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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fuels, an economy where energy is based on a centralized, supply-side approach and which relies on old technologies and outdated business models.”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.

FERC Hears Concerns Regarding EPA Carbon Rules, But Next Steps Remain Less Than Clear

Posted in FERC

At the first in a series of technical conferences, industry and government stakeholders yesterday strongly urged FERC to be proactive in helping to shape the EPA’s Clean Power Plan (“CPP”).  What remains unclear, however, is precisely how the Commissioners can and will seek to influence a rulemaking over which the Commission lacks jurisdiction.

FERC is convening four technical conferences to assess potential impacts of the CPP on the nation’s electric reliability, wholesale energy markets, and energy infrastructure.  The Commission has no formal role in crafting the rule.  But, in opening yesterday’s Commissioner-led conference, Chairman LaFleur framed the conferences as an effort to facilitate dialogue about the CPP’s implications for the nation’s energy sector.

Following an overview of the proposed rule, the Commissioners heard from three stakeholder panels.  Overall, panelists largely reiterated recommendations presented to the EPA through public comments before broadly encouraging the Commissioners to share their perspective and expertise with EPA.

Flexibility to Ensure Reliability

During the opening panel, utility representatives emphasized potential reliability and affordability issues associated with the transition to lower-carbon generation.  The panelists urged the Commissioners to support mechanisms to provide greater flexibility under the CPP, including a delayed implementation timeline and a so-called “reliability safety value,” whereby an emitting generator scheduled for shut-down to meet an emission-reduction target would be allowed to remain in service if needed to maintain grid reliability.  More generally, panelists urged the Commissioners to educate EPA on potential reliability concerns raised by the proposed rule.

Streamlining Infrastructure Planning and Siting

The second panel focused on the potential transmission and pipeline infrastructure demands of a CPP-driven transition to lower-carbon generation.  Despite FERC rate incentives designed to spur new infrastructure, panelists described ongoing challenges to develop new projects under federal, state, and local regulations.  The panel encouraged the Commissioners to work more closely with other regulators to streamline approvals and provide greater rate and licensing certainty for transmission and pipeline developers.  Panelists also pressed the Commissioners to clarify how the CPP’s carbon reduction goals will be incorporated into FERC’s existing rules for transmission planning and cost allocation.

Challenges in FERC-Regulated Energy Markets

Finally, the closing panel focused less heavily on policy considerations in drafting final carbon rules and emphasized instead how to implement CPP requirements in wholesale power markets.  The proposed CPP requires states to draft and carry out their own plans to achieve targeted emissions reductions.  With this in mind, panelists described options to ensure market fairness in RTOs operating across multiple states.  More broadly, panelists argued that well designed markets will help to address potential reliability and affordability issues under a final CPP.

FERC has posted a video of the conference here, and a transcript should be available in the coming days.  Moving forward, FERC will hold three staff-led conferences to consider regional effects of the CPP:

  • February 25, 2015: Denver (Western region)
  • March 11, 2015: Washington, DC (Eastern region)
  • March 31, 2015: St. Louis (Central region)

As we observed in our prior post, FERC rarely weighs in publicly on another federal agency’s rulemaking process.  Thus, while yesterday’s conference helped to clarify certain concerns related to the CPP, it remains unclear what action – if any – FERC may take to attempt to address these concerns.

Large EU Member States Take National Divergent Measures on Shale Gas Extraction

Posted in Europe

Member States continue to adopt national and divergent rules on hydraulic fracturing across Europe.  Last week, the United Kingdom facilitated hydraulic fracturing operations by adopting its Infrastructure 2015 Act.  In contrast, Germany is considering the adoption of a legislative proposal that is intended to be more restrictive than the European Commission’s Recommendation on Hydraulic Fracturing.

