occur by 2016.

The U.S. Navy is expected to seek petroleum and biofuel blends in a second bulk-fuel procurement later this year.  Through both procurements, the U.S. Navy intends to purchase up to 800 million gallons of biofuel by 2015.  The U.S. Navy’s efforts could result in an expansion of the domestic capacity to produce drop-in biofuels, which is currently about 210 million gallons per year according to the U.S. Energy Information Administration.

EPA Clarifies Standards for CERCLA Assessments

Posted in EPA

In a move designed to provide greater certainty to those purchasing, selling, or evaluating industrial or commercial properties, the Environmental Protection Agency (EPA) recently proposed to remove any lingering effect of ASTM International’s E1527-05, a nine-year-old industry standard practice for evaluating potentially contaminated sites under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).

As explained in detail in our February 24, 2014 E-Alert, “Amended All Appropriate Inquiries (AAI) Rule Offers New Due Diligence Standard, Focuses on Vapor Releases,” the EPA referenced and countenanced ASTM International’s updated framework, E1527-13, as an alternative due diligence standard to ASTM E1527-05.  Issued on June 16, 2014, the Proposed Rule would clarify Phase I Environmental Site Assessment (ESA) standards by replacing ASTM E1527-05 with ASTM E1527-13.  Yet these requirements still leave significant uncertainty in the absence of more detailed guidance about how to conduct vapor intrusion evaluations.

I.  Background

International standards organization ASTM International modeled E1527-05 on the EPA’s All Appropriate Inquiries (AAI) Rule in 2005.  The AAI Rule is a due diligence standard that allows buyers of potentially contaminated properties who conduct an investigation meeting the rule’s requirements to preserve certain defenses to federal cleanup liability under CERCLA when conducting Phase I ESAs.  See 40 C.F.R. § 312 (2013).  The ASTM E1527-05 framework was developed to provide guidance for such investigations, and instructed would-be purchasers to undertake all appropriate inquiries regarding the condition of a property before completing its sale.  Any buyer who conducted such inquiries in compliance with ASTM E1527-05 could then qualify for certain landowner liability protections under CERCLA, including the innocent landowner, bona fide prospective purchaser, and contiguous property owner defenses.

Last December, the EPA amended the AAI Rule to allow a purchaser to satisfy Phase I ESA requirements by following either ASTM E1527-05 or ASTM E1527-13.  See 78 Fed. Reg. 79319 (Dec. 30, 2013).  As explained in our February 24, 2014 E-Alert, the 2013 framework included new regulatory file review requirements, updated definitions of certain key terms, including “de minimis condition,” “release,” “Recognized Environmental Condition,” and “Historical Recognized Environmental Condition,” and expanded ASTM E1527-05’s definition of “migrate/migration” to include vapor migrations.

II.  Proposed Rule

The EPA amended the AAI Rule through direct final rulemaking, an approach whereby an agency publishes a rule and a notice of proposed rulemaking simultaneously because it expects that the rule will prove non-controversial.  But the move nonetheless introduced confusion because in endorsing both ASTM E1527-05 and ASTM E1527-13, it recognized two distinct standards.

Responding to that criticism, the EPA has now proposed to replace ASTM E1527-05 with ASTM E1527-13 for purposes of the AAI rule so as “to reduce any confusion associated with the regulatory reference to a historical standard” and “promote the use of the standard currently recognized by ASTM International as the consensus-based, good customary business standard.”  Amendment to Standards and Practices for All Appropriate Inquiries, 79 Fed. Reg. 34480 (proposed June 16, 2014) (to be codified at 40 C.F.R. 312), at 11.  Besides removing all references to ASTM E1527-05, the Proposed Rule would not alter the substance of the AAI Rule.

III.  Implications

ASTM E1527-13 incorporates new language about the need to evaluate soil vapor risk when conducting Phase I ESAs.  Soil vapor intrusion is of particular focus with respect to TCE and other volatile organic compounds, but can also involve other contaminants.  The EPA has suggested, however, that a vapor intrusion evaluation may already have been required under ASTM E1527-05.  In its preamble to the rule offering ASTM E1527-13 as a new due diligence standard, the agency stated that it “in its view, vapor migration has always been a relevant potential source of release or threatened release that, depending on site-specific conditions, may warrant identification when conducting all appropriate inquires.”  78 Fed. Reg. 79319 (Dec. 30, 2013).  It is unclear, however, whether the EPA intended this statement to reflect near contemporary Phase I ESAs (conducted after ASTM E1527-13 was developed) or instead intended to suggest that the obligation has always existed.  Consequently, there may be future disputes as to whether a Phase I ESA not describing an evaluation of soil vapor intrusion actually satisfied the AAI Rule.

