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Transformative Power Technologies: Do We Need Regulation 2.0?

Posted in Electricity

As discussed in a previous post, new technologies — such as distributed generation, electricity storage, and digital control and communications — are making steady inroads toward transforming the traditional role of electric utilities and their relationship to customers.  The future transformed utility is sometimes referred to as “Utility 2.0.”  While integrating new technologies into the grid presents technical challenges, policy makers must focus on another challenge as well: “Regulation 2.0.”

As reported by greentechgrid (Forget Utility 2.0—the Power Sector Needs ‘Regulation of the Future’),  utility executives and regulators at a recent conference addressed some of the fundamental regulatory issues that must be addressed to foster the new utility paradigm.  “We agree today we will no longer write another report [referencing the] ‘utility of the future.  What we need now is ‘regulation of the future,'” said Lawrence Jones, vice president of utility innovations and infrastructure resilience at Alstom.

Rates are an important Regulation 2.0 issue.  For example, customers want customized services, such as different levels of reliability, and new technology allows customized services.  Of course, this means different levels of costs.  But universal service at non-discriminatory rates is a fundamental part of  regulatory policy now.  Michael Champley, a commissioner at the Hawaii Public Utilities Commission, noted that non-discriminatory rates “is a universal practice…But you can question whether it’s appropriate for regulation 2.0.”  Theodore Craver, chairman, president and CEO of Edison International said the utility industry’s non-discriminatory regulatory model is creating barriers for the integration of new technologies.

Another example is volumetric rates.  Utilities recover their costs through rates based on the amount of energy (i.e., kilowatt-hours) used.  But when customers install on-site generation, such as rooftop solar panels, energy taken from the grid goes down and so does the revenue used to cover the cost of maintaining the grid.  The impact is exacerbated where the customer sells some of its unneeded power back to the utility.  New rate designs are needed.

Adopting standards for connecting new distributed resources to the grid is another challenge for regulators.  According to the National Renewable Energy Laboratory, some distribution system components were not designed to coordinate with bidirectional power flows produced by distributed generation, such as photovoltaic solar, and could require modification of protection schemes and additional distribution equipment.  Hawaii Commissioner Champley noted that “(i)t’s great you can plug in, but it’s the rules and terms and conditions of how you play that makes the difference.”

Of course there are many other issues that policy makers need to consider as the regulatory framework is adapted.  Are there appropriate guideposts to help policymakers?

In 2013, the Advanced Energy Economy Institute (AEEI) and MIT’s Industrial Performance Center (IPC) hosted a forum to identify the barriers and opportunities for redesigning regulatory and utility revenue models to enable innovation and allow for flexibility and responsiveness to changing market conditions.  According to a summary of the conference (21st Century Electricity System CEO Forum Summary), the following five points were repeatedly emphasized throughout the discussion:

  • Regulatory and policy goals and objectives must be clearly defined and well understood before redesigning the regulatory framework.
  • Regulation must evolve to allow innovative business models to emerge and take advantage of opportunities presented by new technologies and changing customer needs.
  • Several different business models may be capable of enabling innovation in the electricity distribution sector.
  • Understanding the changing role of the utility is critical to identifying and capitalizing on the opportunities created by technological change.
  • Developing new business models for distribution utilities and technology providers requires a clear understanding of customer needs.

Regulators in New York appear to be thinking along these lines.  The New York Public Service Commission has embarked on a major restructuring of its retail electricity markets that is proceeding along two tracks.  Under the first phase, the commission adopted a comprehensive policy framework for a reformed retail electric industry that is aimed at increasing distributed energy resources and dramatically changing the role of utilities.  The reformed electric system will be driven by consumers and non-utility providers, and will be enabled by utilities acting as Distributed System Platform providers.  With the major policy and objectives now set, the second track will focus on the needed regulatory changes and ratemaking issues.

New York seems to have comprehensively addressed both Utility 2.0 and Regulation 2.0 issues in one initiative.  Other states may take a more measured approach.  Regardless of the approach, transformative technologies are here and regulatory policies need to adapt to them.

Spotlight on Manatee Conservation in Clean Power Plan Debate

Posted in EPA

As the partisan debate about the Environmental Protection Agency’s (EPA’s) Clean Power Plan continues, Chairman of the House Committee on Natural Resources Rob Bishop (R-Utah) recently suggested that the agency’s forthcoming carbon emission rules could significantly harm the West Indian Manatee, a mammal that has been listed as endangered under the Endangered Species Act since 1967.[1]