EU legislation does not specifically regulate hydraulic fracturing.  Instead, hydraulic fracturing is subject to the general requirements of EU environmental and work safety legislation and to the non-binding Commission Recommendation, which essentially interprets the applicability of the EU general rules to hydraulic fracturing.  (On the interpretation of the Commission Recommendation see our blog post of April 30, 2014).  The legislative developments in the United Kingdom and Germany confirm that in the absence of EU binding specific legislation on hydraulic fracturing, European countries will adopt their own national divergent rules addressing country-specific sensitivities and reflecting national political priorities.

United Kingdom

The Infrastructure Act 2015 (the “Act”) significantly facilitates hydraulic fracturing operations in England.  In particular, the Act contains the following provisions on hydraulic fracturing:

  • Provisions concerning the right to use deep-level land (at least 300 metres below surface level) for the exploitation of onshore petroleum and geothermal energy.
  • Safeguards in relation to onshore fracking activities. Specifically, the Act: (i) provides that the Secretary of State may approve onshore fracking activities if he is satisfied that specific safety conditions are met; (ii) prohibits fracking in land at a depth of less than 1,000 meters; (iii) requires local planning authorities to take into account the environmental impact of the activities before approving them (instead of requiring a full environmental impact assessment); (iv) requires authorities to notify the public of any application for a planning permission relating to proposed fracking activities; and (v) imposes obligations and conditions to monitor methane emissions from fracking operations (but no other emissions).

Importantly,  in contrast to the original legislative proposal to prohibit fracking “within and under” protected areas (“protected groundwater source areas” and “other protected areas”), the Act only prohibits fracking “within” these protected areas. The Act therefore leaves open the possibility for fracking under protected areas, such as national parks, if the surface entry zone is outside their boundaries. The definitions of “protected groundwater source areas” and “other protected areas” will be set out in secondary legislation that will be drafted after the UK general election.

Despite the adoption of the Act, Scotland and Wales have used their devolved powers on planning to block hydraulic fracturing operations in their territories.

Germany

Current German legislation does not specifically regulate hydraulic fracturing technologies.  Under general energy legislation, operations to explore and exploit natural gas and oil resources, such as hydraulic fracturing operations, require an approval from the competent authorities of the German federal states (Länder).  Operations that exceed specific extraction volume thresholds also require an environmental impact assessment.

The German coalition government is now considering a specific legislative package on hydraulic fracturing presented by the German Federal Ministries of Environment and of Economy.  Once it considers different proposed amendments, the Government will present the legislative proposal to the Parliament for its adoption, which is expected in 2015.

The legislative package is intended to impose stricter and more specific rules on hydraulic fracturing operations that those set out in the European Commission’s Recommendation.  The package includes three different legislative proposals: (i) a draft act on the prohibition and risk minimisation of fracking technology processes; (ii) a draft act on the extension of liability for mining damages to borehole drilling and caverns; and (iii) a draft regulation introducing environmental impact assessment and mining requirements for the use of fracking technology and deep drilling.

If adopted, the legislative package would impose the following prohibitions and requirements on hydraulic fracturing:

  • A prohibition on hydraulic fracturing of shale and coal bed gas at a depth of less than 3,000 m. There is one important exception to this rule: test drilling for environmental impact research purposes would be allowed, even when carried out at a depth of less than 3,000 m, provided that the fracking liquids used are not water-polluting.  Such test drilling would take place under scientific monitoring and evaluation of an independent expert committee, which would also publish annual assessment reports on the harmfulness of test drillings as of 2018. Importantly, the proposed legislation foresees that, as of 2018, the competent authorities of the federal states may issue an approval for the use of a fracking technology as an exemption from the general prohibition, even for commercial purposes, on the basis of the expert committee’s reports, among other things.
  • A prohibition on hydraulic fracturing of conventional and unconventional fossil fuels in particularly sensitive areas (g., water conservation and mineral source protected areas).
  • Strict approval requirements on hydraulic fracturing of both conventional and unconventional fossil fuels.
  • A requirement to perform an environmental impact assessment for both conventional and unconventional fossil fuel fracking operations.