ASTM E1527-13 leaves open a number of key questions about vapor intrusion evaluations.  Neither ASTM E1527-13 nor the AAI Rule describes, for example, what levels in soil gas or groundwater should lead to concern or what levels would require mitigation.  The EPA and various states are developing guidance in this area to further clarify acceptable levels, how evaluations are to be conducted, whether one can evaluate risk based upon groundwater conditions alone, whether an evaluation must consider multiple lines of evidence, what vapor levels would be deemed acceptable in a residential setting, and what actions are required to mitigate risk.[1]

IV.  Conclusion

Consultants have already been transitioning toward the ASTM E1527-13 standard.  Should the Proposed Rule be adopted, ASTM E1527-05 will still satisfy the AAI Rule for properties acquired between November 1, 2005 and the effective date of the new action.  The EPA also anticipates providing for a delayed effective date of one year following any final action, to give those still using the previous framework time to complete ongoing investigations and become familiar with the updated standard.

However, it is important to recognize the potential that the EPA may claim that a failure to evaluate soil vapor, where otherwise appropriate, is a requirement under ASTM E1527-05 and not only ASTM E1527-13.  It is therefore essential that potentially-affected individuals keep current on EPA developments with respect to the evaluation of soil vapor intrusion, and obtain sound and up to date advice from environmental professionals.

 

EU Court Allows Discriminatory Green Energy Support Schemes

Posted in Europe, Renewables, Wind

David Haughan, Stagiarie, Summer 2014, contributed to this post.  Mr. Haughan was a legal trainee at the Brussels office of Covington and Burling LLP during the Summer of 2014.  David studies at King’s College, London.

In a landmark decision (CJEU, C-573/12, Ålands Vindkraft AB v. Energimyndigheten) the Court of Justice of the European Union ruled that Member States do not need to open up renewable energy support schemes to producers in other EU countries.  The Court made a clear choice in favor of investor confidence, allowing far-reaching limitations to the EU’s fundamental principle of free movement of goods. 

Background

Under Swedish law, electricity distributors are required to surrender a set amount of green certificates per year, which they need to purchase from electricity producers. The Swedish government only awards certificates to Swedish producers of renewable electricity, thereby effectively putting foreign producers at a competitive disadvantage.   Ålands Vindkraft, a Finnish producer of wind energy, located in Finland but mostly connected to the Swedish grid, challenged the Swedish support scheme on the grounds that it violates the principle of free movement of goods.

Importantly, the Swedish system was adopted in an effort to achieve the national renewable energy targets, provided by Directive 2009/28 on the promotion of the use  of renewable energy (“Renewable Energy Directive”).  This Directive allows Member States to adopt support schemes, and grants Member States “the right to decide (…) to which extent they support energy from renewable sources which is produced in a different Member State” (Article 3(3)).

Analysis of the Judgment

Under EU law, measures that restrict the free movement of goods may be justified if they are intended to protect the environment and are proportionate and not discriminatory.  The Court decided that while the Swedish system restricts the free movement of goods, such restriction is justified because it aims to protect the environment by promoting  renewable energy.  In doing so, Court rejected the  Opinion of Advocate General Bot, who argued that both the Swedish system and the Renewable Energy Directive are contrary to EU law.

The Court referred to its Preussen Elektra case, where a reduction of greenhouse-gas emissions was found to protect the environment, to hold that the Swedish scheme could be justified as a measure aimed at protecting the environment.  The Court then assessed the Swedish certification scheme in light of the proportionality principle, which only allows a restriction of the free movement goods  if it is necessary for achieving the environmental objective, and if such objective cannot be achieved by less intrusive measures.