Manatees, known colloquially as sea cows, are herbivorous aquatic mammals that inhabit shallow coastal areas and rivers of the Gulf of Mexico, Caribbean Sea, and Amazon Basin.  Of the three species of manatee, the West Indian variant is perhaps most widely known domestically because it primarily makes its home in the coastal waters of the southern Atlantic Ocean from North Carolina to Florida.  Unable to tolerate prolonged exposure to water temperatures below 68 °F (20 °C), the animals make a winter migration to Florida, where according to Fish & Wildlife Service (FWS) estimates nearly two-thirds of the population congregates near the warm-water outflows of power plants rather than continue south.[2]

As we have discussed in previous posts, EPA’s plan to adopt rules regulating greenhouse gas emissions from existing coal-fired power plants this summer has garnered criticism from various quarters.[3]  Florida and North Carolina regulators recently claimed that rules for existing facilities would lead to economically devastating coal plant closures.[4]  Bishop added concerns about manatee conservation to the mix, pointing out that such closures would decrease the amount of warm water released by industry into Florida’s waterbodies, thus posing a threat to the migrating mammals.

Bishop raised the issue with FWS director Dan Ashe during a budget hearing on March 19, 2015.  He showed the Subcommittee on Federal Lands and Subcommittee on Water, Power and Oceans a photograph of wintering manatees in Tampa Electric’s Big Bend discharge canal—a state and federally designated manatee sanctuary—to illustrate that “if EPA regulations cause this primary warm-water site to close down or substantially alter its operations, then it would adversely affect the manatee.”[5]  After acknowledging that EPA and FWS have not consulted on the proposed rules, Ashe agreed that such consultation was warranted “because there is a very direct and obvious impact and relationship between that water discharge and those manatees.”[6]  FWS subsequently clarified that Ashe was referring to consultation about a power plant’s impact on the mammals, rather than consultation on EPA’s carbon emissions rules writ large.[7]

The Clean Power Plan gives states flexibility and does not preclude them from undertaking wildlife habitat mitigation efforts.  Environmentalists have noted that manatee conservation and the Clean Power Plan can therefore be pursued in concert, and that mitigation measures might involve replacing warm-water regions frequented by manatees—something that the Center for Biological Diversity points out has been contemplated for years—or encouraging the animals to continue their migration further south.[8]

[1] See, e.g., Ben Wolfgang, Republicans enlist manatee in bid to slow Obama carbon emissions regulations, Mar. 22, 2015, available at http://www.washingtontimes.com/news/2015/mar/22/republicans-enlist-manatee-in-bid-to-slow-obama-ca/.

[2] FWS, West Indian Manatee 5 Year Review, 2007, at 16, available at http://ecos.fws.gov/docs/five_year_review/doc3771.pdf.

[3] See, e.g.,Some Light Shed on FERC’s Role in EPA’s Clean Power Plan” (Mar. 2, 2015); “FERC Hears Concerns Regarding EPA Carbon Rules, But Next Steps Remain Less Than Clear” (Feb. 20, 2015); “FERC Conferences to Address Impact of EPA’s Clean Power Plan on Electricity Reliability and Markets” (Jan. 12, 2015).

[4] See Sean Cockerham, Regulators from coastal states of Florida, N.C., pan EPA climate plan, Mar. 17, 2015, available at http://www.mcclatchydc.com/2015/03/17/260061/regulators-from-coastal-states.html.

[5] Sean Cockerham, Lawmaker: Protect coal plants to help the manatees, Mar. 19, 2015, available at http://www.bradenton.com/2015/03/19/5700899_lawmaker-protect-coal-plants-to.html?rh=1.

[6] Id.

[7] Id.

[8] See Wolfgang, supra note 1.

States Announce Conservation Measures to Forestall ESA Protections for Sage-Grouse

Posted in DOI

While the federal debate over Sage-Grouse protections has stalled since the passage of the FY15 appropriations bill—which as we discussed in Sage-Grouse Rider Frustrates Conservation Efforts included a rider effectively prohibiting the United States Fish and Wildlife Service (FWS) from issuing new rules concerning the birds—the discussion continues at the state level.  In particular, Idaho and Utah recently announced new conservation measures in an attempt to demonstrate that the Greater Sage-Grouse can adequately be protected without federal safeguards pursuant to the Endangered Species Act (ESA).[1]

Mining, oil, and gas interests favored the appropriations rider because it prevents FWS from listing the Greater Sage-Grouse under ESA, a designation that would challenge industry development in Idaho, Utah, and nine other western states where the bird is indigenous.  In the absence of ESA listing, the Greater Sage-Grouse will be subject to federal protections only through the Forest Service and the Bureau of Land Management, which is still in the process of revising approximately 100 land-use plans that span millions of acres of the bird’s habitat.