‘Trigger Happy’: Considering the Requirements of Your Price Review Clause

Posted in Arbitration, Oil & Natural Gas

Given the fall in oil prices, many participants in the oil sector have been forced to re-evaluate their investments.[1]  A drop in oil prices not only impacts the oil industry; it can also have a significant effect on gas and LNG prices around the world.  Many long-term gas and LNG sales agreements continue to peg variables in their complex gas-pricing formulae to oil prices.  When oil prices move, the variables in the equation change and the price of gas under the contract is altered.[2]

In agreements spanning 10 years or more, parties may have the ability to revise the contract price if there is a significant change in market circumstances.[3]  For buyers and sellers of natural gas and LNG, it will be important to determine whether the recent trends are a long-term significant change that should be reflected in their price formulae.

The fall in oil prices has been stunning.  As shown by the graph below, the Brent price has declined by approximately 50 per cent, from over $110 per barrel in June 2014 to just under $60 dollars today.

2.19-Brent.Crude.1Y

ft.com

While there has been a de-linkage from the oil price for some contracts and markets, the contract price in many long-term gas and LNG sales agreements remains linked — at least partially — to oil commodity indices.  When the price of oil moves, the price of gas will likely move as well.  This is evidenced by the dramatic decline in spot LNG prices destined for Asia.  Prices in Europe have also decreased; for example, British prices are 30 per cent lower than on the same date last year.  The Henry Hub price, long-considered a proxy for the price of natural gas in the U.S.,[4] is down approximately 49 per cent over the last year.

In these circumstances, buyers under long-term gas and LNG sales agreements may believe that the formula in their contract is not reflecting the extent of the change in oil price, while sellers may believe that the same formula is over-reflecting the change.  As a result, either party to the contract may seek to change the price formula to reflect alleged changes in circumstances.

Parties may hotly dispute whether it is appropriate to revise the price formula.  The party seeking to change the contract price must usually demonstrate a need to revise the formula by satisfying a test or standard set out in the contract. This is commonly referred to as the “trigger”.  For instance, the terms of the agreement might require a party to show that a significant change has occurred in the energy market.[5]

Parties often debate the trigger’s requirements.  While parties may rely on economic analysis, this is primarily a legal question.  Depending on the provision at issue, lawyers may argue that factors such as a change in the mix of substitute energy sources, the growth of gas-to-gas competition or new, competing sources of supply should be considered.  The contract can sometimes require that the change in the energy market be long-term and not temporary in order for the parties to have a right to trigger the price review.  Even if not expressly stated in the contract, arbitrators have in some cases inferred this principle.

The causes of the recent trends, and whether these trends are long-term realities, are a matter of debate among economists.  Some argue that a decision by OPEC to drive American shale oil producers out of the market has impacted the balance of supply and demand and is only temporary.  Others identify weak global economic activity as the primary explanation.  Some point out that the markets are becoming more sanguine about geopolitical risk and reassessing its impact on price.  For others, the U.S. dollar’s recent appreciation is a key factor.

In the current circumstances, parties contemplating a potential price review should consider these recent trends with a wary eye on the trigger of their price review clause.  Showing “change” alone is seldom, if ever, adequate.  Parties must frequently show that the change is lasting.  This can be a high hurdle.  While it is easy to evaluate what has already occurred, it can be difficult to project that these changes will continue to impact oil prices and/or gas markets in the future.  For parties considering a price review, it will be important to consider each of the possible economic explanations and determine whether they are significant, lasting changes.  The answer may be worth hundreds of millions of dollars.


[2] This description is a very simple explanation of how gas pricing formulae work.  The reality is much more complex.  Formulae vary widely and can include variables for a range of other energy types, inflation and other market forces.

[3] See our previous post for a primer on long-term gas supply contracts.

[4] This thinking may be changing as gas production in other regions of the United States becomes more prevalent.

[5] This is simply one example.  Price review provisions in long-term agreements vary and there is no typical clause.