The judgment lists three main reasons why the territorial limitation of the Swedish support scheme is not disproportionate.  First, the Court took note of the practical considerations that justify favoring energy at the production stage, rather than at the consumption stage.  According to the Court, once the green electricity has been allowed into the transmission or distribution system, its origin is difficult to determine, thus rendering identification at the consumption stage difficult to put in practice.  Second, the Court pointed out that the Renewable Energy Directive sets national targets, and that the energy mix of each EU Member State varies.  The Court went on to note that, in accordance with the Directive, “Member States must be able to control the effect and costs of their national support schemes according to their different potential.”  Third, the Court overruled Ålands Vindkraft’s argument that the Swedish territorial limitation was no longer necessary, as Sweden had already fulfilled its requirements relating to those targets.  According to the Court, even though Sweden already reached its target, the national scheme intends to foster investments in new installations, giving producers certain guarantees about the future marketing of their green electricity, thus assuring investors’ confidence.

While logical from a business perspective, this generous proportionality assessment fails to address precisely why territorial restrictions in national support schemes are necessary to achieve the objective of environmental protection.  In particular, the Court does not explain to what extent renewable energy is promoted more efficiently through such schemes than through mechanisms that are open to producers located throughout the EU.  Rather, the judgment focuses on the workability of the current system foreseen by the Renewable Energy Directive, which is based on national targets.  In that particular context, the Court considers that Member States must be able to remain in control of their national support schemes, and that territorial restrictions contribute to investor confidence, which can in turn boost the renewable energy produced by that Member State.

Impact

  • Investor Confidence – The Court’s decision has been widely welcomed by the renewable energy industry.   Opening up the national support schemes to foreign producers could have created uncertainty on the renewable energy market, thus potentially harming investor confidence.  In contrast, the judgment protects the predictability of investments in renewable energy and reassures green energy companies and investors alike.  Indeed, the Court held that the effectiveness of green certificate schemes “requires by definition a measure of continuity sufficient, in particular, to ensure the fulfilment of the legitimate expectations of investors who have committed themselves to such projects, and the continued operation of those installations.”
  • Decision to the Relief of Member States – Several EU governments will undoubtedly have breathed a sigh of relief after reading the Court’s decision as many of them apply support schemes that are similar to the Swedish system.  Should the Court have followed Advocate General Bot, then the very existence of national support schemes would have been questioned, potentially rendering the well-established support systems in many Member States illegal.  German economy and energy minister Sigmar Gabriel welcomed the decision, saying that it would help Germany’s case as it seeks approval for its reformed system of renewable subsidies.
  • EU Internal Electricity Market – Not everyone will be pleased with the Court’s judgment, as it is clearly at odds with the European Commission’s ambition to establish an “internal electricity market.”  In its Communication on the Internal Electricity Market, the European Commission explicitly advocates removing “possible distortions to the single market arising from different national approaches” (original emphasis).  Significantly, according to the Communication, “the Commission specifically as regards renewables envisages exploring options for […] ‘Europeanisation’ of support schemes for the future EU legal framework on renewables.”   In light of the Court’s decision, it seems unlikely that true “Europeanisation” will be achieved any time soon.
  • Spill-Over Effects? – This Court’s decision may have an impact well beyond the sphere of national support schemes.  For instance, the decision provides Member States with strong arguments to publish nationally oriented public tenders in the field of renewable energy.   Indeed, the Court considered that the purpose of the Swedish scheme is “to support the operation of installations producing green electricity once they become active,” and that it is “designed to facilitate the sale of green energy that they produce at a price higher than the market price for conventional energy.”   This reasoning could also apply to public tenders for projects that contribute to the increase of renewable energy shares in a particular Member State.

UK Parliament Announces Tighter Planning Guidance for Onshore Oil and Gas Applications

Posted in Europe, Natural Gas, Oil

In the first blog of this two-part series, we considered the potential impact of the 14th Round on the commercialisation of the shale gas in the UK in light of recent developments in this industry.

This second blog post focusses on the additional planning guidance for licence applications in National Parks, Areas of Outstanding Natural Beauty and World Heritage Sites, which was simultaneously released with the announcement of the 14th Round on 28 July 2014.

As we noted in part one, the 14th Round is the first opportunity for bidders to obtain onshore PEDLs following the release of a study that estimated the UK has a potentially vast amount of shale reserves. The 14th Round is also the first licensing round to follow protests in 2013 by members of the public at Cuadrilla’s site in Balcombe in West Sussex, after which Cuadrilla did not pursue fracking activities at the site. Shortly after these events, the UK Government published a new Environmental Report for public consultation, which assessed the likely significant effects of the draft Licensing Plan for the 14th Round.