On February 11, 2015, the Idaho Department of Lands (IDL) announced a plan to protect 700,000 acres of state endowment lands to “further demonstrate Idaho’s commitment to conserving sage-grouse to prevent a listing of the species under the Endangered Species Act.”[2]  The new measures would complement Idaho’s existing 2012 plan, which already covers millions of acres of Sage-Grouse habitat.  While IDL’s proposal would impose certain lease stipulations—including a half-mile buffer around the bird’s breeding areas, noise limits on drilling, and the adoption of best management practices—it would largely protect industry interests by allowing for mining, oil and gas development, and wind farm operation.[3]  IDL is currently reviewing public comments on the plan.  The state’s Land Board and Oil & Gas Conservation Commission will vote on the proposal on May 19, 2015 and May 21, 2015, respectively.

Like Idaho, Utah is ramping up conservation efforts to stave off ESA listing of the Greater Sage-Grouse which, according to Governor Gary Herbert, would “have a significantly devastating impact” on the state’s economy, particularly on farmers, ranchers, and the energy industry.[4]  On February 10, 2015, Herbert signed an Executive Order directing state agencies to coordinate implementation of the Utah Sage Grouse Conservation Plan of 2013, which mandates maintaining a minimum average population of the bird on monitored breeding grounds and protecting 10,000 acres of its habitat through incentive-based programs.  The Executive Order in in particular also directs the state’s Division of Oil, Gas and Mining to coordinate with the Division of Wildlife Resources on all regulatory actions proposed within so-called Sage-Grouse Management Areas; these areas provide habitat and breeding ground for 94% of the state’s Sage-Grouse population.

It is not yet clear if these efforts will produce the desired effect and persuade FWS to forgo listing the Greater Sage-Grouse under ESA.  Due to a settlement agreement with environmental groups, the agency has until September 2015 to make that decision.

[1] See Jodi Peterson, New state and fed efforts to protect sage grouse, Mar. 6, 2015, available at https://www.hcn.org/articles/states-struggle-to-keep-sage-grouse-off-the-endangered-list.

[2] IDL, Idaho Department of Lands outlines plan to protect sage grouse habitat, Feb. 17, 2015, available at http://www.idl.idaho.gov/news-media/2015-releases/2-17-2015-idaho-dept-lands-outlines-plan-to-protect-sage-grouse-habitat.pdf.

[3] See IDL, Proposed Greater Sage-Grouse Conservation Plan, Feb. 11, 2015, available at http://www.idl.idaho.gov/sage-grouse/draft-sage-grouse-mgmt-plan_v021115.pdf.

[4] Brett Prettyman, Utah guv directs state agencies to protect sage grouse, Feb. 10, 2015, available at http://www.sltrib.com/news/2164901-155/utah-guv-directs-state-agencies-to.

A Spotlight on Solar Power in Africa

Posted in Africa

The new year may only be a few months old, but 2015 has already ushered in a number of exciting developments in the solar power space in Sub-Saharan Africa.

Solar projects coming online across the continent and more in the pipeline. Riding the momentum of 2014 in which it brought online the largest photovoltaic (PV) plant in Africa and joined the ranks of the top ten largest markets for utility-scale solar, South Africa last week announced the opening of KaXu Solar One, the country’s first Concentrated Solar Power plant. In Rwanda, Gigawatt Global has completed the construction of the first utility-scale PV plant in the East Africa region. In West Africa, construction is underway at the Nzema solar plant in Ghana, which, with a projected capacity of 155 MW, will be one of the top ten largest PV plants in the world when completed. In addition, Nigeria has signed a Memorandum of Understanding with a South Korean firm to develop a 1 GW solar PV farm. This is the most recent of a series of new agreements to build gigawatts’ worth of utility-scale and distributed generation projects across the country. A number of other countries, including Côte d’Ivoire and Uganda, have also initiated tenders for solar projects.

Policies and programs that facilitate investment. The World Bank recently announced its Scaling Solar initiative, a “one-stop-shop” that consolidates under one window the existing services that the Bank provides its country clients. These services include technical and legal assistance, partial guarantees of private debt, political risk insurance, and competitive financing. The design of Scaling Solar draws in part upon the South African government’s success with its Renewable Energy Independent Power Producer Procurement program, which has successfully promoted competitive and rapid tenders for grid-connected renewable energy in South Africa. Both investors and communities stand to benefit from policies and programs that catalyze further competition and capital for utility-scale solar projects.

Increased attention to distributed energy solutions. With two-thirds of the region’s population not connected to the grid, off-grid solutions are as important as the utility-scale, grid-connected projects. Recognizing the critical need to develop solutions to serve these 600 million people, the IFC invested $4.5 million last month in Off Grid Electric, a “micro-solar leasing” firm that skirts the problem of high up-front installation costs of solar PV by allowing rural customers to pay incrementally for the installation over time. Innovation in financing mechanisms for off-grid solar, such as pay-as-you-go approaches and mobile payment platforms, is being pioneered by companies like M-KOPA Solar, Greenlight Planet, Azuri Technologies, Fenix International, BBOXX, and more. In addition, venture capital and private equity firms are paying increasing attention—and funding—to the off-grid space as well. In the first two months of 2015, they have invested approximately $35 million in off-grid solar tech companies—a solid start to the year, compared with the $64 million invested in all of 2014.