The Future of the EU Energy Union and Energy Charter Treaty

Posted in Europe

On 6 February 2015, the Energy Union Conference in Riga, Latvia (the “Conference”), signalled the start of the Riga Process towards forming the key dimensions and actions of the new EU Energy Union (the “Energy Union”). During the Conference, the Secretariat General of the Energy Charter Treaty[1] spoke of its relevance to the Energy Union. In this post, we consider the potential future interplay between the Energy Union and the Energy Charter Treaty.

What is the Energy Union?

The Energy Union, encompassing the EU and its 28 Member States, has been described by the European Commission as “a fundamental step towards the completion of single energy market and reforming how Europe produces, transports and consumes energy”. The content of the Energy Union will develop during the Riga Process. Five key dimensions to the Energy Union strategy were articulated at the Conference:

  1. Stronger emphasis on security of supply including by means of solidarity, trust and speaking with one voice;
  2. Completed energy market to connect the whole of Europe;
  3. Moderation of demand for security in line with principles of competitiveness;
  4. Decarbonising the energy mix and making Europe the global leader in renewables and other low-carbon technologies; and
  5. Leading efforts in research, innovation and green growth.

What role will the Energy Charter Treaty play in the future of the Energy Union (and vice versa)?

According to the Secretary General of the Energy Charter Treaty, Dr. Urbán Rusnak, the Energy Charter Treaty is compatible with, and vital to, the building of the Energy Union. In his speech at the Conference, Dr. Rusnak identified the relevance of the Energy Charter Treaty to each of the five dimensions of the Energy Union outlined above. Dr. Rusnak emphasised that “the foundation for the external policy of an Energy Union has already been laid by the establishment of the Energy Charter Treaty”.

The message emerging from the Energy Charter Treaty Secretariat (the “Secretariat”) emphasises the potential benefits of the Energy Charter Treaty to the Energy Union at the extra-EU level. This approach is notable, and perhaps unsurprising, given that the European Commission has recently intervened in several Energy Charter Treaty arbitrations involving intra-EU investors and Member States. In the European Commission’s view, the Energy Charter Treaty should not apply to intra-EU claims.

Additionally, the Riga Progress coincides with an important stage in the planned global expansion of the Energy Charter Treaty. The Secretariat has developed a new initiative, the International Energy Charter 2015 (the “IEC”), a declaration that is intended to promotemutually beneficial energy cooperation among nations for the sake of energy security and sustainability”. In May 2015, up to one half of the UN member states will meet in the Hague to formally adopt and sign the IEC.

The Secretariat is hopeful that signing of the IEC will encourage non-members to consider acceding to the Energy Charter Treaty. However, it recognises thatstrong support from its long-standing members, in particular the EU and its Member States, will be necessary to convince countries worldwide to join the Energy Charter Process”.

The Secretariat’s recent statements indicate that a synergistic and cooperative relationship between the Energy Charter Treaty and Energy Union would be mutually beneficial for the future of both initiatives. The IEC has been described by the Secretariat as “a powerful political vehicle to promote cooperation under a common legal framework”, and by Dr. Rusnak as a “vital component of implementing the strategy for the Energy Union”.

In return, the EU’s outlook on the role of the Energy Charter Treaty in building the Energy Union currently remains unclear. At the 25th Meeting of the Energy Charter Conference in November 2014, Maroš Šefčovič, Vice-President for the Energy Union, confirmed that the European Commission “will continue to work in close cooperation with the EU Member States and all contracting parties and signatories to ensure that the new Charter and the Energy Charter Treaty continue to be regarded as corner stones of global energy architecture”. Mr. Šefčovič then discussed the five building blocks for the Energy Union, without making further reference to the Energy Charter Treaty.

The EU Commission is due to publish the Energy Union package on 25 February 2015 and the Energy Council will debate the Energy Union for the first time on 5 March 2015. It is anticipated that these events will develop the Energy Union’s framework and strategy — and, potentially, help to clarify the extent to which the European Commission envisages the Energy Charter Treaty to play a role in the future of the Energy Union (if at all).


