In the last two weeks, both the Agency for the Cooperation of Energy Regulations (ACER) and the European Securities and Markets Authority (ESMA) have published consultations for market participants on the Regulation on wholesale energy market integrity and transparency (REMIT) and the European Market Infrastructure Regulation (EMIR), respectively. This article considers some of the issues that have been raised by both consultation papers and outlines the areas where the input of markets participants has been sought.
The end of 2011 and the first quarter of 2012 were marked by significant consolidation in the renewable energy industry, in particular in the solar energy industry. The current market conditions and subsequent increase in financially weakened European players have put non-European suitors in a strong position for acquiring businesses in Europe.
The European Market Infrastructure Regulation (EMIR) is due to come into force by the end of 2012. Through EMIR, the European Commission is seeking to introduce requirements that will improve the transparency of the over-the-counter (OTC) derivatives market.
The aim of the European solar energy incentive programs has always been to bring solar technology to the point where photovoltaic (PV)-generated electricity becomes competitive with the retail rate of grid power, a situation known as "grid parity". In most of Europe, grid parity is expected to be reached by 2017, but is already nearly a reality in certain southern European countries with high levels of sunshine and high electricity prices. The recent cuts to incentives in many European markets are both a cause and an effect of this near-parity, and as such are not necessarily bad news. Achieving competitive cost structures for solar power plants is expected to eliminate the market distortion resulting from subsidies, which until now were the driving force of the European PV market.
On May 8, 2012, STX Services B.V. (STX), launched an electronic trading platform for the sale and purchase of renewable energy certificates relating to power consumption within the European Union.
The new platform will allow for the trading of Guarantee of Origin (GoO) certificates which provide proof to the final customer that the energy produced was from renewable sources. GoO certificates were introduced by the 2009 EU Renewable Energy Directive. One GoO certificate represents the generation of one megawatt hour of electricity.
STX, an Amsterdam-based brokerage firm dealing in environmental based commodities, held its first auction on May 8, 2012 and is likely to hold another one towards the end of May 2012. STX has stated that it hopes to eventually run daily auctions, and expand to include other renewable energy certificates.
STX feels that the advantages of the new trading platform are that:
buyers and sellers of GoO certificates can participate concurrently;
buyers and sellers can login to the platform from wherever they are located;
the supply and demand dynamic of the online auction will result in the realization of a true and fair market price; and
it provides greater liquidity in an otherwise fragmented international market.
More than 25 percent of the most active market participants attended the first auction, during which 100,000 GoOs were bought and sold at a clearing price of €0.37. Participants in this first auction pointed to, amongst other things, the transparency and efficiency engendered by the new platform.
The launch of this new trading platform comes at a time when the European Commission is actively looking at ways to regulate and increase the transparency of commodity markets. Proposals include establishing transparent trading venues. STX has designed its new platform with this in mind, and hopes that it will enable all participants to buy and sell renewable energy certificates on a level playing field.
In addition, the new platform represents a further development and expansion in the trading of green power.
On April 27, 2012, the European Commission (EC) announced the full activation of the EU Emissions Trading System (EU ETS) single registry. The full activation process will include the migration of over 30,000 EU ETS accounts from national registries.
On May 3, 2012, the EC provided the following transition table in relation to the full activation:
Starting on May 14, account holders (including aircraft operators) will not be able to open or close accounts or to modify accounts and account representative details, neither in national registries nor in the single registry.
From June 3, the operation of national registries and the single registry will be suspended simultaneously and account holders will not be able to access registry accounts, including allowances held in these accounts. Data held by the national registers will start to be migrated to the EU registry.
On June 20, the single registry will be fully activated. Users of existing national registries will be able to use the single registry as soon as they receive their new authentication credentials from their national administrator.
This will impact account holders in two ways. First, account holders will have to comply with increased documentation requirements and security features to access the transferred accounts in the single registry. Second, account holders will not be able to transfer any allowances until all necessary documentation requirements are satisfied.
In addition, the EC announced that in the event that account holders have any questions or difficulties during the transition, national helpdesks will continue to provide support. The Environment Agency will continue to be the national administrator for the UK.
The EC has further stated that the single registry to be activated in June will not contain all the required functionalities for phase III of the EU ETS. A subsequent update will enable phase III auctions, new account categories and a trusted account list. The EC has stated that software development in relation to these updates has been commenced and a timetable will be communicated on July 15, 2012.
Separately, on May 8, 2012, the UK Department of Energy and Climate Change launched a public consultation on the implementation of phase III EU ETS in the UK. The consultation seeks the views of market participants on how the proposed legislative framework should be successfully implemented in the UK. By simplifying the existing legislative framework, market participants will be subject to less of a regulatory burden than has been imposed by the current regime. Market participants wishing to respond have until July 31, 2012 to do so.
The practice of fracing (referred to as “fracking” in the UK) in the United Kingdom has once again come under scrutiny. The UK’s Department of Energy and Climate Change (DECC) commissioned an independent panel to examine a possible relationship between the practice and certain earthquakes which took place in April and May 2011. The earthquakes occured near the site of the UK’s only fracing operation in Preese Hall, near Blackpool. On April 17, 2012, the panel published its findings in a report.
Fracing is the practice of pumping water, sand and chemicals into shale rock at a high pressure in order to extract reserves of natural gas stored within the shale rock, known as "shale gas." The report considered the impact such a process may have on seismic activity. The report concluded that the fracing operation (which was suspended following the earthquakes) had caused the earthquakes, thus providing some of the first evidence of this connection. However, the report also found that the risk that fracing could cause an earthquake resulting in significant damage was "very low."