In light of the colossal gap in energy infrastructure in Sub-Saharan Africa, these new investments in utility-scale and distributed solar energy are an encouraging sign of the changes to come in Africa’s power sector.

The Road to Paris 2015: The EU Commits to a 40% Reduction of Greenhouse Gas Emissions as Part of its INDC to the UNFCCC COP 21

Posted in COP21 - The Road to Paris 2015

The Council of Environment Ministers of the European Union has approved the EU’s Intended Nationally Determined Contribution (“INDC”) in anticipation of the COP 21 of the UNFCCC in Paris in December 2015.  At COP 21, the UNFCCC contracting parties are expected to agree on a new international legal agreement on climate change to be implemented by 2020 that will apply to all countries and have the objective of limiting global warning below 2°C.

In line with the European Commission’s proposal, the approved INDC commits the EU and its Member States to a binding target of an at least 40% domestic reduction in greenhouse gas emissions by 2030 compared to 1990.  The commitment represents a binding, economy-wide reduction target that covers all sectors and sources of emissions in the EU.

The EU’s INDC explicitly excludes from its 40% reduction commitment any contribution from international credits, which is also in line with the Commission’s intention to exclude all international credits from the EU Emissions Trading System (“ETS”).  This in effect also means that any linkage between the EU ETS and the systems of third countries would require the EU to increase its emissions reduction above 40%.

However, due to Member States’ divergent views on how to include Land Use, Land Use Change and Forestry (“LULUCF”) in the 40% reduction binding target, the EU’s INDC merely states that a “[p]olicy on how to include [LULUCF] into the 2030 greenhouse mitigation framework will be established as soon as technical conditions allow and in any case before 2020.”  This ambiguity has been criticized by different environmental NGOs who claim that the inclusion of LULUCF offsets would lower the 40% commitment by up to 5%.

The EU’s INDC is also silent on adaptation measures and on finance for mitigation and adaptation in developing countries.

Evolving Role of Utilities: Indicators That New Power Technologies May Be Transformative

Posted in Electricity

Many forces are converging to focus the debate on the evolving role of utilities, and events and trends are being closely watched by utilities, regulators and policymakers.  Just in the last week or so, a few developments indicate that new technologies are likely to be transformative.

On the innovation front, the Pacific Northwest National Laboratory (PNNL) reported that with certain advances, fuel cells could provide power to large customer facilities like big box stores or hospitals such that they could go off the grid.  Fuel cells are a form of distributed generation in which electricity is produced by solid oxide ceramic cells that oxidize a fuel electrochemically.  PNNL concludes that natural gas fuel cells could play a significant role in meeting future energy demand if their lifespans are improved and enough systems are produced to reach economies of scale.  Larry Chick, a materials engineer at PNNL, says that “the Department of Energy’s Solid Oxide Fuel Cell program has been achieving targeted improvements over the last decade, so things are moving in the right direction.”  Improvements will lower the cost of fuel cells and hasten their adoption by customers, thereby further eroding the utility’s role as sole power provider.

On the deployment front, energy storage is reportedly poised for significant growth in the U.S.  Storage is an important complement to variable generators such as solar and wind because it provides energy when those resources cannot.  According to a report by the Energy Storage Association and GTM Research, the storage capacity forecasted to be deployed in 2015 (220 megawatts) is more than three times the 2014 total, and by 2019 annual additions are expected to be almost four times the 2015 level (860 megawatts).  Perhaps more important, 90% of storage capacity added in 2014 was on the utility side of the meter but by 2019, 45% of new storage is expected to be on the customer side of the meter.  Increased deployment of customer-side storage will mean customers can lower their demand at peak times and perhaps rely on their own renewable power resources.  Either means less need for utility income-producing investment in generation capacity.

And on the regulatory front, the New York Public Service Commission adopted a comprehensive policy framework for a reformed retail electric industry that is aimed at  increasing distributed energy resources and dramatically changing the role of utilities.  Distributed energy resources “will become integral tools in the planning, management and operation of the electric system,” placing them “on a competitive par with centralized options.”  The current retail utilities will serve as a platform to provide uniform market access to customers, distributed resources and aggregators.  In a press release, Commission Chair Audrey Zibelman said the new policy “will reorient both the electric industry and the ratemaking process toward a consumer-centered approach that harnesses new technologies and markets.”  Each New York utility must file an implementation plan by December 15, 2015.

These developments — advances in fuel cells and storage, and a new regulatory policy in a key state that significantly elevates the role of distributed resources to meet customer needs — are but the most recent indicators that new technologies are making steady inroads toward transforming the traditional role of electric utilities.