[1] The Energy Charter Treaty entered into force in 1998. To date, it has been signed or acceded to by 52 states, the European Community and Euratom. It is a binding multilateral treaty agreement that provides a framework for energy cooperation and the promotion of energy security through the operation of more open and competitive energy markets, while respecting the principles of sustainable development and sovereignty over energy resources.

Nigerian Court of Appeal Allows Third Party to Challenge Arbitration Award

Posted in Africa, Arbitration

In the recently published Abuja Court of Appeal case of Statoil (Nigeria) Limited & Anor v. Federal Inland Revenue Service & Anor ((2014) LPELR-23144(CA)) (“Statoil”) dated 13 June 2014,  the Nigerian court held that a third party had locus standi to challenge an arbitration agreement to which it was not a party.

This decision has been highly criticised by the Nigerian arbitration community, as it appears to have no basis in Nigeria’s Arbitration and Conciliation Act 2004 (“ACA”).  This decision may undermine many of the positive steps taken by Nigeria in recent years to establish itself as one of the more arbitration-friendly jurisdictions in Africa.

Statoil and Texaco, the appellants in Statoil, were one of several oil consortia to have initiated arbitration proceedings against the Nigerian National Petroleum Corporation (“NNPC”).  These arbitrations concerned the payment of “petroleum tax” on oil lifted under production sharing contracts (“PSC”) dating back to 1993.  Initially, the NNPC had obtained a court injunction against the arbitration proceedings on the grounds that tax disputes were not arbitrable under Nigerian law.  However, the injunction was subsequently overturned by the Lagos Court of Appeal[1] in July 2013.

As a further attempt to frustrate the arbitration, the Federal Inland Revenue Service (“FIRS”) applied to the courts to challenge the validity of the arbitration agreement between Statoil, Texaco and the NNPC.  Counsel for the FIRS argued that the purpose of the arbitration was to avoid the proper computation of taxes accruable to its account, stating that:

“[t]he whole game . . . was to exclude the [FIRS] from the clandestine arrangement in the Arbitration Tribunal so that in the event the award is made, as it is evident that the tribunal is rail-roaded and programmed for that purpose, the [FIRS] as the Central and component part of the Government of the Federation, will be compelled to disgorge revenues already and severally collected, and allocated, which will form part of the awards to be eventually made by the Arbitral Tribunal.

The Abuja Court of Appeal agreed and confirmed that FIRS had locus standi to make such a challenge, despite the fact that it was not party to the agreement itself.  In its decision, the Court of Appeal noted that if the claimants were successful with their claim, the FIRS would lose tax revenue and therefore would be affected by the outcome of the arbitration.  With this in mind, Tine Tur J of the Abuja Court of Appeal stated:

[i]f a party to an arbitral agreement can challenge the jurisdiction of the Arbitration Tribunal, or that the arbitral agreement was ab initio, null and void, what about a person or authority, such as the [FIRS], who was not a party to the agreement but complains . . . that the proceedings or subsequent award by an arbitral tribunal constitute an infringement of some provisions of the Constitution or the laws of the land or impede her constitutional and statutory functions or powers?  Would the person be debarred from seeking declaratory remedies, or by originating summons?  I do not think so.  Where there is a proved wrong, there has to be a remedy.   

Neither the ACA nor any other Nigerian statute suggests that the courts have the power to allow third parties to challenge the validity of an arbitration agreement or the jurisdiction of the tribunal.  Indeed, the decision appears to contradict Section 34 ACA, which provides that “a Court shall not intervene [in arbitral proceedings] in any matter governed by this Act except where so provided in this Act.”  While the reasoning in the judgment is difficult to follow, it appears that Tine Tur J, on identifying a perceived wrong, considered it necessary to remedy such a wrong, regardless of whether or not statute allows for such a remedy.