Responses to the consultation showed that there was “strong support for the exclusion from licensing of environmentally sensitive sites”. The announcement of tighter planning guidelines acknowledged these such concerns and expressed the need to “create the right framework to accelerate unconventional oil and gas development in a sustainable way”.

On 28 July 2014, Lord Ahmad of Wimbledon, a Tory communities minister, clarified the Government’s approach to the exploration of unconventional hydrocarbons, stating that: “there are areas of outstanding landscape and scenic beauty where the environmental and heritage qualities need to be carefully balanced against the benefits of oil and gas from unconventional hydrocarbons.”

The planning guidance attempts to strike this “careful balance” by requiring mineral planning authorities to give “great weight” to “conserving [the] landscape and scenic beauty” of National Parks, the Broads and Areas of Outstanding Natural Beauty when considering applications for unconventional hydrocarbon development in such areas. Further, where applications represent “major development” in such areas, planning permission should be refused, “except in exceptional circumstances and where it can be demonstrated they are in the public interest”.[1]  In relation to World Heritage Sites, mineral planning authorities should “refuse consent unless wholly exceptional circumstances apply”.[2]

In addition, licence applicants will be required to submit a Statement of Environmental Awareness to demonstrate their understanding of environmental sensitivities relevant to the area proposed for licence.[3]

The planning guidance does not exclude the possibility of licensing fracking activities in even the most significant of the UK’s environmentally sensitive areas, should such activities be considered capable of deriving an exceptional benefit. Proponents of the shale gas industry in the UK, and its potential economic and energy security-related benefits for the nation, would view this as a pragmatic approach to balancing the possibility of exploiting highly lucrative hydrocarbon reserves against preserving the UK’s landscape.

Perhaps unsurprisingly, the announcement has not silenced all of the critics of fracking activities in the UK. Greenpeace UK reiterated its opposition to fracking in light of the 28 July 2014 announcement. In March 2014, the National Trust publicly advocated a complete ban on fracking in National Parks. In a 28 July 2014 press release, the National Trust welcomed the Government’s new planning proposals, but also suggested that the scope of the planning guidance should extend further still, to cover “nature reserves and other wildlife sites like Sites of Special Scientific Interest (SSSIs) as well”.

The 14th Round expands the possibility for increased commercial exploitation of shale gas in the UK, while also attempting to balance new exploration activities with concerns to safeguard the UK’s most significant environmental sites. These developments are likely to be of interest to energy companies considering investment in unconventional gas in the UK; this appears to be the hope of the UK Government, which is taking steps to actively encourage the future development of the UK’s shale gas industry. However, it remains to be seen whether the latest licensing round will be a “game changer” for the shale gas industry in the UK or public attitudes towards the impact of fracking activities on the UK’s countryside.


[1] The assessment that needs to be carried out is set out in paragraph 116 of the National Planning Policy Framework.

[2] The test to be considered by mineral planning authorities is set out in paragraph 133 of the National Planning Policy Framework.

[3] Statement by Baroness Verma on the outcome of the strategic environmental assessment (SEA) which has been conducted for further onshore licensing. [https://www.gov.uk/government/speeches/outcome-of-the-strategic-environmental-assessment]

UK Parliament Announces the 14th Landward Licensing Round

Posted in Europe, Natural Gas, Oil

In the first of a two part series on recent developments in the UK shale gas industry, this blog post considers the potential impact of the announcement on 28 July 2014 by the Business and Energy Minister, Matthew Hancock, inviting applications for Licences in the 14th Landward Licensing Round (the 14th Round) on the exploitation of shale gas in the UK, in the context of key recent developments in this fledgling industry.

The licensing system for the exploitation of the UK’s onshore and offshore oil and gas reserves is administered by Department for Energy and Climate Change (DECC). The award of a Petroleum Exploration Development Licences (PEDL) by DECC grants the licensee exclusivity in respect of oil or gas exploration or production within the licence area.[1]

The 13th onshore licensing round (the 13th Round) was the latest onshore licensing round in the UK, occurring in 2008. In the 13th Round, onshore PEDLs were awarded by DECC for the exploration of unconventional hydrocarbons, including shale gas, for the first time. After planning permission was granted, consent was given to drill for shale gas in five locations, two of which were held by Cuadrilla, an independent UK exploration and production company. To date, the UK shale gas industry remains in the exploratory phase, which is the earliest phase of development.