EU Court of Justice Clarifies that the Exploratory Drilling of Petroleum and Natural Gas May Be Subject to an Environmental Impact Assessment

Posted in Europe

Recently, the Court of Justice of the European Union (“CJEU”) held that EU Member States are not obliged to require an environmental impact assessment for all exploratory drillings.  However, the Court’s decision can also be interpreted as requiring Member States to demand such impact assessment if the drillings can be classified as “deep drillings” and, on the basis of specified criteria (e.g., size and location of the project), they are “likely to have significant effects on the environment.”  The CJEU also held that when assessing whether an exploratory drilling operation must be subject to an environmental impact assessment, its potential environmental impact must be assessed “jointly with other projects” in the same area.

The CJEU’s decision is also relevant and provides some clarity in the European regulatory landscape on hydraulic fracturing where, in the absence of EU specific rules, Member States continue to adopt divergent legislation.  In effect, the Court’s decision can be interpreted as following a stricter approach on exploratory drillings than the European Commission’s Recommendation on Hydraulic Fracturing.

Facts and Legal Framework

The CJEU decision was in response to a request for a preliminary ruling from the Austrian Higher Administrative Court (“Verwaltungsgerichtshof”) on whether Directive 85/337/EEC (“Environmental Impact Assessment Directive” — “EIA Directive”)[1] requires that exploratory drilling operations be subject to a mandatory environmental impact assessment.  The request was referred to the Court in the context of litigation proceedings initiated by the municipality of Straßwalchen and 59 of its inhabitants against a decision of the Austrian Federal Minister for Economy, Family and Youth authorizing the company Rohöl-Aufsuchungs AG to undertake exploratory drilling up to a depth of 4,150 meters without a prior environmental impact assessment.

Article 4(1) and Annex I of the EIA Directive oblige EU Member States to require an environmental impact assessment before the start of listed operations including those on the extraction of petroleum and natural gas “for commercial purposes” if the extracted amount exceeds 500 tons/day, in the case of petroleum, or 500,000 cubic meters/day, in the case of gas.  Most shale gas extraction installations have a maximum daily production rate of no more than 250,000 cubic meters/day.

In addition, Article 4(2) and Annex II of the EIA Directive provide that Member States must determine on a case-by-case basis or on the basis of thresholds or criteria whether “deep drilling” projects must be made subject to an environmental impact assessment.  Member States must make this determination on the basis of the specific criteria listed in Annex III to the EIA Directive (e.g., size and location of the project, cumulative environmental impact with other existing projects).

Importantly, Article 2(1) of the EIA Directive also states that Member States must require an environmental impact assessment for “projects likely to have significant effects on the environment by virtue, inter alia, of their nature, size or location.”

CJEU Findings

Not All Exploratory Drillings Are Subject to a Mandatory Environmental Impact Assessment

The CJEU first held that exploratory drillings do not fall within the category “extraction of petroleum and natural gas for commercial purposes [in quantities above 500 tons per day in the case of petroleum and 500000 m3 in case of gas]” listed in Annex I to the EIA Directive and subject to a mandatory environmental impact assessment.  Although the Court acknowledged that exploratory drilling constitutes an operation carried out for commercial purposes, it argued that the reference to specific volume thresholds suggests that the category listed in Annex I does not include exploratory drilling because it is not possible to determine with certainty the extraction volumes of exploratory drilling operations before they are started.

Deep Exploratory Drillings That Are Likely to Have Significant Effects on the Environment Must Undergo an Environmental Impact Assessment

However, the Court’s decision also suggests that exploratory drillings must be subject to an environmental impact assessment if they constitute deep drilling and they are likely to have significant effects on the environment.

First, the Court held that an exploratory drilling at a depth of 4,150 meters is a form of “deep drillings” listed in Annex II to the EIA Directive for which Member States may require an environmental impact assessment on the basis of the criteria laid down in Annex III to the Directive.  The Court argued that the category of deep drillings of Annex II to the EIA Directive covers all types of deep drillings, including exploratory drillings, other than drillings for investigating the stability of the soil.

Second, the Court noted that the level of discretion enjoyed by Member States when determining whether a deep drilling project must be made subject to an impact assessment “is limited by the obligation set out in Article 2(1) of the directive to make projects likely, by virtue inter alia of their nature, size or location, to have significant effects on the environment subject to an impact assessment.”  As the Advocate General argued in his opinion, the Court’s reasoning means that “the need for an environmental impact assessment may . . . arise directly from Articles 2(1) and 4(2) of, and Annex II to, the EIA Directive if the project falls under that annex and is likely to have significant effects on the environment.”  In other words, the Court’s decision can be interpreted as requiring Member State authorities to demand an impact assessment for all deep exploratory drillings that, on the basis of the criteria of Annex III, are likely to have a significant impact on the environment.