The court issued its decision despite the fact that the arbitration was still pending.  In the words of Tine Tur J :

I am of the humble opinion that it will be in the best interest of the [FIRS] not to wait or stand by for the Arbitration Tribunal to complete the proceedings and make an award.  [The FIRS] has the locus standing to act timeously to arrest the situation by a declaratory action or originating summons in a Court of Law.  Where the claim succeeds, the Court may make a declaration that the arbitral agreement was void ab initio or that the Arbitral Tribunal lacked the jurisdiction to have entertained the dispute on grounds of constitutional or statutory illegality etc.

The decision is particularly damaging to international arbitration in Nigeria, as it conflicts with two arbitration-friendly Nigerian Court of Appeal decisions from July 2013[2] and February 2014[3].  These decisions had upheld the principle of non-intervention as set out in Section 34 ACA.  In these decisions the Court of Appeal had overturned injunctions seeking to restrain arbitral proceedings, relying on Section 34 ACA and holding that the courts had no power under the ACA to restrain arbitral proceedings with an ex-parte injunction.  Such conflicting decisions create an unpredictable environment for arbitration.

Despite the recent decision of Statoil, Nigeria has taken positive steps to establish a suitable legal framework for international arbitration.  The ACA, enacted in 2004, is based on the UNCITRAL Model Law and the Lagos Court of Appeal has confirmed that foreign arbitral awards will be enforced directly in Nigeria under Section 51(1) ACA and the New York Convention.[4]

However, the decision in Statoil, which appears to have been based on the whims of the judge in question rather than the applicable arbitration law, shows that arbitration in Nigeria remains unpredictable.  Therefore, parties looking to invest in Nigeria should be aware of these risks when negotiating the dispute resolution clauses of their agreements.


[1] The Nigerian Court of Appeal has 16 regional divisions, each with equal authority.  The Abuja Court of Appeal and Lagos Court of Appeal are two of these regional divisions.

[2] Statoil (Nigeria) Ltd & Anor v. Nigerian National Petroleum Corporation & 2 Others (2014 NWLR (part 1373) 1), decided by the Court of Appeal, Lagos Division, on 12 July 2013.

[3] Nigerian Agip Exploration Ltd v Nigerian National Petroleum Corporation & 2 Others (Suit No. CA/A/628/2011), decided by the Court of Appeal, Abuja Division, on 25 February 2014.

[4] See Tulip Nigeria Limited v Noleggioe Transport Maritime SAS (2011 4 NWLR (part 1237) 254).

Geothermal Power in East Africa

Posted in Africa

Last week, London-based firm EnergyNet held its “Powering Africa Summit” in Washington.  The Summit, opened by U.S. Secretary of Energy Moniz, attracted project developers, equipment suppliers, financiers, the U.S. Government’s Power Africa team, and African government officials.  Unfortunately, due to the African Union Summit that was being held at the same time in Ethiopia, no minister of energy from Africa attended.  This wasn’t the first event of its kind, but it did draw a much more diverse group of actors, which suggests more developers and energy companies are looking to Africa for new business opportunities.

On the margins of the conference, other institutions in DC convened panels of experts to examine a few specific issues, including ideas for accelerating the development of the Rift Valley’s prodigious, and environment-friendly, geothermal resources.  Studies have shown that the Rift Valley has the potential to generate between 15,000 and 20,000 MWs.  And with countries such as Kenya and Tanzania struggling to keep 2,000 or so megawatts on line and operational, it is a very reliable base-load resource.

So, what’s keeping a relatively cheap, reliable, and clean resource from being converted into power?  Simply put, there are a lot of risks, and capital generally avoids risk.  Those who operate in the industry identify “drilling risk” as a major inhibitor to geothermal development.  It’s quite costly at $6 – $10 million a well, and in the past one had to have both good studies and a “steam diviner” to find the perfect resource.  Recent improvements in technology have actually reduced the risk.  Geo-physics studies have become more precise in locating the resource, while multi-directional drilling has become a game-changer.  A recent World Bank report concluded that the success rate in drilling has climbed to 80%.