The report recommended that fracing be allowed in the UK but, given that there is evidence of a connection between fracing and seismic activity, a number of safety provisions should be put in place to mitigate against seismic risks arising from fracing. The safety provisions include:
conducting a detailed assessment of the relevant area prior to fracing taking place, including: performing baseline seismic monitoring so that seismic risk of the area can be determined; using both geological and geophysical data to determine the existence of any active faults in the area; and using ground motion prediction models to consider and assess the possible impact of any earthquakes; and
implementing a "traffic light" system with real-time monitoring of seismic activity during the fracking process. A "red light" would be triggered by any seismic tremor meauring 0.5 local magnitude (a level lower than the size of the 2011 earthquakes) or higher. The triggering of a red light would require the cessation of fracing and the taking of certain safety procedures including, allowing fluid to flow back to the surface.
In conjunction with the publishing of the panel’s report, the DECC is inviting public comment on the recommendations made by the report until May 25, 2012.
The DECC has stated that no decision will be made as to whether fracing operations for shale gas can be resumed until all comments in response to the report have been received and considered.
The UK feed-in tariff (FIT) scheme was introduced in the United Kingdom in April 2010, under the Energy Act 2008, to encourage households and businesses to operate small scale (less than 5MW) low carbon electricity generation facilities. Under the scheme, eligible generators can receive a fixed generation tariff for each kWh of electricity generated and consumed on-site and an additional export tariff for each kWh of electricity that is exported to the grid, for a maximum of 25 years from the date an installation becomes eligible under the scheme. FIT payments are paid to generators by suppliers and funded by electricity consumers.
Of the eligible technologies (biogas, hydro, micro-CHP and solar photovoltaic (PV)), solar PV has to date been by far the most popular technology.
On April 13, 2012, it was announced that Nord Pool Spot (NPS), the Norwegian operator of the day-ahead and intraday energy trading markets, has been chosen to develop and operate the United Kingdom’s first virtual energy hub. The decision was taken following a competitive tender process run by the UK’s National Grid Interconnectors Ltd., the operator of a 2,000MW high voltage direct current link between the UK and France. The aim of the virtual hub is to integrate the UK into the proposed North West Europe (NWE) coupling project, with the ultimate goal of creating a single European market by 2014.
According to a statement released by NPS, the new hub is due to facilitate the pooling of GB liquidity. As the market currently operates, each power exchange may have different prices. However, it is envisaged that the creation of the hub will allow for the formation of a common, more robust, reference price for electricity across all participating UK power exchanges by the end of 2012.
Currently, the UK is the only country involved in the NWE market that allows for multiple power exchanges and interconnector operators to participate in the market. The launch of the new hub is designed to assist access to the numerous power exchanges, as well as establishing one electricity price for the UK. Market participants will continue to maintain their existing contractual relationships with their power exchanges, with the virtual hub being designed to ease inter-exchange transactions and arrange interconnector flows with interconnector operators.
The NPS statement went on to state that their experience in market coupling has already allowed for the successful integration in the Nordic countries, and Estonia, with NPS currently working with the Polish power exchanges to establish price coupling between the Nordic markets and Poland. Under the NWE umbrella, NPS is aiming to deliver market coupling and capacity allocation into the UK, the Central Western Europe region and the Nordic areas.
The announcement regarding NPS comes a month after further steps were taken to create a third electricity interconnector between the UK and mainland Europe, this latest interconnector being a joint project between the National Grid and the Belgian transmission operator Elia. The project involves putting in place an interconnector between Kent in South East England, and Belgium.
The UK’s Financial Services Authority (FSA) published a Consultation Paper (Consultation) on March 15, 2012 detailing its proposals for authorization and supervision of firms intending to bid for emission allowances under Phase Three of the European Union Emissions Trading Scheme (EU ETS). Phase Three covers the period of 2013-2020 and marks the final phase of the EU’s strategic commitment to a 20 percent reduction in carbon emissions from the levels in the 1990s.
The purpose of the Consultation is to set out the circumstances in which bidding for emissions allowances becomes subject to FSA regulation following amendments to current regulations. It offers a preliminary guide for firms looking to bid for emissions allowances with a view to allowing as much time as possible for applications for permission to be processed. The first auctions are not expected until autumn 2012, however the European Commission (EC) may choose to commence auctions on its central platform as early as June 2012.
The UK (alongside Germany and Poland) has opted to host a national platform for EU ETS auctions. This right is enabled under the Regulated Auction Platform Regulations 2011, which creates in the national platform a Regulated Auction Platform and in turn, a new body subject to FSA supervision. Bidders will have the choice of two types of emission product available for auction: a two-day spot and a five-day future. The choice of emission product will play a role in determining whether or not a firm will be subject to FSA regulation. Amongst others, investment firms and credit institutions are most likely to require FSA authorization to undertake auctioning activities.
Changes to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 will establish bidding as a new regulated activity, therefore, firms will still be required to make a further application to the FSA even if they currently have permission to carry out existing FSA regulated activities. It is not, however, anticipated that any variation of a firm’s existing permissions would be unduly complex. This would be the case unless the FSA considers that the proposed bidding activities will pose any material risk to the firm’s business, since the FSA is of the view that the newly created bidding activity is similar to certain existing regulated activities.
The FSA invites comments by April 19, 2012 with the intention to finalize the proposals set out in the Consultation through rules which are due to be published in late May 2012. A policy statement and feedback on any responses will be published shortly thereafter.
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