The Potential Impact on the Environment of Exploratory Drillings Must Be Assessed Jointly with Other Projects in the Same Area

Finally, the CJEU held that, when assessing the potential impact of an exploratory drilling operation on the basis of the criteria of Annex III to the Directive to determine whether such project should be subject to an environmental impact assessment, Member States must take into account the cumulative impact of other projects in the surrounding area.  According to the Court, this must not be limited to projects of the same kind, but should include any project that would make the environmental effects of the drilling project greater than it would be in the absence of such other projects.

[1] Directive 85/337/EEC and its three amendments have been codified by Directive 2011/92/EU of 13 December 2011, which has been further amended by Directive 2014/52/EU.  However, the rules on extraction of petroleum and natural gas have remained substantially unchanged after the 2014 review of the Directive.

Some Light Shed on FERC’s Role in EPA’s Clean Power Plan

Posted in FERC

Amid concerns regarding the impact on reliability of EPA’s proposed Clean Power Plan (“CPP”), FERC scheduled a series of technical conferences to discuss the impacts of state, regional and/or federal plans for compliance with EPA’s proposed rule.  Such plans could affect electric reliability, wholesale electric markets and operations, and energy infrastructure.  FERC recently held the initial national conference where industry and government stakeholders strongly urged FERC to be proactive in helping to shape the CPP.

What remains unclear, however, is precisely how FERC will seek to influence a rulemaking over which the Commission lacks jurisdiction.  In fact, FERC’s holding a conference on another agency’s proposed rule is highly unusual.

In a recent article on POWER magazine’s website (FERC’s Work on the Clean Power Plan), FERC Chairman Cheryl LaFleur shed some light on the Commission’s role by discussing three areas where FERC has responsibilities with respect to the CPP: infrastructure, markets, and “convening and facilitating discussions about how to balance the core values of reliability, cost, and the environment.”

Chairman LaFleur’s most interesting comments were in noting that FERC’s job “is to serve as an honest broker as work on the CPP is finalized and implemented.”  After hearing in the technical conferences about how compliance with the rule might impact various entities, FERC will  continue its “engagement with agencies, especially the EPA and the states, to lend our expertise, share information, and provide constructive suggestions.”

With respect to infrastructure, Chairman LaFleur notes that additions to both natural gas and electricity infrastructure will be needed.  FERC has permitting authority over the additional  pipeline capacity needed for the new gas-fired generators likely to be added.  And FERC is responsible for planning and setting rates for interstate transmission lines likely to be needed to connect remote solar and wind generation resources to the grid.

With respect to markets, FERC will need to adapt the current wholesale electricity markets to individual states’ plans for implementing the CPP “while still delivering the benefits of competition.”

Ms. LaFleur’s chairmanship of FERC is scheduled to end in mid-April.  Current FERC Commissioner Norman Bay is to become chairman on April 15, 2015.

The Road to Paris 2015: The European Commission Announces its Initiatives to Achieve a European Energy Union and an International Climate Change Deal

Posted in COP21 - The Road to Paris 2015, Europe

On February 25, 2015, the European Commission presented three communications on:

  1. a Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy;
  2. Achieving the 10% Electricity Interconnection Target: Making Europe’s Electricity Grid Fit for 2010; and
  3. The Paris Protocol: A Blueprint for Tackling Global Climate Change Beyond 2020.

These three Communications build upon the EU’s Agreement on the Framework for Climate and Energy and the Commission’s Communication on a European Energy Strategy and lay out the new Commission’s goals and strategies on energy and climate change for the next years.

The Communication on the Paris Protocol also presents an ambitious proposal for a protocol to the United Nations Framework Convention on Climate Change (UNFCCC) that, according to the European Commission, should cover all sectors and ensure a long term goal of reducing global emissions by 60% below 2010 levels by 2050.  The fact that the Commission presented its proposals for an international climate change deal in Paris in December 2015 together with its vision for a European Energy Union highlights the interrelation between Europe’s energy and climate change policies and the extent to which Europe’s international climate change strategy is defined by its need to reduce its foreign energy dependency.

A European Energy Union

A reinforced European Energy Union is one of the main objectives and action items  of the new Juncker’s European Commission.  According to the Commission, this Energy Union should be based on the objectives of ensuring energy security of supply, sustainability and competitiveness, so that Europe “move[s] away from an economy driven by fossil fuels, an economy where energy is based on a centralized, supply-side approach and which relies on old technologies and outdated business models.”

To achieve these objectives, the Commission proposes an Energy Union Strategy with a long list of initiatives that fall into five interrelated dimensions.  While these initiatives have been presented as “the most ambitious European energy project since the Coal and Steel Community,” in effect many of them implement or reinstate prior Commission commitments.  Moreover, to a large extent the EU will only implement the proposed initiatives if Member States are willing to cooperate as the EU has no exclusive competence in energy policies and many decisions in this area must be taken by unanimity.