Even with these improvements, a 20% risk can still be too high.  To mitigate risk further, donors, industry, and government  have developed several “de-risking” tools, which so far haven’t proved to be as effective as hoped.  Munich Re offers a commercial, and costly, insurance product for drilling.  Some countries are considering to take on the drilling risk themselves.  Kenya, for example, has created the Geothermal Development Corporation (GDC), whose mandate is to develop geothermal sites, drill wells, and bid concessions.  Other countries are considering a similar model in hopes of attracting capital.  On the donor side, Germany’s KfW created a “Geothermal Risk Mitigation Facility” that is housed within the African Union, and the AfDB hosts a number of instruments and funds under its Sustainable Energy Fund for Africa.  Iceland, Germany, the UK, the US, among others, also have their own important programs, but each has its own unique set of criteria for applicants.  Simply put, though intentions are good, the instruments are too restrictive in their use and too diffuse, spreading across a multitude of organizations.  To make a project bankable, a developer will often have to use several of these tools, and that means timing and sequencing of their application are critical factors in successfully closing projects.  The (up-to) 1,000 MW Corbetti project in Ethiopia provides a useful example of artful deployment of many tools on the part of lead developer Reykjavik Geothermal, but it has taken many years to get to this point.

As industry examines the best means of accelerating project development and, more important, the actual delivery of power, below are several recommendations for consideration:

(1) Develop a geothermal resource center that is on every donor’s and industry association’s website.  The resource center would ideally list all the geothermal projects in the Rift Valley in operation, those that are being developed, and ones likely to come up for bid.  It would contain (non-propriety) information on each project, the project costs and terms, and further help prospective developers by identifying de-risking tools (commercial and donor-supplied), how and when to apply for them, and potential financing options.

(2) The donors should consolidate their funds and de-risking mechanisms wherever possible, and identify one single donor to lead and coordinate.  The logical choice for leading the donors is the African Development Bank (AfDB).  With its very strong regional office in Nairobi, technical expertise, and a number of instruments to support geothermal development, the AfDB as the development bank for the continent is by far best positioned to triangulate the interests of developers, financiers, and host governments.

(3) On consolidation, the industry should look hard into whether the Geothermal Risk Mitigation Facility (GRMF) should continue to reside within the African Union Commission in Addis Ababa.  The AU is largely a political and policy-making institution.  Maintaining a facility that supports commercial interests under its control is affecting implementation.  For example, when decisions on how Round I funding would be allocated, staff suggested funds should be “fairly distributed” among the countries and not based on project merits.  The political lens should be removed from this facility.

The GRMF is a good concept – actually a very good one.  Effective execution has been lacking, however.  The AfDB is better suited to run this important de-risking program and make it more timely in evaluating projects on a rolling basis, and allocating funds based on data-driven, technical decisions.

(4) Project developers, equipment suppliers, and EPC (engineering, procurement, and construction) contractors should form partnerships and alliances early on in the process to broaden the range of equity partners in order to cover early project development costs.

The Rift Valley presents exciting opportunities for renewable energy projects that will help the countries of East Africa fill its severe electricity deficit.  Millions of Africans could have reliable, relatively cheap power if the tools to attract investment were sharpened.

Energy Efficiency Standards A Quiet Success

Posted in Energy Efficiency

Electricity consumption in the United States has generally declined in recent years, due in part to the quiet success of several energy efficiency standards.  In 2013, for instance, the average amount of electricity used in American homes fell to 2001 levels, despite consumers using more products that require electricity.

Building on this success, the U.S. Department of Energy (DOE) announced at various times throughout 2014 several new energy efficiency standards for consumer and commercial products.  Most recently, DOE issued pre-publication final rules setting new efficiency standards for both general service fluorescent lamps (GSFLs) and automatic commercial ice makers (ACIMs).  GSFLS, fluorescent tubes that feature pins at one or both ends for installation, are generally used to light homes, offices, and industrial sites.  DOE estimates that the new standards will reduce CO2 emissions by 90 million metric tons and save more than $15 billion in electricity bills through 2030.  DOE estimates that its updated energy standards for ACIMs–which now include machines that produce “flake” or “nugget” ice–will reduce CO2 emissions by 4 million metric tons and save nearly $600 million in electricity costs through 2030.