During this initial stage, the shale gas industry in the UK has experienced notable setbacks. The UK Government announced a moratorium on fracking in the UK following seismic tremors (with magnitudes of 2.3 and 1.5) arising from fracking activities at Preese Hall in Lancashire in April and May 2011. Preparations for the 14th Round originally began in December 2010, but were suspended after the events at Preese Hall.

In December 2012, the Energy and Climate Change Secretary of State announced that new regulatory requirements were being introduced to reduce the potential seismic risks associated with fracking activities in the UK and that fracking could resume in the UK. With this announcement, preparations for the 14th Round also resumed.

Further positive news for the industry followed in June 2013, when a report published by the British Geological Survey (BGS) in association with DECC estimated that there is 1,300 trillion cubic feet (tcf) (central estimate) of shale resources deposits in the Carboniferous Bowland-Hodder Shale area, which stretches from Blackpool and Wrexham in the North West of England to Scarborough in the North East of England. The potential significance of these estimated reserves for the UK’s future energy needs is put into perspective when compared to the annual consumption in the UK of just over 3 tcf.

In June 2014, the BGS announced that it had completed an estimate for the amount of shale gas and oil in the Midland Valley of Scotland. The shale gas in place is estimated at 80.3 tcf (central estimate), and the shale oil in place is estimated at 6.0 bbl (central estimate). The UK Onshore Operators Group (UKOOG), the representative body for the UK onshore oil and gas industry, welcomed the BGS’s estimates as a “reassurance to investors who wish to explore for oil and gas onshore in Scotland”.

However, the commercial viability of extracting some or all of the country’s potential shale resources must also be considered. A 2013 report by the US Energy Information Energy has estimated that technically recoverable shale oil and shale gas resources in the UK could amount to up to 26 tcf. Various studies have been undertaken on the potential impact of the commercialisation of shale gas for the UK, but so far have not produced concrete conclusions on the outlook for shale gas in the UK. For instance, an Energy and Climate Change Select Committee (ECCC) inquiry in 2011 concluded that although shale gas resources in the UK could be considerable — particularly offshore — shale gas was unlikely to be a “game-changer” as in the US. A follow-up ECCC inquiry in 2013 on the impact of shale gas on energy markets concluded that it was “too early to say whether domestic production of shale gas could result in cheaper gas prices in the UK” and that “[…] it remains uncertain whether industry will consider shale oil economically worthwhile to explore”.

DECC’s plans to create an attractive and effective framework for the exploration of shale gas are intended to encourage the development of the shale gas industry in the UK. In addition to inviting bidders to apply for PEDLs in the 14th Round, the UK Government has recently introduced measures to make the tax environment more appealing to investors in unconventional hydrocarbons. The development of the shale gas industry will, in turn, help to more accurately ascertain the amount of estimated reserves that can be viably extracted and exploited from the UK’s underground shale deposits, as the most accurate estimates can be obtained from test drilling.[2]

The announcement of the 14th Round represents a step forward in this development plan, creating the first opportunity for applications for new onshore PEDLs since the BGS published its estimates of the UK’s shale gas reserves. The competition for licences is likely to attract significant interest from energy companies seeking to explore the UK’s potentially vast shale reserves. Of particular interest are likely to be the Bowland basin of the north-west, a central belt of Scotland and the Weald in the south-east.

The identity of the bidders for PEDLs in the 14th Round will be noted with interest. In June 2013, Centrica acquired a 25% stake in Cuadrilla’s interest in the Lancashire Bowland shale gas exploration licence area. The introduction of larger players, such as Centrica, investing in UK shale gas after the 13th Round indicates an increased confidence in the industry. However, it would be premature to conclude that this acquisition marks the beginning of a trend of activity in UK shale gas by larger energy companies. At present, the industry remains dominated by independent energy companies, notably Cuadrilla.


[1] In addition to the award of a PEDL, there are various other statutory and legal requirements in order for exploration or production activities to be commenced within the licence area. The licensee must also obtain: access rights from landowners; planning permission under the statutory planning regime (which may also involve undertaking an Environmental Impact Assessment); permits from the Environment Agency; and approval from the Health and Safety Executive. Further activities such as the drilling of wells, installation of facilities or production of hydrocarbons require additional authorisation by the Secretary of State for Energy and Climate Change.

[2] Parliamentary Note SN/SC/6073, 5 June 2014.