Energy Security, Solidarity and Trust. The Commission announced the following measures among others to complete the internal market, diversify energy supply and ensure a more efficient energy consumption:

  • Take measures to ensure that Member States fully implement the 3rd Internal Energy Market Package and strictly enforce the competition rules of the EU Treaties in the energy sector.
  • Propose a resilience and diversification package for gas in 2015-2016.
  • Prepare a comprehensive strategy for liquid natural gas and its storage. Among other things, the Commission will work to remove obstacles to LNG imports from the US and other countries.
  • Develop access to alternative gas suppliers, including from the Southern Gas Corridor Route, the Mediterranean and Algeria.
  • Propose legislation in 2016 to allow the Commission to review energy (g., gas) Intergovernmental Agreements (between Member States and third countries) before such agreements are negotiated, involve the Commission in the negotiations, and develop standard contract clauses.  This may have a significant impact on Member States’ energy supply negotiations with Russia and other third countries.
  • The Commission also made clear its position that producing shale gas and other unconventional oil and gas in Europe is an option “provided that issues of public acceptance and environmental impact are adequately addressed.”

A Fully Integrated Energy Market. The European Commission argues that the current design of the electricity market does not lead to sufficient investments, market concentration and market competition.  To address these failures and complete the electricity internal market, the Commission announced the following measures:

  • Propose legislation on the security of supply and a new market design for electricity in 2016.
  • Produce reports on energy prices, analyze the role of taxes, levies and subsidies in the energy market and seek the phasing out of regulated energy prices below cost.
  • The Communication on Achieving the 10% Electricity Interconnection Target announces the Commission’s intention to promote the implementation of infrastructure projects that will ensure a 10% electricity interconnection target by 2020 and to propose measures to reach a 15% interconnection target by 2030.  Currently 12 Member States do not reach the 10% interconnection target.  The Commission estimates that around €40 billion will be needed to reach 10% target by 2020.  In effect, the 10% interconnection target reflects the EU’s lost decade in this area due to the resistance of some Member States to cooperate.

Energy Efficiency As a Contribution to the Moderation of Energy Demand. The Commission sticks to the European Council’s indicative target at the EU level of at least 27% for improving energy efficiency by 2030 with the commitment to review this target by 2020 having in mind an EU target of 30%.  To achieve these targets, the Commission announced the following policy measures and revisions of EU legislation:

  • Review and propose the necessary amendments to EU energy efficiency legislation in 2015 and 2016 to ensure the 27% energy target by 2030.
  • Propose a strategy to facilitate investment in heating and cooling.
  • Develop a Smart Financing for Smart Buildings initiative to allow access to funding for making existing buildings more energy efficient.
  • Propose a road transport package promoting more efficient pricing of infrastructures, the deployment of intelligent transport solutions and enhancing energy efficiency in transport.
  • Create the right market conditions for the deployment of alternative fuels, and to encourage the procurement of clean vehicles, including electric vehicles.

Decarbonization of the Economy. To achieve the EU’s goal to reduce its emissions by 40% by 2030 compared to 1990, the Commission announced the following measures concerning the revision of the EU Emissions Trading System and the EU renewable energies framework.  In its Communication on the Paris Protocol: A Blueprint for Tackling Global Climate Change Beyond 2020, the Commission also laid out the international dimension of its climate change objectives (see below).

  • Propose legislation amending the EU Emissions Trading System Directive. Among other things, the proposed amendment should increase the linear reduction factor to 2,2 as of 2021 and address carbon leakage.
  • Ensure an agreement on national targets for sectors not included in the EU Emissions Trading System Directive, which should also cover the land and forestry sectors.
  • Propose new renewable energy legislation in 2016-2017 that should also include a new policy for sustainable biomass and biofuels and rules to ensure that the 27% renewable energy target for 2030 is met in a cost efficient way. This legislation must also ensure that energy markets and grids are fit for renewable energies.

Research Innovation and Competitiveness. The Commission also announced a series of initiatives to develop a forward-looking energy and climate-related research and innovation strategy to encourage European technological leadership and expand export opportunities.