These two rules, which go into effect in 2018, are DOE’s ninth and tenth energy efficiency standards finalized in 2014.  Their announcement marks DOE achieving its goal of finalizing ten energy efficiency standards in 2014 as part of the White House’s Climate Action Plan.  The DOE estimates that the ten standards–which apply to dishwashers, water heaters, and other products–will collectively reduce CO2 emissions by over 435 million metric tons and save $78 billion in electricity bills through 2030.

Additionally, 2014 saw the final phase-out stage of certain types of light bulbs.  Originally a bipartisan success story, one aspect of the Energy Independence and Security Act of 2007 established increased minimum energy efficiency standards for various types of light bulbs that were to be phased in from 2012 through 2014.  The DOE was poised to begin enforcing the new rules, which effectively ban certain types of incandescent light bulbs, but recent appropriations bills have effectively blocked DOE from enforcing the rules.  Light bulb manufacturers, however, have already begun complying with the standards.

Older efficiency standards have also been quietly succeeding.  For instance, a new refrigerator meeting the current federal energy efficiency standards would use roughly a quarter of the energy of a refrigerator from 1973, despite offering more storage space and costing significantly less.

RefridgeratorUse

Source: Appliance Standards Awareness Project

FERC Conferences to Address Impact of EPA’s Clean Power Plan on Electricity Reliability and Markets

Posted in FERC

Further highlighting the breadth of potential impacts of EPA’s proposed Clean Power Plan on our nation’s system of electricity generation and the difficult issues posed by the relation of EPA’s proposal to state and regional energy regulatory authorities, FERC has planned a focused dialogue around these issues.

Some members of Congress and others have raised concerns with the EPA’s proposed rule, which would set carbon emission limits for existing electricity generating units, regarding its potential  impact on the reliability of the grid.  Utility decisions to close coal-fired generators in response to the proposal, and potential insufficient pipeline infrastructure in some regions to deliver natural gas to new gas-fired generators, have caused some to say the rule may result in electricity shortages.[1]

In response to these concerns, FERC will hold a series of technical conferences to discuss the implications of state, regional and/or federal plans for compliance with EPA’s proposed rule, especially the impact on electric reliability, wholesale electric markets and operations, and energy infrastructure.  The conferences will also address how the proposed rule may drive the need for additional infrastructure, especially new electric transmission and natural gas pipeline facilities, and whether there are regulatory barriers that need to be addressed.

The first conference, to be held on February 19, 2015, at FERC headquarters, will be Commissioner-led and address a national overview of issues.  According to the recently-released agenda, this conference will address:

  • Electric reliability considerations, including how state, regional, and federal compliance plans could affect grid operations, and how reliability planning and compliance planning can be coordinated to address potential issues.
  • Identifying and addressing infrastructure needs, including coordinating reliability and infrastructure planning and siting with environmental compliance efforts.
  • Potential implications for FERC-jurisdictional markets and opportunities to coordinate compliance approaches with those markets to meet the proposed rule’s requirements.

FERC will also hold three staff-led regional conferences to address the proposed rule’s potential impacts in each region on reliability, operations, generator dispatch and infrastructure.  The regional conferences are as follows:

  • February 25, 2015: Denver (Western region)
  • March 11, 2015: Washington, DC (Eastern region)
  • March 31, 2015: St. Louis (Central region)

FERC does not have a definitive role in EPA’s Clean Power Plan proposal and FERC holding technical conferences with respect to another agency’s rulemaking process is highly unusual.  Accordingly, what, if any, action FERC may take after the conferences is unclear.


[1] In an additional action to assist potential commenters address these important issues, EPA released a Notice of Data Availability that discussed the technical issues for meeting the proposed emission reductions and approaches stakeholder have proposed for addressing those issues.