The Commission’s Vision on the Paris Protocol on Climate Change

In its Communication on the Paris Protocol: A Blueprint for Tackling Global Climate Change Beyond 2020 the European Commission presents its vision for a protocol to the UNFCCC that should be agreed on at the COP 21 of the United Nations Framework Convention on Climate Change in Paris in December 2015.  According to the Commission, this Protocol should:

  1. Specify a long term goal to reduce global emissions by at least 60% below 2010 levels by 2050.
  2. Impose binding mitigation commitments on all parties, other than Least Developed Countries.
  3. Require emission reductions in all sectors, including agriculture, forestry and other land uses, international aviation and shipping and fluorinated gases.
  4. Enter into force as soon as countries with a collective total of 80% of current global emission have ratified it.
  5. Include robust rules on monitoring, reporting, verification and accounting and process for holding each party accountable for achieving its commitments.
  6. Set out a process applicable to all contracting parties to regularly review and strengthen commitments in accordance with the long term goals of the protocol. This review should facilitate transparency and be repeated every five years starting in 2020.
  7. Reinforce the comments of all parties to continue to formulate, plan and implement measures to facilitate adaptation and to report on these measures through their national communications.
  8. Encourage all countries to participate in climate finance, technology development and transfer and capacity building, in addition to emission reduction commitments.

The Communication also announces the Commission’s intention to present the EU’s Intended Nationally Determined Contribution  (“INDC”) during the first quarter of 2015.  This INDC should reflect the EU’s commitment to reduce its emissions by 40% by 2030 compared to 1990 levels. The Communication also suggests that the EU would not propose a higher conditional target and that if the outcome of the negotiations warrant a more ambitious target, the EU would be open to the use of international credits to complement domestic commitments, provided that their environmental integrity is secured and double counting is avoided.

The Communication also calls on G20 countries, in particular the United States and China, to present ambitious INDCs by the first quarter of 2015.

CFTC Position Limits: Recent Congressional and Ongoing CFTC Developments

Posted in CFTC

The Commodity Futures Trading Commission’s (CFTC) proposed rule on position limits continues to be a priority for energy market participants, as both Congress and the CFTC are actively reviewing this issue.  The final rule threatens well-established hedging and risk management practices related to the trading of futures and swaps by energy market participants.

Recently, the House Committee on Agriculture held a hearing to review the futures, options, and swaps markets that the CFTC regulates.  Among the topics discussed was the CFTC’s re-proposal on position limits (“Position Limits Proposal”).  The Position Limits Proposal has been pending since the CFTC voted 3-to-1 on November 5, 2013 to propose revised regulations setting position limits on speculative positions in 28 “core” physical commodity contracts – including natural gas, crude oil, heating oil, and gasoline – and their “economically equivalent” futures, options, and swaps.

It is notable that since CFTC Chairman Gensler departed in January 2014, the CFTC has reopened the comment period three times.  The comment period recently closed on January 22, 2015 and was re-opened again on February 25, 2015 with a comment deadline of March 28, 2015.  In addition, since January 2014, the CFTC has held a public roundtable on position limits, addressed position limits at a CFTC Agricultural Advisory Committee meeting and will again address position limits at a February 26, 2015 meeting of the Energy and Environmental Markets Advisory Committee.  To date, the primary concern raised by some in the industry is that the Position Limits Proposal narrows the definition the CFTC has used for decades related to what is “bona fide hedging.”  Bona fide hedging is critical because it allows a commercial producer or user of the commodity, such as a refinery that uses crude oil futures contracts to manage price risk, to exceed the position limits in order to align its trading with its commercial needs.  In short, the Position Limits Proposal provides a list of what constitutes bona fide hedging and some industry participants have argued that elimination of the existing process for end-users to seek non-enumerated hedging exemptions is not workable.

During the House Agriculture hearing on February 12, 2015, Chairman K. Michael Conaway (R-TX-11), stated his position, in part:

[A]s the Commission contemplates its position limits rule, it is not enough to regulate simply because the Commission has the power.  The law directs the Commission to set new position limits “as appropriate” and “as the Commission finds are necessary” to curtail “excessive speculation.”  As the Commission moves forward, its proposed rule must first explain whether or not price movements in commodities are based on reasonable market forces…  The Commodity Exchange Act also includes an expansive definition of bona fide hedging which specifically includes anticipatory hedging needs.  It is important that this exemption remain broad enough that legitimate commercial hedging activity can be sheltered from any limits the Commission may demonstrate are appropriate.

(emphasis added).

CFTC Chairman Timothy Massad provided an update of the CFTC position in his opening remarks:

Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that the market works for commercial end-users seeking to hedge routine risk through bona fide hedging.  We have received substantial public input on the position limits rule which the staff is reviewing.  Most recently, we received valuable input from participants at the December Agriculture Advisory Committee meeting.  It is important that we consider these comments carefully as we develop a rule.

(emphasis added).

Position limits have been in proposal phase for a long time period – the first proposal was published in 2011 and was vacated in 2012 – and the industry remains poised to receive a final rule that does not disrupt hedging activities.  While some believe the final rule will be issued later this year, given the time the rule has been pending, the final position of the Commission remains to be determined.  Commercial end-user, including energy market participants, must remain attuned to shifts in the debate at the CFTC and in Congress on this issue or risk having current hedging practices negatively impacted by the unintended consequences of the position limits rules.